KNUT WICKSELL AND THE SWEDISH BRAND OF NEO-CLASSICISM

In a discipline that has been rich in eccentrics, Knut Wicksell (1851-1926) must rank near the top of any list of unforgettable characters. By his own admission he displayed a 'contrary disposition' from an early age and throughout his life he was a vigorous opponent of social conventions.

In his theoretical writing Wicksell polished and refined the marginal approach to the analysis of value and distribution. He did not emerge with the conclusion (as some of his neo-classical contemporaries had done) that the allocation of resources produced by free competition would be socially optimal. He did not deny that a regime possessing the conditions required by pure competition would tend to yield an outcome in which the prices of productive factors would be equated to the value of their respective marginal products and the prices of outputs made equal to the marginal costs of production. Nor did he deny that these results suggested that no gains in output could be accomplished through a re­allocation of a given stock of productive resources. He insisted, however, that the social desirability of this outcome could not be judged in isolation from the distribution of income and wealth.

As a matter of fact all argument in favour of free competition rests on one tacit assumption, which, however, corresponds but little to reality, namely that from the beginning all men are equal. If that were so, everyone would be equipped with the same working power, the same education and, above all, the same economic assets, and much could then be said in favour of free, unhampered competition; each person would have only himself to blame if he did not succeed.

But if all conditions are basically unequal, if some people have good hands from the beginning and others hold only low cards, free competition does nothing to stop the former from winning every trick while the latter pay the table.12

It did not follow, Wicksell maintained, that the means of production should be socialized. He saw little prospect that public ownership could improve on the productive performance of the free market system. He elaborated this position with arguments similar to those Bohm-Bawerk had used to demonstrate that all societies beyond the most primitive faced the same fundamental problems of 'capitalistic' production. The attention of the state, as he saw it, should be directed to reducing the handicaps suffered by the weak in the competitive struggle by making opportunities freely and universally available and by levying heavy inheritance taxes.

The most novel of Wicksell's analytical contributions lay in the area of monetary theory. Orthodox neo-classicism, it will be recalled, treated monetary questions as matters of distinctly secondary concern. Money, of course, was essential as a circulating medium in an exchange economy, but it was still only a ‘veil' covering exchanges of goods. Wicksell contended to the contrary that money and credit had a crucial bearing on the level of economic activity. Moreover, these matters grew in importance and complexity with the increasing reliance on banks as creators of means of payment. The amount of credit banks supplied was, of course, determined primarily by the demand for loans which, in turn, derived from the net gains a borrower anticipated from the use of credit.

... saving will be discouraged and for that reason there will be an increased demand for goods and services for present consumption. In the second place, the profit opportunities for entrepreneurs will thus be increased and the demand for goods and services, as well as for raw materials already in the market for future production, will evidently increase to the same extent as it bad previously been held in check by the higher rate of interest. Owing to the increased income thus accruing to the workers, landowners, and the owners of raw materials, etc., the prices of consumption goods will begin to rise, the more so as the factors of production previously available are now withdrawn for the purposes of future production. Equilibrium in the market for goods and services will therefore be disturbed. As against an increased demand in two directions there will be an unchanged or even diminished supply, which must result in an increase in wages (rent) and, directly or indirectly, in prices.13

In short, Wicksell's analysis pointed to the possibility that the behaviour of interest rates - rather than tending automatically to assure aggregative equilibrium - might instead generate cumulative movements away from equilibrium. Moreover, in a system with a highly elastic supply of bank credit, there was no reason to expect these fluctuations to be self­correcting without considerable dislocation. The indirect connexions Wicksell established between the monetary system and the level of economic activity via the rate of interest foreshadowed a major revolution in economic thinking which in the 1930s shook the very foundations of neo-classical economics.