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Knut Wicksell and the Swedish School

Swedish Knut Wicksell was born in 1851 like Bohm-Bawerk. However his career as an economist followed a stage of lively activity as a neoMalthusian polemist, freelance lecturer and journalist. His fame among his contemporaries derived from his radical opposition to the prevailing moral beliefs on family, religion, motherland and state authority. His provocative attitudes hindered his academic career, aroused widespread hostility and even landed him in prison - at the ripe age of fifty - on charges of offence against the state religion.[1]

His interest in economic issues concentrated for a long time on the population problem. His studies in economic theory were at first collateral to this interest and were seriously tackled only when, in 1887, the thirty-six-year-old Wicksell gained a scholarship abroad. He was thus able to study in London, Strasbourg and Vienna. In 1890 he also began an academic career, but only in 1905 did he become full professor. He died in Stockholm in 1926.

His main works in economic theory were Value, Capital and Rent (1893), Interest and Prices (1898), Marginal Productivity as the Basis for Distribution in Economics (1900) and the two volumes of Lectures on Political Economy (1901-6). In the 1893 essay Wicksell developed a marginalist theory of income distribution between capital, labour and land based on their respective marginal productivities, which came out a few years before Wicksteed’s. In this work, and in the first volume of the Lectures, Wicksell utilised Bohm-Bawerk’s theory of the average period of production; however, he eventually set out to develop it in such a way as to take into account the heterogeneity of the means of production. Thus, in essence, Wicksell wavered between an aggregate notion of capital and a disaggregated notion, which he adopted when identifying capital with the entire temporal structure of the direct and indirect labour flows necessary to obtain a given product.

Wicksell also developed a distinction between the money interest rate and the natural interest rate. The latter was determined by the real variables that concur to determine equilibrium for the economic system; more precisely, it corresponded to the marginal productivity of capital, as indicated by the marginalist theory of income distribution. The money rate of interest, on the other hand, was determined on the money markets, with some degree of autonomy with respect to the natural rate. The relationship between money and natural rate of interest was then utilised to explain the cyclical oscillations of the economy and the inflationary or deflationary pressures on the general level of prices. Whenever the money rate of interest is lower than the natural one, entrepreneurs find it advantageous to take out loans and invest, thus giving rise to inflationary pressure; conversely, whenever the money rate ofinterest is higher than the natural rate, investments are discouraged and deflationary pressure is generated.[2]

This theory takes its place in a current of monetary explanations of the cycle and inflation that tried to have it both ways, on the one hand safeguarding the marginalist theory of value and distribution, in terms of which to determine the equilibrium values for prices and distributive variables, and on the other hand recognising a fact obvious to any empirical economist, namely the existence of disequilibria and of a certain influence monetary vicissitudes have on real variables.

As from the late 1920s, the “Swedish school” (Erik Lindahl, 1891-1960; Gunnar Myrdal, 1898-1987, Nobel prize in 1974; Bertil Ohlin, 1899-1979) developed various aspects of Wicksell’s theory and in contrast with Keynes’s analysis re-proposed the tool of sequential analysis (already present in the Austrian tradition and later re-embraced by Hicks).

  • [1] See the fascinating biography by Gardlund 1956. Wicksell constitutes striking proof of theerroneousness of the thesis, typical of the Marxian tradition, of an opposition betweena politically progressive classical approach and a politically conservative marginalistapproach. Wicksell is no isolated exception in this respect: suffice it to recall, for instance,Walras’s social reformism, with his support for land nationalisation, or the BritishFabians.
  • [2] In his theory on inflationary and deflationary cumulative processes Wicksell assumed thatno changes took place in production techniques; as a consequence, neither incomedistribution nor production levels or relative prices can change, and the disequilibriacan only translate into changes in the monetary variables, namely the price level.
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