Works
It is no easy task to assess Cassel’s contributions to economics. His success as a popular- izer of economics was, in his own view, based on his emphasis on simplification of theory to bring out its “essentials”, on realism, and on political engagement in the non-partisan “service of reason”.
Cassel’s critics argued, however, that his general equilibrium framework was simplistic and incomplete, that he confused positive and normative thinking, and that, in his conceited manner, he was incapable of contributing to a fruitful discourse. With hindsight it might nevertheless be argued that Cassel managed to set some impulses for the progress of economic thinking.According to Cassel, it all started in the summer of 1898, in the little university town of Tubingen, a place in Southern Germany that he liked for its mountains and plane tree- lined avenues. “The economic teaching, on the contrary, I found most unsatisfactory and almost ridiculous”, he remembered in his memoirs (1940: 15). Rejecting the widely taught, but “worthless” concepts of value, Cassel became fully convinced of his historical mission: “During these weeks, my decision to abolish the whole theory of value and build up an economic theory directly on a study of price formation came to maturity” (ibid.). Soon thereafter Cassel published his outline of an elementary theory of prices, explaining in the introduction: “Of the authors that can... be regarded as my predecessors, only Walras be mentioned here. It is deplorable that he deprived himself of a wider readership by using an extraordinarily clumsy mathematical apparatus.” (1899: 396, my translation). Cassel simplified Walras’s general equilibrium theory to the extent of doing away with “utility metaphysics”, and value theory in general, in favour of the “universal principle of scarcity”. In his Sozialokonomie (1918), he used this principle to integrate the quantity theory of money and business cycle theory with a general equilibrium analysis in which all prices are expressed in terms of money.
He no longer referred to Walras: “Since the theory is based on foundations that differ strongly from the conventional, the examination of other opinions would mostly have been rather sterile” (Cassel 1918: v, my translation).Moreover, Cassel’s unifying use of the scarcity principle did not imply that he had overcome the neoclassical dichotomy of the determination of relative prices and money prices - on the contrary:
In the general economic theory we must reckon all values in a unit of money. The value of this unit itself cannot be determined there. To do this is the separate function of the theory of money. The central point of this theory is that the value of the unit is determined by the scarcity of the means of payment valid in the given monetary system. (Cassel 1918 [1932], vol. 1: v-vi)
Likewise, business cycles were described in terms of the scarcity of savings, where variations in the production of fixed capital result from “an over-estimate of the supply of capital, or of the amount of savings available for taking over the real capital produced” (Cassel 1918 [1932] vol. 2: 649).
Even though Cassel (1918) refused to refer to Walras, he helped to revive interest in Walrasian general equilibrium analysis, which had been largely lost out of sight by the 1890s. Chapter 4 of his Sozialokonomie (1918) contains a model of a perfectly competitive, closed and stationary economy, in which goods are produced by making use of factor services, with a technology defined by fixed technical coefficients. The system consists of several sets of equations. The first, in Cassel’s order, describes the prices of final goods as equal to their production costs in “free competition”. The second set determines the demand for each final good as a function of the prices of all final goods. The third set states the market clearing conditions for all goods: “[T]he fixing of prices in accordance with the principle of scarcity has to restrict the demand until it can be met out of the available supply of commodities” (Cassel 1918 [1932] vol.
1: 137). The fourth set uses technical coefficients of the production functions to state the market clearing conditions for the factors of production. All four sets constitute a system of simultaneous equations by which equilibrium prices, costs and quantities are determined jointly. As the number of unknowns in the system is equal to the number of equations, the system satisfies the criterion of completeness. To Cassel, this was sufficient proof of the existence of a unique general equilibrium solution. He argued, though only verbally, that this proof could also be given for a “uniformly progressing economy”, in which factor supplies and demands for goods are increased at a fixed identical rate such that aggregate output grows along a steady-state path.Ignoring the complexities of value theory, Cassel managed to model the interaction of markets in a price system, where only consumer preferences, technology and factor endowments are exogenous. His analytical framework became thus the “proximate starting point of the development of modern neoclassical general equilibrium theory” (Kurz and Salvadori 1995: 408). Using the logic of this framework, Cassel invoked Say’s law to argue, contra Keynes and others, that there is nothing such as involuntary unemployment, as long as factor prices (both wages and interest) are allowed to move freely (Boianovsky and Trautwein 2003).