Impact

The first reactions to Cassel’s Theory of Social Economy were not all positive. Wicksell (1919) wrote a long and devastating review, in which he drew attention to numerous inconsistencies and shortcomings, starting from the demonstration that Cassel’s rejec­tion of value theory is flawed, because “scarcity and marginal utility are fundamentally one and the same thing” (1919 [1934]: 221).

Later, the Stockholm School came to work with Wicksell’s ideas rather than Cassel’s. However, Gunnar Myrdal, Bertil Ohlin, Erik Lundberg and other members of the Stockholm School had been students of Cassel, and some of their main contributions clearly bear traces of Cassel’s influence. The origin of Ohlin’s (1933) theory of interre­gional trade, which became the core of neoclassical trade theory, was an attempt to extend Cassel’s model of price determination in one economy to a model of exchange between several economies. Cassel’s name could easily be added to the “Heckscher-Ohlin” label of that theory, even if Ohlin greatly expanded the scope of Cassel’s general equilibrium analysis, not only by extending it to the multi-economy case, but also by endogenizing the technical coefficients as cost-minimizing variables (Samuelson 2002). Myrdal’s (1927) dissertation on price formation and change extended Cassel’s static system to more dynamic considerations of uncertainty and the formation of expectations. It marked the beginning of the Stockholm School, which developed from central macroeconomic insights of Wicksell, but sided with Cassel in critique of Wicksell’s value-theoretical concept of the natural rate of interest. The other impacted dissertation, often taken to mark the end of the Stockholm School, is Lundberg’s Studies in the Theory of Economic Expansion (1937), which contains a formalization of Cassel’s “uniformly progress­ing economy”.

As the leading textbook in the interwar period, Cassel’s Sozialokonomie also gave impulses for theoretical advances outside Sweden, especially in the fields of exchange-rate determination, Walrasian general equilibrium theory and business cycle theory. Cassel’s concept of purchasing power parity (PPP) as a fundamental explanation of exchange rates among “free and independent currencies” has been generally acknowledged as the base of modern exchange-rate theories. In the field of Walrasian general equilibrium theory, Cassel’s contribution to progress was more indirect. Cassel’s claim to have proved the existence of a unique general equilibrium by the criterion of completeness was critically examined by Hans Neisser (1932), Frederik Zeuthen (1932), and Heinrich von Stackelberg (1933), who (in this order) showed that completeness is not sufficient to guarantee a solu­tion that makes economic sense (in terms of non-negative prices), that the system ought to be written as inequalities, and that it could be overdetermined. These problems provoked debate in Karl Menger’s Mathematical Colloquium at Vienna and led, in 1935-36, to Abraham Wald’s proof of the existence of a unique equilibrium in a stationary Walras- Cassel economy, which in turn prepared the ground for the Arrow-Debreu model, nowa­days the standard of Walrasian general equilibrium theory.

Another area in which Cassel made an impact is business-cycle theory. In the 1920s and 1930s, the German language arena saw lively debates about the compatibility of general equilibrium analysis with a general explanation of industrial fluctuations. Together with Arthur Spiethoff, Cassel was the most prominent proponent of a non-monetary overin­vestment theory of business cycles, while his general equilibrium framework became the representative target of attack from all camps. Friedrich Lutz (1932) criticized Cassel extensively for explaining cyclical fluctuations by populistic mixes of theory and styl­ized facts, instead of consistently sticking to general equilibrium analysis proper. Lutz argued that cycles could all be explained within the latter’s confines, since they either represent exogenous changes in the data or endogenous reactions of the system - a view that resembles the use of Ragnar Frisch’s “impulse-propagation” terminology in modern mainstream economics.

Yet it was precisely Cassel’s skilful mix of a primitive relativity theory of market interaction with pragmatic shortcuts to the explanation of stylized facts that made both Cassel and Walrasian-style theory popular in the 1920s. When general-equilibrium approaches to business cycle theory became popular in the 1980s, Cassel was rediscov­ered as a pioneer of business cycle theory, growth theory, monetary targeting, revealed preferences and other concepts (Brems 1989). Such claims have later been disputed and downsized (Samuelson 1993), but it may still be argued that Cassel’s provocative simpli­fications have had catalytic effects on the development of economic thinking.

Hans-Michael Trautwein

See also:

Business cycles and growth (III); General equilibrium theory (III); Open economy macroeconomics (III); Stockholm (Swedish) School (II); Marie-Esprit-Leon Walras (I); Knut Wicksell (I).