Undergraduate Economist

Perspectives of an economics student

Knut Wicksell: Some Aspects of his Work

Posted by Alex M Thomas on March 21st, 2010

This post is different from the others because it deals with the contributions of a single economist. Knut Wicksell was a Swedish economist who made significant contributions to capital theory, monetary economics and fiscal policy. Despite being grouped under the neoclassical or the Austrian school because of his affinities to ‘marginal’ analyst, Wicksell was a socialist and a radical. He advocated policies which involved the government in a big way. And owing to his varied interests in poetry, mathematics, feminism, mathematics, politics, etc he became a Professor of Economics and Fiscal Law at Lund University only when he was fifty. A few of his well known students are Erik Lindahl, Gunnar Myrdal and Bertil Ohlin. They are considered to be part of Stockholm or Swedish school of economic thought.

In the passages below, only a few of his contributions will be elaborated. He has also made lasting contributions to the theory of interest, revitalised quantity theory of money, introduced mechanisms linking the real and monetary sector, etc.

Wicksell demonstrated that problems could arise if capital is treated just like other ‘factors of production’ – land and labour. Cambridge capital controversies dealt with many of these problems. “Knut Wicksell (1851–1926) himself casts doubt on the specification of the value of capital, along with the physical quantities of labour and land, as part of the data of the system. ‘Capital’ is but a set of heterogeneous capital goods. Therefore, unlike labour and land, which ‘are measured each in terms of its own technical unit . . . capital . . . is reckoned . . . as a sum of exchange value’ (Wicksell, 1901, 1934, p. 49). But capital goods are themselves produced commodities and, as such, their ‘costs of production include capital and interest’; thus, ‘to derive the value of capital goods from their own cost of production or reproduction’ would imply ‘arguing in a circle’ (ibid., p. 149).” [Segura and Braun 2004]

Like other contemporaries of his, Wicksell did not write about unemployment. This was because the existence of unemployment was considered to be a paradox, an anomaly for neoclassical economists. As they could not comprehend why resources (here, labour) would be left idle! The central problem in (neoclassical) economics was not to provide or create uses for factors, but only to allocate the factors among various uses. As Bo Sandelin, editor of Wicksell’s papers and the author of A History of Swedish Economic Thought writes in the introduction that “the fundamental question in economics was how to manage an economy with scarce resources.” Strange indeed!

Wicksell was a strong proponent of the marginal productivity theory of distribution. A corollary of this theory is the the sum of all the marginal products of the factors should be equal to the total product, known as the product exhaustion theorem. However Wicksell demonstrated that the operation of this theory depends on the returns to the scale. That is, only under constant returns to scale will the marginal products exactly add up to the total product. And that for both decreasing returns and increasing returns, the product will not be completely exhausted.

The Swedish school made another important contribution to economic theory. They introduced the categories of ex ante and ex post. These categories, we know are used widely today and were the result of the School’s dissatisfaction with the equilibrium analysis. Apart from these ways of thinking, Myrdal has provided us with the concept of circular and cumulative causation as well. These categories provide us with alternative modes of conceptualising or thinking about economic problems.

Relying solely on textbooks reduces our extent of reach. We often fail to come across interesting and heterodox economists. But, history of economic thought provides us with ample personalities to look into. Wicksell is one among them. Also, some of their categories provide us with alternatives, which remain unfinished. For instance, after going through some of the secondary and primary works on/by Wicksell, he appears exceedingly interesting and aware of the implications of certain simplifying assumptions. He pointed out the ‘necessity’ of the constant returns to scale assumption, which economics faithfully aligned with for a considerable period. This was challenged within the mainstream only with the entry of the endogenous growth theories, which emphasised increasing returns.

References

Pressman, Steven (2004), Fifty Great Economists, Routledge: India.

Groenewegen, P and Vaggi, G (2006), A Concise History of Economic Thought: From Mercantilism to Monetarism, Palgrave Macmillan.

De Marchi, N and Blaug, M (1991), Appraising Economic Theories: Studies in the Methodology of Scientific Research Programmes, Edward Elgar.

Segura, J and Braun, C (2004), An Eponymous Dictionary of Economics: A Guide to Laws and Theorems Named After Economists, Edward Elgar.

2 Responses to “Knut Wicksell: Some Aspects of his Work”

  1. Jan Says:

    MMT and the Wicksell connection
    Professsor Lars Pålsson Syll
    2 November, 2012 http://larspsyll.wordpress.com/2012/11/02/mmt-and-the-wicksell-connection/

    Reading L. Randall Wray‘s new book Modern Money Theory – in which the author challenges conventional (neoclassical) wisdom on modern monetary theory by replacing the usual mystifications of the nature of money with a theory that shows what’s really going on in modern monetary economies – yours truly came to think of how most mainstream economists seem to think the idea behind Modern Monetary Theory is new and originates from economic cranks.

    New? Cranks? How about reading one of the great founders of neoclassical economics – Knut Wicksell. This is what Wicksell wrote in 1898 on “pure credit systems” in Interest and Prices (Geldzins und Güterpreise), 1936 (1898), p. 68f:

    It is possible to go even further. There is no real need for any money at all if a payment between two customers can be accomplished by simply transferring the appropriate sum of money in the books of the bank …

    A pure credit system has not yet … been completely developed in this form. But here and there it is to be found in the somewhat different guise of the banknote system …

    We intend therefor, as a basis for the following discussion, to imagine a state of affairs in which money does not actually circulate at all, neither in the form of coin … nor in the form of notes, but where all domestic payments are effected by means of the Giro system and bookkeeping transfers. A thorough analysis of this purely imaginary case seems to me to be worth while, for it provides a precise antithesis to the equally imaginay case of a pure cash system, in which credit plays no part whatever [the exact equivalent of the often used neoclassical model assumption of "cash in advance" - LPS] …

    For the sake of simplicity, let us then assume that the whole monetary system of a country is in the hands of a single credit institution, provided with an adequate number of branches, at which each independent economic individual keeps an account on which he can draw cheques.

    What Modern Monetary Theory (MMT) basically does is exactly what Wicksell tried to do more than a hundred years ago. The difference is that today the “pure credit economy” is a reality and not just a theoretical curiosity – MMT describes a fiat currency system that almost every country in the world is operating under.

    In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover and taxing and borrowing is degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not the major problem, since fiat money means that governments can always make more of them.

  2. Jan Says:

    Wicksell’s critique of harmony economics-Professsor Lars Pålsson Syll
    3 November, 2012 at 15:34
    http://larspsyll.wordpress.com/2012/11/03/wicksells-critique-of-harmony-economics/
    With the advent of neoclassical economics at the end of the 19th century a large amount of energy was invested in trying to formalize the stringent conditions of obtaining equilibrium and showing in what way the prices and quantities of free competition constituted some kind of social optimum.

    That the equilibrium reached in free competition is an optimum for each individual – given prevailing prices and income distribution – was not, however, seen by some economists as making a very strong case for a free market economy per se. It was not possible to prove that free trade and competition gave a maximum of social utility. The gains made in exchange are not a manifestation of a maximum social utility.

    Knut Wicksell – the greatest Swedish economist of all time – was one of those who criticized the idea of regarding the gain in utility arising from free competition as an absolute maximum. this market fundamentalist idea of harmony in a free market system did not live up to Wicksell’s demand for objectivity in science – as argued in my Scandinavian Economic History Review article Wicksell on Harmony Economics: The Lausanne School vs. Wicksell – and “the harmony economists, who endeavoured to extend the doctrine so that it might become a defence of the existing distribution of wealth” were judged severely by Wicksell (Lectures 1934 (1901) p. 39).

    When propounders of the new marginalist theory – especially Walras and Pareto – overstepped the strict boundaries of science and used it in ascribing to the market economic properties it did not possess, Wicksell felt he had to react. To Wicksell (Lectures 1934 (1901) p. 73) it was

    almost tragic that Walras … imagined that he had found the rigorous proof … merely because he clothed in mathematical formula the very arguments which he considered insufficient when they were expressed in ordinary language.

    But what about the Pareto criterion then? Wicksell had actually more or less anticipated this in his review ( in Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, 1913: 132-51) of Pareto’s Manuel, but did not think it contributed anything. It was just the same old doctrine in a new disguise. To Wicksell the market fundamentalist doctrine of the Lausanne School obviously didn’t constitute an advance in economics.

    http://larspsyll.wordpress.com/2012/11/03/wicksells-critique-of-harmony-economics/

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