Monetary Theory and Macroeconomics

In his monetary theory, Lindahl also started out from a critical appraisal of Wicksell’s approach, but here his critique was so severe as to lead effectively to its abandonment. Lindahl approved of Wicksell’s general approach to monetary analysis, according to which the same sort of mechanisms should be used to explain monetary and “real” phenomena, and stressed that “changes of the price level as well as of relative prices should be explained by the relationship between demand and supply of goods” (1930 [1939]: 245).

However, he dismissed Wicksell’s concept of the “natural rate of interest”, together with the associated idea that it acts as an attractor for the money rate of interest:

Only under very special assumptions is it possible to conceive of the natural or real rate of interest determined purely by technical considerations, and thus independent of the price system. For this to be true it must be supposed that the productive process consists only in investing the units of goods or services of the same type as the final product, the latter increasing with the passage of time without the cooperation of other scarce factors.... Under more realistic assumptions it is not possible to measure the investment and the product in the same real unit. To compare services invested and the resulting products, they must be expressed in a common unit which presupposes that the price relation is given. Then the real rate of interest does not depend only on technical conditions, but also on the price situation, and cannot be regarded as existing independently of the loan rate of interest. (1930 [1939]: 247-8; emphasis added) In Penningpolitikens Medel (1930 [1939]) Lindahl investigated the consequences of cumulative processes that are triggered by a lowering of the money rate of interest. Following Wicksell, he, for simplicity, assumed a pure credit economy, in which the monetary authority sets the money rate of interest autonomously (Lindahl 1930 [1939]: 139-41), and then explored in a variety of scenarios the effects on the price level, income, savings, and investment by varying the assumptions regarding investment periods (rigid, non-rigid), resource constraints (fully employed, unemployed resources), expectations formation (static, adaptive, forward-looking), and the state of information (perfect, imperfect foresight). In one of those scenarios Lindahl argued that the credit expansion consequent upon the lowering of the money rate would induce an income redistribution mechanism by means of which savings ex post are adapted to the increased level of investment.

The rise in the price level that follows from the credit expansion reduces the purchasing power of fixed nominal incomes, but tends to raise the incomes of entrepreneurs, inducing them to plough back their inflationary windfall profits into further investment: “The shift in the price level will be sufficiently large to cause such a change in the distribution of incomes that total savings in the community will correspond to the value of real investment” (1930 [1939]: 175). Lindahl stressed that the amount of “unintentional saving” depends on the assumptions regarding expectations formation: with static expectations, the cumulative price rise “need not continue indefinitely, but comes to an end when the supply of capital has been increased until it corresponds to the new rate of interest” (1930 [1939]: 181). Obviously, savings and investment are here envisaged as being equilibrated not by changes in aggregate income but by variations in income distribution. Lindahl thus anticipated important elements of the Kaldor-Pasinetti theory of distributive shares (see Chiodi and Velupillai 1983; Velupillai 1988). In his later contributions to monetary theory, Lindahl (1957) adopted a monetarist perspective and anticipated the Phelps-Friedman “accelerationist hypothesis” in inflation theory (Boianovsky and Trautwein 2006).

Christian Gehrke

Monetary Theory and Macroeconomics

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