December 14, 2018 Reading Time: 6 minutes
Image credit: National Affairs

Many believe that the postulate that public budget deficits do not matter comes from John Maynard Keynes, the English economist who proposed the policy of deficit spending. Yet Keynes was in favor of a balanced budget in the long run. Deficits were meant to revive the economy in a recession, while the boom time should serve to reverse the deficit and obtain a budget surplus. The origin of the thesis that deficits don’t matter is not in Keynes but Michal Kalecki. His theory was highly influential for development policy. Yet while many developing countries have abandoned this failed approach and turned to sound economic policies, the opposite has happened in the United States. Here, the theory of Michal Kalecki came back disguised as the “modern monetary theory” (MMT). The message of this theory is that deficits don’t matter, and for that reason it is highly welcome to America’s new democratic socialists.

Kalecki’s Thesis

Few authors have exerted a more disastrous influence on economic policy than Michal Kalecki (1899–1970). This Marxist economist prepared the theoretical groundwork for the expansion of government spending, particularly in the countries of the third world.

More explicit than the Keynesian theory of aggregate demand, the Kaleckian model postulates that deficit spending is self-financing. It comes as no surprise that the theories of Michal Kalecki found a wide resonance among economists and politicians in developing countries. While in the Keynesian version, national consumption is a part of aggregate demand along with investment, government spending, and net exports, Kalecki’s theory differentiates between the consumption of capitalists, which depends on profits, and the consumption of the workers, which depends on wages.

Based on the Marxist thesis that capitalism is a class society that is formed by capitalists and workers only, the Kaleckian macroeconomic theory defines national income as the revenue of the capitalists in the form of profits and the revenue of the workers, which consists in wages. The Kaleckian hypothesis says that workers consume all their income and therefore have a marginal consumption rate of one and a savings rate of zero. Any amount of additional income that goes to the workers in the form of wages ends as consumption expenditure.

As all their income is spent on consumption, workers have no savings. As the logical consequence of the definition in which national income consists of profits and wages, Kalecki’s model states that the profit of the capitalists is the difference between national income and wages.

Because all consumption of the workers is equal to their wages, investment and the consumption of the capitalist remain as residuals and determine the profits of the capitalists. In other words: profits are determined by the investment of the capitalists and their consumption. The economist Joan Robinson, a friend to both Keynes and Kalecki, summarized the Kaleckian theory in the phrase “the workers spend what they get, and capitalists get what they spend.”

Extending the model by introducing government spending, taxes, and net exports, Kalecki defines private savings in the same way as in the basic Keynesian model as that part of income that is left after taxes and consumption. Because overall consumption is composed of the consumption of capitalists and the consumption of the workers, private savings along with the trade surplus and the government budget deficit is equal to investment.

According to this model, business investments create private savings as their counterpart, and this is also the case with a budget deficit. The investment by the capitalists and the deficit of the government automatically generate the savings to finance these expenditures. In its quintessence, the Kaleckian macroeconomic model says that a budget deficit creates its own savings to finance itself. The higher the budget deficit, the more savings will rise.

An additional aspect of the Kaleckian model refers to the external sector. The exposition of the model favors a mercantilist policy of achieving a trade surplus. Different from the view that a trade surplus is the result of an excess of domestic savings, the Kaleckian model says that like the budget deficit, the surplus in the trade balance augments national savings.

Economic Policy

While Karl Marx has served as the supplier of the political slogans, the economist Michal Kalecki has provided the guidelines for the actual policy in many parts of the world. His theory has served to justify the errors that have plagued development policies since the 1950s. The followers of Kaleckian macroeconomics have promoted policies of systematic budget deficits without regard for their consequence for the public debt burden and price stability; they have promoted a policy of crude quantitative investment that has led to massive squandering of capital and to high inflation.

The followers of the Kaleckian development model have promoted a policy of import substitution, which has impeded competitiveness and productivity, particularly in Latin America, where this type of reasoning is still in vogue. Inasmuch as the Kaleckian macroeconomic model promotes state capitalism, the adoption of this model was also crucial in making the third world a hotbed of corruption. A weird combination of the doctrines of Keynes and Kalecki has led to development catastrophes when budget deficits are combined with incentives for private mass consumption. With only a slight exaggeration, one can say that Michal Kalecki is the father of modern state capitalism in the third world and thus of the evils that come with this system of governance.

Kaleckian economics favors investment in purely quantitative terms because this theory holds that in the same fashion as how budget deficits create their own financing, investment automatically means higher revenue. As the capitalists in the system automatically create their level of profits and consumption when investing, they are depicted as parasitic. Therefore, the investment function should be taken away from the capitalist in the private sector and transferred to the state.

Kaleckian macroeconomics favors state capitalism as a system that will run budget deficits, promote consumption, and shift the investment function away from private hands to the state. When the state acts as an entrepreneur, it is no longer the capitalists who get what they earn as profit; the state now gets what it spends as public revenue. As Kalecki explains:

The budget deficit always finances itself — that is to say, its rise always causes such an increase in incomes and changes in their distribution that there accrue just enough savings to finance it.… In other words, net savings are always equal to budget deficit plus net investment … Any level of private investment and budget deficit will always produce an equal amount of saving to finance these two items.

The system of state capitalism is in permanent financial need, and the Kaleckian theory offers the excuse to run high budget deficits. Yet the promise that these deficits would finance themselves through higher savings has never been fulfilled. Instead, the countries that have followed the Kaleckian model have suffered from chronic stagflation and have remained stuck in the underdevelopment of the middle-income trap.

Modern Monetary Theory

Using a similar set of equations as in the model of Kalecki, according to which private savings automatically finance the government’s budget deficit, the adherents of the modern monetary theory have become prominent promoters of deficit spending as the motor for economic growth. The slogan that deficits don’t matter and that government spending has no limits is highly welcome to those who favor more state, warfare, and public welfare.

The representatives of modern monetary theory” (MMT) argue that the causal relation is from the deficit in the public sector to a savings surplus in the private sector. Under the premise of a balanced external account, the central equation of this theory says that a public sector deficit implies a savings surplus in the private sector. Yet this is not a valid argument. Mathematics can say nothing about the direction of causality.

The set of equations provides logical implications such as that when exports equal imports, a budget deficit implies a surplus in the private sector. The central equation says nothing of the overall absolute size of the variables and thus of the amount of the imbalances in the subsectors. Which way the causality runs is not a mathematical question but an issue of economic analysis, and likewise how a budget deficit affects the level of economic activity is not a mathematical but an economic question.

The equation holds that when the public debt has brought the economy to its knees, it has come about with a savings surplus in the private sector. Yet this surplus does not result from an increase in savings, but from a decline in private investment. The savings surplus that the adherents of the MMT celebrate is the consequence of the decline of private investment. Sinking investment in the private sector, however, means that the economy is on the path to stagnation and decline.

Contrary to the proponents of the modern monetary theory, deficits do not raise savings, and budget deficits and public debt will matter, and they will matter bitterly, when the savings surplus comes from the crowding -out of, the private sector as the result of a weakened economy, but that because are.


Mathematics without the appropriate economic content can lead to severe misjudgments with catastrophic consequences. Keynes, Kalecki, and the proponents of the modern monetary theory use a set of assumptions, rearrange the variables, and infer causality to prove their point, which is often of a purely ideological nature. The Keynesian theory of the multiplier, the Kaleckian thesis that capitalists earn what they spend and that when the state acts as a capitalist it is the state that gets what it spends, and the slogan of the adherents of the modern monetary theory that deficits do not matter all suffer from the abuse of mathematical abstractions for political purposes.


Antony Mueller


Antony P. Mueller is a professor of economics at the Federal University UFS in Brazil where he is also a researcher at the Center of Applied Economics, and Senior Fellow of the American Institute for Economic Research. Antony Mueller earned his doctorate in economics summa cum laude from the University of Erlangen-Nuremberg, Germany. He was a Fulbright Scholar in the United States and a visiting professor at the Universidad Francisco Marroquin (UFM) in Guatemala as well as a member of the German academic exchange program DAAD. Antony Mueller has recently published the book “Beyond the State and Politics. Capitalism for the New Millennium”.

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