Knut Wicksell Research Articles

Stagnation and the Natural Rate of Interest: Tracing the Roots of Lawrence Summers’s Theory of Secular Stagnation

ABSTRACT Over the past decade, Lawrence Summers has argued that stagnation cannot be rectified by monetary policy because it is the result of a negative natural rate of interest. This analysis brings together two separate streams of thought: traditions in which stagnation has been connected to excessive saving linked to income distribution, or to diminishing investment demand; and a tradition centred on the natural rate of interest and its relationship to the market rate. However, they remained largely separated until Summers brought them together. Modern discussions of the natural rate stem from Knut Wicksell’s Interest and Prices (1898). However, although he came close to arguing that the natural rate might be negative during cyclical depressions, it was mainly under-consumptionists who argued for the possibility of stagnation. These two strands of thinking came closer in the interwar period but they remained separate. The main advocate of secular stagnation, Alvin Hansen, drew on the American Institutionalist tradition, not Wicksell. Postwar Keynesians did not pursue the idea of a negative natural rate even though Samuelson had provided a theoretical explanation. It was not until Summers that a negative natural rate, income distribution and the possibility of secular stagnation were brought together.

From Austrian theory of capital to dissent: Nicholas Kaldor, Friedrich A. Hayek and the way to disequilibrium

PurposeIn the early 1930s, Nicholas Kaldor could be classified as an Austrian economist. The author reconstructs the intertwined paths of Kaldor and Friedrich A. Hayek to disequilibrium economics through the theoretical deficiencies exposed by the Austrian theory of capital and its consequences on equilibrium analysis.Design/methodology/approachThe author approaches the discussion using a theoretical and historical reconstruction based on published and unpublished materials.FindingsThe integration of capital theory into a business cycle theory by the Austrians and its shortcomings – e.g. criticized by Piero Sraffa and Gunnar Myrdal – called attention to the limitation of the theoretical apparatus of equilibrium analysis in dynamic contexts. This was a central element to Kaldor’s emancipation in 1934 and his subsequent conversion to John Maynard Keynes’ The General Theory of Employment, Interest, and Money (1936). In addition, it was pivotal to Hayek’s reformulation of equilibrium as a social coordination problem in “Economics and Knowledge” (1937). It also had implications for Kaldor’s mature developments, such as the construction of the post-Keynesian models of growth and distribution, the Cambridge capital controversy, and his critique of neoclassical equilibrium economics.Originality/valueThe close encounter between Kaldor and Hayek in the early 1930s, the developments during that decade and its mature consequences are unexplored in the secondary literature. The author attempts to construct a coherent historical narrative that integrates many intertwined elements and personas (e.g. the reception of Knut Wicksell in the English-speaking world; Piero Sraffa’s critique of Hayek; Gunnar Myrdal’s critique of Wicksell, Hayek, and Keynes; the Hayek-Knight-Kaldor debate; the Kaldor-Hayek debate, etc.) that were not connected until now by previous commentators.

James M. Buchanan and the Soul of Classical Political Economy

Boettke and Marciano’s (2020) The Soul of Classical Political Economy curates ten previously unpublished works by James M. Buchanan. The editorial introductions to these are independently valuable as scholarly works; they shed light on the context in which the papers, essays and letters were written, and draw important connections across Buchanan’s different writings. In this review essay, I consider Buchanan on classical liberalism, Knut Wicksell and the role of the economist in light of these newly available writings. The book and review essay should prove of interest not only to historians of economics, but also to scholars and economists generally, as Buchanan’s views on the classical tradition provide important philosophical support for the entire neoliberal enterprise, particularly as it relates to public policy, public economics and public choice.

Les Wicksell, la population et l’égalité des sexes en Suède

This paper considers Anna Bugge Wicksell use of economic arguments in her fight for gender equality. Specific attention is paid to the intersection of gender issues with the ‘population question’—or the Swedish national preoccupation with fertility rates that dominated popular discussion from the 1880s through the 1930s. We first outline Knut Wicksell’s contributions to the economics of population. Next, we consider Bugge Wicksell’s writings as they relate to population, equal education, marital property rights, and women’s labor conditions. The persistence of the Wicksells’ ideas through to the next generation of social reformers is examined using the specific case of Alva and Gunnar Myrdal’s Kris i befolkningsfrågan (1934). The discussion illustrates several themes common to the historiographic literature on the contributions of women to economic thought. First, that women often worked on practical and gendered issues is one reason their work has gone unrecognized; this effect is compounded when women write solely for the popular press. Second, the ability of women to make recognized contributions to economic thought was often dependent on idiosyncratic features of their personal relationships as well as influenced by the broader socio-cultural context. Third, considering the production of extra-academic knowledge makes clear that women’s contributions to social debates were not peripheral but had a direct influence on policy.

Refuting Samuelson’s capitulation on the re-switching of techniques in the Cambridge capital controversy

Paul A. Samuelson’s (1966) capitulation with his Austrian model during the so-called Cambridge controversy on the phenomenon of re-switching of techniques in capital theory had implications not only in pointing at the supposed internal contradiction of the marginal theory of production and distribution but also in the pursuit of vested interests in the academic and political world to this day. The present paper is aimed at demonstrating that Samuelson’s capitulation was logically groundless from the point of view of the economic theory of production by considering the interest rate in the role of the real price of capital goods instead of the stationary real rental prices as correctly suggested by Leon Walras, Knut Wicksell, John Hicks, and others. Because of the non-linear effects of the interest rate on relative input prices, the Sraffian re-switching of techniques noted in the range of the interest rate always disappears in the space of the corresponding real input prices in the stationary equilibrium.

The road to The General Theory: J. M. Keynes, F. A. Hayek, and the Genealogy of Macroeconomics

ABSTRACT The criticism made by Friedrich A. Hayek to A Treatise on Money by John Maynard Keynes, and the subsequent controversy that followed with the involvement of members of the Cambridge Circus, sustained important elements to Keynes’ abandonment of his earlier ideas and to his way to General Theory. The figure and position of Hayek operated to clarify the underlying differences and the new theoretical routes for Keynes, one that was more explicitly opposite to critical authors drawing from Knut Wicksell. To some degree, the road to General Theory was paved in the famous 1931 controversy - in particular the rejection of the Wicksell connection.

The Problems of Inflation Targeting Originate in The Monetary Theory of Knut Wicksell

The Problems of Inflation Targeting Originate in The Monetary Theory of Knut Wicksell

Jeff E. Biddle, Progress Through Regression: The Life Story of the Empirical Cobb-Douglas Production Function

Many economists invoke the term “Cobb-Douglas” frequently, while knowing little of its history. In 1927, Paul H. Douglas presented his results on an estimated production function in a paper at the American Economic Association annual meeting. This was joint work with the mathematician Charles W. Cobb. What became known as the Cobb-Douglas production function was not new—Knut Wicksell had previously suggested it—but its estimation using time-series data marked the beginning of a new literature...

On continuity and general equilibrium: Pareto, Cassel, and the foundations of neoclassical economics

This article explores the application of the principle of continuity to general equilibrium theory by Vilfredo Pareto, Gustav Cassel, and Knut Wicksell. It begins by recapping Pareto’s early works based on cardinal utility and continuity. After that, Cassel’s proposal of an elementary framing for general equilibrium with discontinuous functions is presented. The next section covers some unpublished letters between Pareto, Maffeo Pantaleoni, and Cassel related to the issue. It is followed by a review of the reception of Cassel’s ideas advanced in his 1899 Grundriss. In the end, some reflections are offered on the scientific implications of the principle of continuity to neoclassical economics.

James M. Buchanan and Gordon Tullock à propos des faiblesses du vote majoritaire

This paper provides a narrative of the different but complementary accounts of James M. Buchanan and Gordon Tullock on the weaknesses of simple majority voting. The paper shows that these authors took different paths to reach the same conclusion. Buchanan used his knowledge about Knut Wicksell which he applied to an abstract framework. Tullock was inspired by his reading of Duncan Black and Anthony Downs and between 1959 and 1961 in particular, produced numerous published and unpublished works which formed the basis of his contribution to The Calculus of Consent. This book which was jointly authored by Tullock and Buchanan proposes a theoretical reflection on majority voting. The present paper examines Buchanan and Tullock’s critique of majority voting and highlights the radical but overlooked contribution made by Tullock to the book and to the development of the Virginia public choice research program.

Wicksell, Myrdal and Swedish Intellectual Thought on Inequality

The ‘Swedish Model’ of the welfare state was born from a confluence of geographic, cultural, political, and economic factors in the immediate post-war period. Its intellectual history, however, lay in a much longer tradition that originated with the economist Knut Wicksell (1851 – 1926). A radical and progressive thinker on issues of inequality, social justice and the role of the state, Wicksell had a profound influence on Swedish economic thought. His concerns carried over to the next generation of Swedish economists, including Gunnar Myrdal (1898 – 1987) – Nobel Prize winning economist, public intellectual, architect of the Swedish welfare state, and technocrat of postwar international economic order. This paper takes Wicksell as its starting point, considering the intellectual history of Myrdal’s views on inequality and the welfare state as a ‘middle way’, a ‘system of social morals.’ Like Wicksell, Myrdal initially conceived of inequality as a national problem. However, Myrdal’s Beyond the Welfare State (1960) extended Swedish intellectual thought on domestic inequality to issues of international economic development. Myrdal argued that contemporary welfare programs were too narrow and irrationally nationalistic, concluding that what was needed was a welfare world, not a welfare state.

The broken bridge of public finance: majority rule, earmarked taxes and social engineering

Abstract Nobel laureate James Buchanan was influenced substantially by Knut Wicksell’s arguments in favor of unanimous consent or “qualified majorities” for approving or rejecting specific public spending programs. Buchanan thought of Wicksell’s recommendation that spending proposals be tied to dedicated revenue sources as way of erecting a bridge between the two sides of the public budget, thereby forcing politicians to face the same tradeoffs as individuals do when formulating their spending plans. We examine the history of Buchanan’s ideas on public finance and discuss how legislative processes have demolished the bridge between public expenditures and public revenues. In modern practice, tax “earmarking”, whereby local, state and federal governments ostensibly finance specific spending programs with the revenues raised by targeted consumption taxes, often becomes a smokescreen hiding the opportunistic reallocation of taxpayers’ monies to finance unrelated policies or programs. Taxes on sugar-sweetened beverages provide our main case study. Other examples from public finance, past and present, such as selective excise taxes on cigarettes, lottery tickets and motor fuels, along with Alexander Hamilton’s tax on whiskey to pay Revolutionary War debts also are examined.

Widening Wicksell’s conception of political economy: his “thoroughly revolutionary programme”

Knut Wicksell’s opinion that political economy is a “thoroughly revolutionary programme” has often been neglected in the literature. Actually, Wicksell aimed at implementing such a programme in order to enlarge political economy as a “practical science”. It is articulated around three main features: a criticism of the marginal theories, the redefinition of society as a whole, and the advent of social justice. Indeed, Wicksell claimed that economic and social problems may be solved only by a complete social reorganisation. Hence, I show that Wicksell’s social reform programme drives his particular view of and approach to political economy.

Wicksell on Pareto: Efficiency, Welfare, and Distribution

No individual in the history of public economics has been subject to more contentious discussion than Knut Wicksell – and perhaps no concept subjected to more diverse interpretation than Wicksell’s unanimity rule. The story begins in 1896 with the publication of Wicksell’s public finance treatise, Finanztheoretische Untersuchungen, and starts to take shape in 1906 with the publication of Pareto’s Manual of Political Economy. The crux of the matter hinges on the relationship between Wicksell’s unanimity rule and Pareto’s optimality. This article examines Wicksell’s one-sided debate with Pareto in sociological, economic, and methodological terms, and evaluates Pareto’s influence on Wicksell’s subsequent analysis of collective economic welfare. Also considered is the trajectory of their economic ideas that led to an eventual convergence in public choice.

Wicksell, Secular Stagnation and the Negative Natural Rate of Interest

Knut Wicksell’s concept of the natural (or neutral) rate of interest, introduced between the end of the 19th and beginning of the 20th centuries, has played an important role in modern monetary macroeconomics, especially after the development of inflation targeting policy in the 1990s. More recently, the revival of Alvin Hansen’s 1939 secular stagnation hypothesis by Larry Summers and others has brought to the fore the notion of a negative natural rate of interest, in the sense that there is no positive rate of interest able to equilibrate saving and investment at full-employment income. The present paper investigates whether the negative natural rate of interest may be found in Wicksell. It also examines in what extent the idea of secular stagnation is compatible with his original theoretical framework.

Knut Wicksell on Utility and Market Aggregation

Knut Wicksell discussed in his 1893 Value, Capital, and Rent, as part of a critical comment on Launhardt and Jevons, conditions for consistent aggregation. He argued that Jevons's “trading body” concept was only valid if identical linear marginal utility functions (with ensuing parallel Engel lines for all individuals) could be assumed, which he regarded as unrealistic. Wicksell preferred Léon Walras's notion of market excess aggregate demand functions, which are functions of prices only. Such functions would not be affected by aggregation problems, if only disequilibrium transactions were assumed away. The article also addresses Wicksell's position concerning the so-called Cournot problem (that the general equilibrium system may not be able to provide precise numerical solutions), and his use of the notion of the representative agent in the formulation of the saving function.

Moeda, crédito e ciclos econômicos em Marshall

Resumo Este artigo tem por objetivo examinar os elementos centrais da análise de Alfred Marshall sobre as flutuações cíclicas, contemplando o papel da especulação e do crédito nesse contexto. A primeira seção contém breve introdução ao assunto. A seguir, tratam-se das contribuições de Marshall sobre os determinantes das taxas de juros normal e de mercado, bem como a sua reformulação da Teoria Quantitativa da Moeda. Após, apresenta-se a sua explicação dos ciclos econômicos, na qual se articulam em uma mesma estrutura os elementos teóricos expostos nas seções anteriores. Ao final, uma comparação da teoria monetária de Marshall com as contribuições de Irving Fisher e Knut Wicksell é realizada, destacando-se os pontos de contato, bem como de distanciamento, entre esses proeminentes teóricos neoclássicos dos fenômenos monetários. Elabora-se ainda uma versão dinâmica formal do modelo marshalliano dos ciclos, incluída em apêndice.

Wicksell, Pareto and Public Choice

No individual in the history of public economics has been subject to more contentious discussion than Knut Wicksell – and perhaps no concept subjected to more diverse interpretation than Wicksell’s unanimity rule. The story begins in 1896 with the publication of Wicksell’s public finance treatise, Finanztheoretische Untersuchungen, and starts to take shape in 1906 with the publication of Pareto’s Manual of Political Economy. The crux of the matter hinges on the relationship between Wicksell’s unanimity rule and Pareto’s optimality. This article examines Knut Wicksell’s one-sided debate with Vilfredo Pareto on issues in welfare economics and considers the trajectory of their economic ideas that led to an eventual convergence in public choice.

The Origins of the Income Theory of Money

Abstract The income theory of money was conceived in the 19th century, and in the first half of the 20th century it formed the backbone of all the main monetary approaches of the time. Yet, since it did so mostly implicitly rather than explicitly, and since the later developments moved economic theory in a different direction, the income theory of money is hardly remembered at present. While mainly accounting for the origins of the approach, I am also offering a brief comparison with the present mainstream economics and I shortly address the question of the possible future of the theory too. The income theory of money explains how nominal prices are formed by interaction of nominal expenditures streams with real streams of goods sold. While various ideas leading to this theory were expressed already by John Law, Richard Cantillon, and Jean-Baptiste Say, it is perhaps only Thomas Tooke whom we might want to call the originator of the theory. Within the Classical School of Political Economy, Tooke's ideas were further elaborated by John Stuart Mill. The theory reached a momentous formulation in the works of Knut Wicksell, in many respects a similar exposition was delivered also by Friedrich Wieser. The recognition of the theory was impaired by a change of the main-stream paradigm as well as by a surge in emphasis laid on the quantitative modelling in economics. Yet, there are certain fundamental questions of the monetary theory which the general equilibrium style models cannot cope with, while the income theory of money can, at least to a certain degree. This might give the theory some hope for the future.

Teoria procentu Knuta Wicksella

Teoria procentu Knuta Wicksella