Brief Outline of Topics Covered in Lecture 17:
- The Neoclassical School ‑ Marshall Ch.
- The Neoclassical School ‑ Walras
- The Monetarist School - Wicksell, Fisher, and Hawtrey (class notes)
Irving Fisher (1867-1947)
Additional Reading
Knut Wicksell: Economist Knut Wicksell made his name among the Swedish public with a series of provocative lectures on the causes of prostitution, drunkenness, poverty, and overpopulation. A malthusian, the young Wicksell advocated birth control as the cure for these social ills. His image as a radical social reformer did much to attract the attention of the press and the Young Socialists with whom he sympathized. But his rejection of marx and marxism limited his popularity.
Wicksell was not so much an innovator as a synthesizer. His integration and refinement of existing microeconomic theories helped earn Wicksell recognition as the “economists’ economist.” In his 1893 book, Value, Capital, and Rent, Wicksell analyzed and praised the Austrian theory of capital as elaborated by Eugen von Böhm-Bawerk. In the first volume of his Lectures on Political Economy Wicksell concluded that Böhm-Bawerk’s idea of roundaboutness did not make sense, and agreed with Irving Fisher that waiting was a sufficient explanation for interest rates.
Wicksell also laid out marginal productivity theory, the theory that the payment to each factor of production equals that factor’s marginal product. Economists Philip Wicksteed, Enrico Barone, and John Bates Clark had already elaborated this theory, but Wicksell’s exposition of it was superior. Wicksell also emphasized that an efficient allocation of resources is not necessarily just, because the allocation depends on the preexisting distribution of income, and nothing guarantees that this preexisting distribution is just.
Wicksell is best known for Interest and Prices, his contribution to the fledgling field now called macroeconomics. In this book and in his 1906 Lectures in Political Economy, volume 2, Wicksell sketched out his version of the quantity theory of money (monetarism). The standard view of the quantity theory before Wicksell was that increases in the money supply have a direct effect on prices—more money chasing the same amount of goods. Wicksell focused on the indirect effect. In elaborating this effect, Wicksell distinguished between the real rate of return on new capital (Wicksell called this the “natural rate of interest”) and the actual market rate of interest. He argued that if the banks reduced the rate of interest below the real rate of return on capital, the amount of loan capital demanded would increase and the amount of saving supplied would fall. Investment, which equaled saving before the interest rate fell, would exceed saving at the lower rate. The increase in investment would increase overall spending, thus driving up prices. This “cumulative process” of inflation would stop only when the banks’ reserves had fallen to their legal or desired limit, whichever was higher.
In laying out this theory, Wicksell began the conversion of the old quantity theory into a full-blown theory of prices. The Stockholm school, of which Wicksell was the father figure, ran with this insight and developed its own version of macroeconomics. In some ways this version resembled later Keynesian economics. Among the young Swedish economists who learned from Wicksell were Bertil Ohlin, Gunnar Myrdal, and Dag Hammarskjöld, later secretary general of the United Nations.
For much of his adult life, Wicksell depended on several small inheritances, grants, and the meager income earned through public lectures and publications. Not until 1886, when he was awarded a major grant, did he begin to pursue economics seriously. With financial support secured, Wicksell traveled to universities in London, Strasbourg, Vienna, Berlin, and Paris. By 1890 Wicksell had returned to Stockholm, but being “too notorious” and unqualified to teach—he held degrees in mathematics, but economics instructors were then required to have formal degrees in law and economics—he returned to freelance writing and lecturing.
In 1900, when Wicksell was forty-eight years old, he was granted his first teaching position at the University of Lund, which he retained until his retirement in 1916. His quirky habits, friendly demeanor, and willingness to actively defend his beliefs earned him respect and popularity among his students. Throughout his lifetime Wicksell never lost his penchant for radicalism. He forfeited a professorship by refusing to sign the application with the conventional “Your Majesty’s most obedient servant.” In 1910 he was jailed for two months by the Swedish government for a satirical public lecture he delivered on the Immaculate Conception. In spite of his disdain for ceremony and fanfare, his common-law widow consented to an extravagant funeral upon his death at age seventy-four.
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