Abstract
The Swedish economist Knut Wicksell (1851–1926) exerted profound influence over many of the scholars who shaped macroeconomics in the 1930s as well as in later years. In his acclaimed treatise on monetary theory, Interest and Prices (1898), Wicksell reevaluated the debates among the Classicals, who did not provide satisfactory answers to the determination of the price level. Wicksell suggested an alternative innovative approach based on his “two rates” theory. Wicksell’s writings during the first decade of the twentieth century, mainly in the years 1906–1910, shifted from his early attention focused on the price level to questioning the disturbing phenomena of fluctuations in the real economy—cycles and crises—a topic that became central in the economic debates of the 1930s. In considering how we could avoid “economic fluctuations and crises...” his answer was that the economy should follow a “stationary” state, where demographic and productive changes were synchronized. Later chapters discuss the impact Wicksell's innovative ideas had on later scholars, among them John Maynard Keynes and Friedrich Hayek.
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Notes
- 1.
On Wicksell’s life see the brief introduction by Ohlin to the English translation of Interest and Prices (1936), as well as Gardlund (1958) and Uhr (1960), who are the two authoritative biographers of Wicksell; the first is a (shortened) translation of the original 1956 Swedish biography, emphasizing personal aspects, while the second focuses more on theories, entitled The Economic Doctrines of Knut Wicksell. See also an excellent entry by Trautwein (2016), “Knut Wicksell (1851–1926),” in the Handbook on the History of Economic Analysis: Vol 1, edited by Faccarello and Kurz, and an article by Boianovsky (2017).
- 2.
Wicksell’s approval process in joining Lund became a public issue between liberals and conservatives in Sweden. Typically for a principled persona, Wicksell almost lost the appointment for refusing to sign his final application with the traditional “your humble servant,” choosing instead to sign “respectfully.” See Gardlund (1958), pp. 173–188.
- 3.
One short paper, “The Influence of the Rate of Interest on Prices,” originally appeared in English in 1907 in the Economic Journal after it was presented before the Economic Section of the British Association in 1906. Lectures on Political Economy was his next major work; the first volume entitled “General Theory” was published in 1901 and the second “Money” in 1906. Both appeared in English only in the 1930s; the translations to English are from later versions. More of Wicksell’s papers, including on monetary issues, appeared in English in 1958 in a volume edited by Erik Lindahl, Knut Wicksell: Selected Papers on Economic Theory, and in 1997 and 1999 by Bo Sandelin, who edited Knut Wicksell: Selected Essays in Economics (Volumes I and II). On the literature related distinctively to business cycles see below.
On the monetary aspects of Wicksell’s thought see, among the voluminous literature: Patinkin (1952, 1965, 1972b, 1982), Leijonhufvud (1981), Laidler (1991), Chap. 5, Boianovsky (1995, 1998b, 2011, 2016) and Boianovsky and Trautwein (2001), on an early draft of Wicksell, from apparently 1889, and references therein.
- 4.
See Patinkin (1952, 1965), Laidler (1991), (1993) Chap. 5, Arnon (1993), and Humphrey (1986, 1997, 2003) and many references within.
- 5.
“In a developed credit economy both these obstacles are removed, and either actually or virtually a higher velocity of circulation is provided—or, more correctly, the velocity of circulation is capable of being increased more or less at will” (pp. 62–63).
- 6.
That the abstract organized system has implications for the real system, analyzed in the 1840s by the Currency School, seemed clear to Wicksell. When he referred to a bank-note system he concluded: “Notes provide in themselves the basis for a more or less elastic system of credit, and they circulate with a velocity which is more or less variable. It is for this reason that it was never possible for even the older supporters of the Quantity School to provide a satisfactory demonstration of the exact relationship which they held to exist between the price level and the quantity of notes (and coin).” (pp. 69–70).
- 7.
Its first appearance: “We have so far dealt with the interval of time, dependent on nature and technique, which separates purchase from the corresponding sale. But actual long-term credit itself has a part to play. Many people require in their business, either regularly or at certain periods, more capital than they themselves possess, while others possess more capital than they are able or willing to find use for. The resultant lending and borrowing can be supposed to be effected through the intervention of our Bank.” (p. 73).
- 8.
Wicksell refers to Tooke’s arguments repeatedly in the book and is often critical of his positions, although he sometimes approves of them. “We have seen that a casual and temporary change in the discount rate would not in itself exert any marked influence on prices. To this extent it can be granted that Tooke was quite right in maintaining, in contradiction to Ricardo, that the banks' discount policy is in itself of direct significance in respect only to such matters as international or interregional movements of capital and the postponement of payment of fluctuating liabilities, but that it is of smaller importance in respect to the structure of prices.” (p. 92).
- 9.
Wicksell’s note in the original refers the readers to page 143 in the text.
- 10.
“[T]he movement and equilibrium of actual money prices represent a fundamentally different phenomenon, above all in a fully developed credit system, from those of relative prices. The latter might perhaps be compared with a mechanical system which satisfies the conditions of stable equilibrium, for instance a pendulum. Every movement away from the position of equilibrium sets forces into operation – on a scale that increases with the extent of the movement – which tend to restore the system to its original position, and actually succeed in doing so though some oscillations may intervene.
The analogous picture for money prices should rather be some easily movable object, such as a cylinder, which rests on a horizontal plane in so-called neutral equilibrium. The plane is somewhat rough and a certain force is required to set the price-cylinder in motion and to keep it in motion. But so long as this force – the raising or lowering of the rate of interest – remains in operation, the cylinder continues to move in the same direction. Indeed it will, after a time, start “rolling:” the motion is an accelerated one up to a certain point, and it continues for a time even when the force has ceased to operate. Once the cylinder has come to rest, there is no tendency for it to be restored to its original position. It simply remains where it is so long as no opposite forces come into operation to push it back.” (pp. 100–101).
- 11.
“When the money rate of interest is relatively too low all prices rise. The demand for money loans is consequently increased, and as a result of a greater need for cash holdings, the supply is diminished. The consequence is that the rate of interest is soon restored to its normal level so that it again coincides with the natural rate.” (pp. 109–110).
- 12.
See pp. 142–150.
- 13.
In the Active Money group, Humphrey includes Marget (1938), Myhrman (1991), Patinkin (1965), Trautwein (1996); in the Passive Money group are Haavelmo (1978), Niehans (1990), and Leijonhufvud (1981). In many respects the distinction reflects, of course, that between the Bullionist and anti-Bullionist and that between the Currency and Banking Schools.
- 14.
See Ohlin (1936) who explains that the “chief reason why Wicksell changed his views so little was undoubtedly that the criticisms which his theory met did not go down to fundamentals” (p. xii). Ohlin mentions three changes in the 1906 edition, quoting Wicksell, who was aware of them; they relate to (1) the role that saving and investment play in determining the natural and normal rates; (2) the strengthened emphasis on “bridging the gap between price theory and monetary theory” and (3) the actual impact of additional gold production on prices. One important change in the 1915 edition in Ohlin’s mind, but not in Wicksell’s, concerned the mutual effect the two interest rates have on each other (pp. xiii–xvii).
- 15.
See pp. 192–193.
- 16.
The paper was read in 1906 before The Economic Section of the British Association.
- 17.
See Laidler (1999).
- 18.
“Wicksell’s interpretation of the dynamics of the credit market, with a price (interest rate) distinct from its equilibrium value, did not fit into the Walrasian tâtonnement mold. Likewise, Wicksell’s marginal productivity theory and its role in the interpretation of entrepreneur’s profits in an economy with a sequence of markets added a new dimension to Walras’s general equilibrium. In order to bring that out, Wicksell introduced a macroeconomic way of reasoning, which may be understood as an extension of general equilibrium to an economy with a small number of aggregate markets for commodities, labor, money, and bonds interacting with one another through time.” (Boianovsky, 2016, pp. 280–281).
- 19.
The issue of language gap remains an obstacle even today, as the following quote from Boianovsky makes clear. “During the process of elaboration of his money Lectures, Wicksell (1903, 1904, 1999) wrote two articles in which he advanced the changes mentioned above. His 1903 “Obscure Point in the Theory of Money”—regarded by Joseph Schumpeter (1954, p. 1085n9) as “very important” for emphasizing some points that do not stand out so clearly in his books—is available in Swedish only and is seldom mentioned in the literature. The “obscure point” in need of clarification was precisely the concept of excess aggregate demand for output as a whole, called by Wicksell (1903, p. 491) “pecuniary” or “monied demand” (in English in the original) for goods. The 1904 article “Monetary Problems of the Future” was a reaction to Karl Helfferich (1903), one of the very few contemporary works on money he admired. Wicksell disagreed with Helfferich’s view—relatively common at the time—that economic booms are associated with changes in the “spirit of enterprise” brought about by increased consumption demand and prices. It was in that context that Wicksell put forward the notion that the determinant of the nominal level of activity is not consumption but excess investment, which brought in the idea of a normal rate of interest.” (p. 263).
- 20.
Most of those writings were in Swedish and a few were in German; they were translated to English many years later.
- 21.
The paper was delivered as a lecture in May 6th, 1907, to the Political Economy Club in Oslo. It was published in the Swedish journal, Statsøkonomisk Tidsskrift, vol. 21: pp. 255–284, the same year and translated to English in 1953 by Carl G. Uhr, Wicksell’s biographer, and appeared in the International Economic Papers; it can also be found in the 1965 re-publication of Interest and Prices, in Kelley’s Reprint of Economic Classics: pp. 221–239, from which I quote. The biographer/translator adds that Wicksell “expressed similar views to those in this paper” in two articles in 1890. Wicksell mentions one of those in his “New Theory of Cycles” that will be discussed below. However, as we have seen in the former sections, his attention from 1890 and up to 1906 was not devoted mainly to real cycles and crises; it was only later that he returned intensively to that question.
- 22.
See a brief and profound introduction to the English translation of the paper by Hagemann (2001); the paper also appeared in Hagemann (2002), Vol. 2: 97–105. Although Wicksell apparently intended on writing the paper in German, as Hagemann speculates, to succeed in conveying his ideas on cycles to the German-speaking audience, the paper was not published at the time.
- 23.
Wicksell referred specifically to two exceptions, Pohle and Spiethoff, though their treatments, he added, were not satisfactory. Tugan-Baranowsky was clearly another influence on Wicksell.
- 24.
Volume 2: Money and Credit; see the 1935 English translation, pp. 209–214.
- 25.
See also Wicksell’s review of Cassel’s theory of the trade cycle: “Considering the extraordinary difficulty of the subject (and my own far from adequate comprehension of it), I certainly cannot vouch for the correctness of all his conclusions, but on the whole they appear preponderatingly sound and just” (1901, p. 255).
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Arnon, A. (2022). Wicksell’s Novel Macro Thinking: Consequences for Understanding Cycles, Crises and Policy. In: Debates in Macroeconomics from the Great Depression to the Long Recession. Springer Studies in the History of Economic Thought. Springer, Cham. https://doi.org/10.1007/978-3-030-97703-0_1
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