Impact on Concepts of Economic Policy

The members of the Stockholm School were not only involved in the development of dynamic theory; they were also engaged in designing policy strategies for macro­economic stabilization.

The first contribution is Lindahl’s persistent struggle for price-level stabilization as adviser to the central bank (see Boianovsky and Trautwein 2006). Even though he per­sonally favoured nominal GDP targeting (Lindahl 1929b, 1939: 223-44), he supported the shift from exchange-rate targeting to price-level targeting when Sweden went off the gold standard in 1931. He did this mainly for pragmatic reasons, as national accounting was not yet developed. In Lindahl’s view, setting the focus on the general price index, which he helped to develop and maintain, was more operational for anchoring the infla­tion expectations of the public. The Riksbank was the first central bank in history to control inflation by such a strategy. At the same time, Lindahl’s work on concepts of estimating national income, which was closely related to his work on monetary econom­ics and dynamic analysis, laid some grounds for social accounting theory (Lindahl 1937).

The second contribution is the concept of countercyclical fiscal policy, which Lindahl and Myrdal developed between 1930 and 1935. They argued that monetary policy would not always be sufficient for stabilizing the economy, when interest rates failed to coor­dinate saving and investment. In a section later omitted from the English translation, Lindahl (1930: 63-8) discussed strategies of stabilization by variations of public revenues and expenditures. In a memorandum on The Economic Effects of Fiscal Policy, Myrdal (1934) outlined a strategy of countercyclical fiscal policy that would balance the public budget over the business cycle instead of each and every fiscal year. Lindahl (1935 [1939]: 351-82) showed how macroeconomic stabilization and fiscal soundness could be made compatible and operational as principles for balancing the budget.

The third contribution is Ohlin’s work on aggregate income mechanisms and an employment norm for economic policy. Among his publications on these issues, his report on Monetary Policy, Public Works, Subsidies and Tariff Policy as Remedies for Unemployment (1934) stands out, together with an article “On the formulation of mon­etary theory” (1933, translated 1978). Ohlin rejected the approaches of Lindahl and Myrdal, who interpreted Wicksell’s cumulative process as a failure of the interest-rate mechanism to coordinate intertemporal plans. In his view, Wicksell’s achievement was to describe imbalances of aggregate demand and supply. These need not be caused by interest-rate gaps; they could also be generated by autonomous changes in consumption, both private and public. Ohlin (1933 [1978]: 368-80) argued that such impulses induce changes in investment demand which generate the levels of output and income that ex post bring saving in line with investment. Contrary to the cliches of political geography, Ohlin, a liberal by conviction and affiliation (later to become opposition leader in the Swedish parliament), favoured the minimization of unemployment as a norm for mon­etary policy (see Wadensjo 1991), whereas this norm was criticized by Myrdal, the social democrat, because it would lead to unintended “cumulative price movements...

Finally, these positions were supported by Alf Johansson’s Wage Changes and Unemployment (1934), which showed - with reference to the depression in the early 1920s - that wage cuts are not a safe remedy for curing depressions. They tend to reduce aggregate demand and to make depressions even worse by their negative effects on expected profits and investment. Both Johansson and Ohlin combined elements of multiplier and accelerator analysis, but did not contribute to the debates about dynamic method.

Looking back on the achievements of the Swedish economists between 1930 and 1935, it should not be surprising that Keynes failed to make much of an impression on them in October 1936. They found his General Theory less general than their own work and his conclusions nested in their own approaches. Since then, there have been debates again and again, to which extent the Stockholm School anticipated the core ideas of Keynes’s General Theory (see Lundberg 1996: 19-37). There are similarities in the rejection of the “classical” concepts of a natural rate of interest, the stability of full-employment equilibrium and strictly balanced public budgets. However, as Lundberg (1996: 36) summarized it:

[T]he Swedish economists focused on the dynamics of expansion and contraction, whilst Keynes concentrated mainly on those factors that determined an under-employment equilib­rium. Furthermore, the economists of the Stockholm School also dealt with the analysis of booms, with supply constraints during periods of expansion and with period-to-period dynam­ics of contraction.

Many of the Swedish insights were complementary to Keynesian theory and became standard fare in macroeconomics. The label of the Stockholm School faded away, because it was never a school in the sense of a unifying “core model” or body of doctrines. Its members had a common research agenda in terms of dynamic theory and stabilization policy. But they had a tendency of agreeing to disagree in order to expand the scope of their analysis. Furthermore, their discourse ended in the second half of the 1930s, when all of them, except Lindahl, left academia, and in some cases even the country. They went into applied research, administration and politics. Some of them made impressive careers, such as Dag Hammarskjold, who became UN General Secretary. Others, such as Ohlin and Myrdal, received Nobel Prizes - although not essentially for their contribu­tions to the economics of the Stockholm School.

Hans-Michael Trautwein

See also:

Gustav Cassel (I); Erik Lindahl (I); Keynesianism (II); Macroeconomics (III); Gunnar Myrdal (I); Knut Wicksell (I).