Knut Wicksell

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Knut Wicksell bigraphy, stories - Swedish economist

Knut Wicksell : biography

December 20, 1851 – May 3, 1926

Johan Gustaf Knut Wicksell (December 20, 1851 – May 3, 1926) was a leading Swedish economist of the Stockholm school. His economic contributions would influence both the Keynesian and Austrian schools of economic thought.

Works

  • Interest and Prices (), Ludwig von Mises Institute, 2007
  • Value, Capital and Rent (), Ludwig von Mises Institute, 2007
  • Lectures on Political Economy ( and , pdf), Ludwig von Mises Institute, 2007

Theoretical contributions

Wicksell was enamored with the theory of Léon Walras (the Lausanne school), Eugen von Böhm-Bawerk (the Austrian school), and David Ricardo, and sought a synthesis of the three theoretical visions of the economy. Wicksell’s work on creating a synthetic economic theory earned him a reputation as an "economist’s economist." For instance, although the marginal productivity theory—the idea that payments to factors of production equilibrate to their marginal productivity—had been laid out by others such as John Bates Clark, Wicksell presented a far simpler and more robust demonstration of the principle, and much of the present conception of that theory stems from Wicksell’s model. Wicksell’s (1898, 1906) theory of the "cumulative process" of inflation remains the first decisive swing at the idea of money as a "veil" as well as Say’s Law.

Extending from Ricardo’s investigation of income distribution, Wicksell concluded that even a totally unfettered economy was not destined to equalize wealth as a number of Wicksell’s predecessors had predicted. Instead, Wicksell posited, wealth created by growth would be distributed to those who had wealth in the first place. From this, and from theories of marginalism, Wicksell defended a place for government intervention to improve national welfare. Wicksell influenced the field of constitutional political economy. His 1896 work on fiscal theory Finanztheoretische Untersuchungen called attention to the significance of the rules within which choices are made by political agents, and he recognized that efforts at reform must be directed toward changes in the rules for making decisions rather than trying to influence the behaviour of the actors.

Wicksell’s most influential contribution was his theory of interest, published in his 1898 work, Interest and Prices. He made a key distinction between the natural rate of interest and the money rate of interest. The money rate of interest, to Wicksell, was merely the interest rate seen in the capital market; the natural rate of interest was the interest rate that was neutral to prices in the real market, or rather, the interest rate at which supply and demand in the real market was at equilibrium – as though there were no need for capital markets. This theory was taken after of the Austrian School, which theorized that an economic boom happened when the natural rate of interest was higher than the market rate.

This contribution, called the "cumulative process," implied that if the natural rate of interest was not equal to the market rate, demand for investment and quantity of savings would not be equal. If the market rate is beneath the natural rate, an economic expansion occurs, and prices, ceteris paribus, will rise. This gave an early theory of endogenous money – money created by the internal workings of the economy, rather than external factors, and various theories of endogenous money have since developed.A handbook of alternative monetary economics, by Philip Arestis, Malcolm C. Sawyer,

Knut Wicksell’s theory of the "cumulative process" of inflation remains the first decisive swing at the idea of money as a "veil". Wicksell’s process has its roots in that of Henry Thornton . Recall that the start of the Quantity Theory’s mechanism is a helicopter drop of cash: an exogenous increase in the supply of money. Wicksell’s theory claims, indeed, that increases in the supply of money leads to rises in price levels, but the original increase is endogenous, created by the relative conditions of the financial and real sectors. With the existence of credit money, Wicksell argued, two interest rates prevail: the "natural" rate and the "money" rate. The natural rate is the return on capital – or the real profit rate. It can be roughly considered to be equivalent to the marginal product of new capital. The money rate, in turn, is the loan rate, an entirely financial construction. Credit, then, is perceived quite appropriately as "money". Banks provide credit, after all, by creating deposits upon which borrowers can draw. Since deposits constitute part of real money balances, therefore the bank can, in essence, "create" money.