The twentieth century
The breakthrough for neoclassical academic economics in Sweden is most often connected with three names: David Davidsson, Knut Wicksell and Gustav Cassel. When David Davidsson (1854—1942) in 1899 started Ekonomisk Tidskrift, this was the first step in the professionalisation of modern academic economics in Sweden.
However, Davidsson was never a neo-classicist. In his early days he was clearly inspired by the German Katheder-sozialisten and even in old age he did not altogether abandon his fondness of the Marx/Ricardo labour theory of value. His chair was placed partly in the Faculty of Law and partly in the Faculty of Philosophy, and the bulk of his teaching was in economic law and the history of economic thought.Seen in perspective the most outstanding of the threesome was most probably Knut Wicksell (1851—1926). He started his career as a radical student in Uppsala and became known as neo- Malthusian propagating for birth control. He was also a republican and critical of the established state church, which he mocked especially for its teachings on the immaculate conception — in an essay which sent him to jail for two months in 1909. After becoming a doctor he was refused the Docent title in Uppsala (probably because of his radicalism). Instead he moved to Lund where he received a chair in Nationalekonomi och finansratt in 1901. Later on he was used as an expert by different Swedish governments on taxation and he sat in many parliamentary committees. While never being a socialist, his social reform views made him an ally of the emerging Social Democratic party.
While studying abroad in the early 1890s, Wicksell came into contact with the Austrian school and especially the works of Carl Menger and Eugen von Bohm-Bawerk. Already in 1892 he had published an essay Kapitalzins und Arbeitslohn where he presented a rough sketch of what later became his marginal productivity theory of distribution.
It was followed up by a number of original works — influenced by the Austrians, but also including a number of innovative ideas on the use of marginal analysis in different fields of economics — such as Uber Wert, Kapital under Rente (1893, translated into English in 1954 as ‘Value, Capital and Rent') and Geldzins und Guterpreise (1898, translated as ‘Interest and Prices' in 1936). For his doctorate he dug deep into the theory and practice of fiscal policy, and in 1896 he received a doctorate magna cum laude for the first part of Finanztheoretische Untersuchungen. In Sweden his position as the leading economist of his time was established after the publication of the first part of his Forelasningar i Nationalekonomi (1901, 1906), which for a long time became the standard academic textbook introducing the new neoclassical theories into the Swedish universities.However, Wicksell was more than a compiler of new theories on marginal analysis. What has made him so attractive to later generations of neoclassicals, such as J.R. Hicks and others, was his mix of Austrian theories of production and capital with a Walrasian general equilibrium theory. His ability to synthesise especially showed in his paper Om Inkomstfordelningen (1901), in which he elegantly presented his version of the marginal cost theory later developed by Cobb and Douglas, which remained standard for many years to come. However, in Sweden he became most known for his analysis of what he called ‘natural rent' (where no inflation occurred), where the rent of money equalised the interest on capital. His contribution here paved the way for what some decades later would become known as ‘the Stockholm school' with its emphasis on disequilibrium and the impact of prices.
The third of this first wave of new professional economists, Gustav Cassel (1864—1944) has remained a controversial figure. Receiving a chair in Stockholm 1904 — after a passing flirt with the Historical School and social reform — he became an enigmatic Walrasian.
However, what was problematic was that he was eager to emphasise that his version of general equilibrium theory was the original one, rather than Walras's. Later generations have been less convinced, or for that matter that his magnum opus, Teoretisk Socialekonomi (1914) was as innovative as Cassel thought it to be. Outside Sweden, after the First World War he became something like an international monetary expert travelling to different countries in order to give advice on how to adapt to the reintroduction of the Gold standard, as well as making vocal his ideas within the international conference on monetary stabilisation in Genoa in 1922.The birthplace of the so-called Stockholm school of economics has been located to a meeting with the Stockholm-based Nationalekonomiska klubben in 1928, where a number of young Turks of the younger generation of economists — including Gunnar Myrdal (1898—1987), Erik Lindahl and Dag Hammarskjold (who later became Secretary general of the United Nations) — aggressively attacked the older generation, particularly Cassel, Sven Brisman and Eli Heckscher (1879—1952). Heckscher was at heart an economic historian, but together with Bertil Ohlin (1899—1979) he had formulated the so-called Heckscher-Ohlin theorem of comparative advantage in 1919. Although Ohlin was not present at the meeting, he surely also belonged to this group.
Partly inspired by the ‘new economics’ stemming from J.M. Keynes, but more fundamentally from their reading of Wicksell’s theories on the ‘natural rate of rent’, this group of young economists started out from the assumption that the older generation’s faith in the inevitability of general equilibrium in the long run was a false start. Especially in Myrdal’s dissertation, Prisbildningsproblemet och Foranderligheten (1927), its message was formulated: that the old microbased and static theories had little to say about such phenomena as slumps, crises and mass unemployment. In his dissertation Myrdal especially discussed the role of expectations and the dynamics between ex ante and ex post.
It was not self-evident that an economy, having fallen into problems, would automatically readjust itself and reach equilibrium. Taking off where Wicksell had ended with his discussion on cumulative disruption over time, Myrdal, Ohlin, Hammarskjold and others developed an analysis of the business cycle which, in contrast to Keynes’ General Theory, was of a dynamic kind. Perhaps Erik Lundberg in his Studies in the Theory of Economic Expansion (1936) went furthest in this direction, and also highlighted the weakness of the whole group. Instead of contributing to a reconciliation between micro and macro theory — which seemed a necessary task for ‘Keynesian’ economists after 1945 — the work of the Stockholm school led into opposite and, for standard economic theory, dire directions.Two themes appear once the Stockholm school is up for discussion. First its relation to Keynes, and here it seems clear that Wicksell instead was the school’s main source of inspiration. Secondly, the impact of both Keynes and the Stockholm school on the crisis policies developed in Sweden during the 1930s has been discussed vividly. Also in this case, Keynes’ influence on the Stockholm school was minimal. Already in 1932 Myrdal and Ohlin formulated the new fiscal policies which would be the hallmark of the new Social democratic government coming to power the same year. When Keynes’ General Theory appeared in 1936, such policies in order to stimulate demand were standard procedure. More important for Myrdal and Ohlin had been the general discussion during the 1920s on public works formulated by liberals and social democrats both in Britain and Sweden.
While the Stockholm school in the 1930s seemed to provide an alternative road to Keynes for macroeconomics, this would not become the case. Why? There are several reasons for this. First, of course, Keynes’ theories were easier to model with — and to combine with the old micro fundamentals — than Stockholm’s complex and dynamic case-study approach, which offered few if any equilibrium points.
Secondly, many of the leading Stockholm economists went into politics or administration: Myrdal first went to the USA to write An American Dilemma (1944) concerning race problems, and then after the war became a minister in the social democratic government; Ohlin became the leader of the liberal Folkpartiet. Thirdly, this meant that they did not raise a second generation of Stockholm economists in the universities. Rather, their influence waned and after 1945 Keynesianism was also adopted as an orthodoxy in Sweden.As in most other Western countries, the dominance of Anglo-Saxon economics and the neoclassical synthesis became strongly felt after the Second World War. When economics at the universities grew in importance during the 1960s/70s, macro- and microeconomics a la Paul Samuelson were taught and explicated. When the Institute for International Economics was started at Stockholm University in 1967 this was where Sweden's leading economists gathered. Up to the 1970s economists such as Erik Lundberg and Assar Lindback were defending orthodox Keynesianism — but always seeking to combine macro with micro, and emphasising the role of the market instead of the visible hand of the state. However in the 1980s there was a breakthrough for new theories. The influence of Hayek, Friedman, and also the Public Choice School became remarkably strong. This reflected what was going on elsewhere, but was perhaps reinforced in Sweden by the establishment in 1968 of the Swedish Central Bank Nobel Memorial Prize, which most probably has led to a certain trendiness within the Swedish economic establishment. At the same time the neoclassical orthodoxy has prevailed very strongly among Swedish economists. In recent years the subject in Sweden has been divided up into a number of sub-fields: particularly strong have been labour market economics, general macroeconomics, taxation and game theory.