Knut Wicksell

Knut Wicksell, Swedish economist

Johan Gustaf Knut Wicksell (December 20, 1851 – May 3, 1926) was a Swedish economist, often regarded as the father of Stockholm school of economics. Elements of his public policy were taken by the Swedish government, becoming part of their program of welfare state. He tried to synthesis the three theoretical schools of economy - the Lausanne school, the Austrian school, and the Ricardians. He is also renown for his pioneering work in monetary theory.

Life

Knut Wicksell was born in Stockholm, Sweden, the son of a relatively successful businessman and real estate broker. He lost both his parents at a relatively young age - his mother died when he was only six years old, and his father when he was fifteen. His father's considerable estate allowed Wicksell to enroll at the University of Uppsala in 1869 to study mathematics and physics. He received his first degree in two years, but continued in graduate studies until 1885 when he received his doctorate in mathematics. In the following years, however, his interests began to shift toward the social sciences, and in particular, economics.

In 1887, Wicksell received a scholarship from the Victor Lorén Foundation to study economics in Germany and Austria. There he attended lectures by the economist Carl Menger in Vienna, and also studied at the universities of Strassburg, Berlin and Paris. After the return to Stockholm, he continued to draw attention with his radical lectures and papers, but was unable to secure permanent employment.

Wicksell took in 1887 a common-law wife, Anna Bugge, with whom he had two sons. He soon found it difficult to support his family on his irregular positions and publications. He received his doctorate in economics from University of Uppsala in 1896, but still could not get a professorship job. Economics in Sweden at the time was taught as part of the law school and Wicksell was unable to gain a chair as a professor because of a lack of a law degree. He returned to the University of Uppsala where he completed a four-year study in two years, and subsequently became an associate professor at that university in 1899.

In 1900, Wicksell became a full professor at Lund University, where his career blossomed. He published numerous works and taught classes in tax law and economics. After a lecture in 1908 satirizing the Immaculate Conception, Wicksell was briefly imprisoned for two months, serving the sentence in 1910.

In 1916, Wicksell retired from his post at Lund and took a position at Stockholm, advising the government on financial and banking issues. In Stockholm, Wicksell continued to supervise doctoral dissertations in economics, of many future great economists of the so-called "Stockholm School," such as Bertil Ohlin and Gunnar Myrdal.

Wicksell died in 1926 in Stockholm, while writing a final work on the theory of interest.

Work

As a lecturer at Uppsala, Wicksell had attracted attention for his opinions about labor. At one lecture, he drew correlation between worker’s alienation and poverty with social ills such as drunkenness and prostitution. Although he was sometimes identified as a socialist, his solution to the above problems was decidedly Malthusian in advocating birth control – a theory he would defend to the end of his life.

Although he had attracted some attention for his fiery ideas, his first work in economics, Value, Capital and Rent, published in 1892, was largely unnoticed. In 1896, he published Studies in the theory of Public Finance, applying the ideas of marginalism to progressive taxation, public goods, and other aspects of public policy, attracting considerably more interest.

Wicksell was enamored with the theory of Léon Walras (the Lausanne school), Eugen von Böhm-Bawerk (the Austrian school), and David Ricardo, and sought a synthesis of the three theoretical visions of the economy. Wicksell's work on creating a synthetic economic theory earned him a reputation as an "economist's economist." For instance, although the marginal productivity theory - the idea that payments to factors of production equilibrate to their marginal productivity - had been laid out by others such as John Bates Clark, Wicksell presented a far simpler and more robust demonstration of the principle, and much of the present conception of that theory stems from Wicksell's model.

Extending from Ricardo's investigation of income distribution, Wicksell concluded that even a totally unfettered economy was not destined to equalize wealth, as a number of his predecessors had predicted. Instead, Wicksell claimed, wealth created by growth would be distributed to those who had wealth in the first place. From this, and from theories of marginalism, Wicksell defended a place for government intervention to improve national welfare.

Wicksell's most influential contribution was his theory of interest, published in his 1898 work, Interest and Prices. He made a key distinction between the natural rate of interest and the money rate of interest. The money rate of interest, to Wicksell, was merely the interest rate seen in the capital market; the natural rate of interest was the interest rate that was neutral to prices in the real market, or rather, the interest rate at which supply and demand in the real market was at equilibrium - as though there were no need for capital markets. This connected to the theory of the Austrian School, which theorized that an economic boom happened when the natural rate of interest was higher than the market rate.

This contribution, called the "cumulative process," implied that if the natural rate of interest was not equal to the market rate, demand for investment and quantity of savings would not be equal. If the market rate is beneath the natural rate, an economic expansion occurs, and prices, ceteris paribus, will rise.

This idea would be expanded upon by the Austrian school, which used it to form a theory of the business cycle based on central bank policy - changes in the level of money in the economy would shift the market rate of exchange in some way relative to the natural rate, and thus trigger a change in economic growth. The cumulative process was the leading theory of the business cycle until John Maynard Keynes' The General Theory of Employment, Interest, and Money. Wicksell's theory would be a strong influence in Keynes's ideas of growth and recession, and also in Joseph Schumpeter's "creative destruction" theory of the business cycle.

Legacy

Wicksell is regarded the father figure of the Stockholm school, which took many of Wicksell’s insights and developed them into its own version of macroeconomics. This version, in a way, resembled later Keynesian economics. Among the Swedish economists who continued to expound on Wicksell were Bertil Ohlin, Gunnar Myrdal, and Dag Hammarskjöld, later secretary general of the United Nations.

Elements of Wicksell’s public policy were taken strongly to heart by the Swedish government, including his vision of a limited welfare state. Wicksell's contributions to economics have been described by some economists as fundamental to modern macroeconomics.

Wicksell's main intellectual rival was the American economist Irving Fisher, who espoused a more succinct explanation of the quantity theory of money. Although both economists concluded from their theories that at the heart of the business cycle (and economic crisis) was government monetary policy, their disagreement would not be solved in their lifetimes, and indeed, it was inherited by the policy debates between the Keynesians and monetarists beginning a half-century later.

Publications

• Wicksell, Knut. 1896. Finanztheoretische Untersuchungen debst Darstellung und Kritik

des Steuersystems Schwedens. Jena: Gustav Fischer

• Wicksell, Knut. 1936 (original published in 1898). Interest and Prices. Augustus M Kelley Pubs. ISBN 0678000867
• Wicksell, Knut. 1967. Lectures on Political Economy. Augustus M Kelley Pubs. ISBN 0678065209
• Wicksell, Knut. 1969. Selected Papers on Economic Theory. Augustus M Kelley Pubs. ISBN 0678004935
• Wicksell, Knut. 1970 (original published in 1892). Value, Capital and Rent. A. M. Kelley. ISBN 0678006520
• Wicksell, Knut. (original published in 1896). Studies in the theory of Public Finance.

References

ISBN links support NWE through referral fees

• Blaug, Mark. 1992. Knut Wicksell (1851-1926). Pioneers in economics, 28. Aldershot: Elgar. ISBN 1852784911
• Formaini, Robert L. n.d. Knut Wicksell: The Birth of Modern Monetary Policy. Federal Reserve Bank of Dallas, 9(1). Retrieved on July 21, 2007, <http://www.dallasfed.org/research/ei/ei0401.html>
• Garlund, Torsten W., and Nancy Adler. 1958. The life of Knut Wicksell. Acta Universitatis Stockholmiensis, new ser., 2. Stockholm: Almqvist & Wiksell.
• Strøm, Steinar, and Bjorn Thalberg. 1979. The Theoretical contributions of Knut Wicksell. London: Macmillan. ISBN 0333253450
• Uhr, Carl G. 1960. Economic doctrines of Knut Wicksell. Berkeley: University of California Press.
• Wood, John C. 1994. Knut Wicksell: critical assessments. London: New York. ISBN 0415108861

External links

• Knut Wicksell - Article on Knut Wicksell from the Federal Reserve Bank of Dallas
• Knut Wicksell - Biography in Concise Encyclopedia of Economics
• Knut Wicksell – Article by Anetta Čaplánová
• Knut Wicksell – Article by Richard E. Wagner
• Knut Wicksell – Biography in Encyclopedia Britannica Concise
• Knut Wicksell and Contemporary Political Economy – Article by Richard E. Wagner

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