Stockholm school (economics)
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The Stockholm school, or Stockholmsskolan, is a school of economic thought. It refers to a loosely organized group of Swedish economists that worked together, in Stockholm, Sweden primarily in the 1930s.
Overview of the Stockholm school
The members of the Stockholm school arguably developed Keynesian economics before John Maynard Keynes, except that hardly anybody in the English speaking countries could read Swedish, with the result that their work was unknown until later. Still, it is clear that they came, independently and at the same time as Keynes, to the same conclusions on macroeconomics and the theories of demand and supply. The reason is that, like Keynes, these economists were inspired by the works of Knut Wicksell, a Swedish economist at the turn of the twentieth century, whose classic quote is, certainly, worth to be read here:
A general rise in prices is therefore only conceivable on the supposition that the general demand has for some reason become, or is expected to become, greater than supply. This may seem paradoxical, because we have accustomed ourselves, with J.B. Say, to regard goods themselves as reciprocally constituting and limiting the demand for each other. And indeed ‘ultimately’ they do so; here, however, we are concerned with precisely what occurs, ‘in the first place’, with the middle link...Any theory of money worthy of the name must be able to show how and why the monetary or pecuniary demand for goods exceeds or falls short of the supply of goods in given conditions (Wicksell 1906: 159-60; Emphasis in original).
The impact of Swedish economists on the development of modern economic analysis has been profound. They were dealing with various aspects of the development of economics and economic thought from the mid- eighteenth century to the middle of the twentieth century. Most of their early work cover the golden age of Swedish economics, the early decades of the twentieth century, and deal with such figures as Knut Wicksell, Gustav Cassel, Eli Heckscher, Bertil Ohlin, and Erik Lindahl.
The "Political Economy Club," created a year before the end of World War I, was a small gathering of trained economists who were interested in scientific work in economics. Including Bertil Ohlin and his teachers, Eli Heckscher, Knut Wicksell, and Gustav Bagge, professors David Davidson and Sven Brisman, and half a dozen "docents" (associate professors), the membership numbered 20 economists of whom a few were graduate students. Bertil Ohlin recalled the meetings:
The meetings of this club were certainly the most stimulating "seminar" one could imagine. One of the members opened a discussion and then followed a free exchange of opinions. The subjects were chiefly theoretical. Knut Wicksell, who was 67 years old when I became a member, was probably the most stimulating participant of all the members (Ohlin 1977).
But the major point here is that they were trying to draw the general public interest in their issues. An example of one of the member's enormous productivity: in the years 1932-1943 he published on average almost 70 articles a year in Stockholms-Tidningen alone.
The economists from the Stockholm School have taken an active part in practically every debate of importance in Sweden since the turn of the century. Issues discussed there included the eight-hour workday, the New Economics of the 1930s, and forestry economics. Brinley Thomas, in the first account in English of the Stockholm School, emphasized the influence that professional economists of the School appeared to have on public affairs as seen by the above example. The publication in the newspapers soon gave way to the actual political activity of the Schools members.
Typical example was Bertil Ohlin who began as a scholar, then wandered back and forth for a time across the boundary between the academic and political worlds, eventually becoming a full-time politician. Similarly, Gunnar Myrdal, appointed in 1933 to the Lars Hierta Chair of Political Economy and Public Finance at the University of Stockholm as the successor of Gustav Cassel, was, in addition to his teaching activities, active in Swedish politics and was elected to the Senate in 1934 as member of the Social Democratic Party.
The best known scholars of the institution were arguably the economists Eli Heckscher and Bertil Ohlin, who developed the so called Heckscher-Ohlin theory of international trade. Ohlin later received the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. Heckscher is also known as the founder of economic history as an academic discipline in Sweden.
The movements name, "the Stockholm school," was launched in an article by Bertil Ohlin in the influential Economic Journal in 1937. The article was published in response to the publication of Keynes' magnum opus General Theory of Employment, Interest and Money in 1936, and its purpose was to draw international attention to the Swedish discoveries in the field, many of which had predated Keynes' discoveries.
Myrdal and Ohlin, eventually, and despite their " parallel political careers,” went on to further develop their theories, and in so doing they developed the intellectual underpinnings and theoretical basis of the modern Northern European welfare state. Their theories were embraced and implemented as national policy by the two powerful arms of the Swedish labor movement; the Swedish Social Democratic Party and the national labor union the Swedish Trade Union Confederation. In the post-World War II geopolitical situation with two rival predatory political blocks, their theories also got wide international appeal as a "third way," i.e. a middle way between a capitalist economy and a socialist economy. The objective of the "third way" being to achieve high levels of social equality, without stifling private entrepreneurship.
Leading members
Knut Wicksell
Knut Wicksell (1851-1926), who was a neoclassical economist, thought that if the price of one commodity got higher, it would be explained by either the increasing demand or the decreasing supply for that commodity, so if prices of all commodity got higher, it would also be explained in the same way. However, there is Say’s law in the neoclassical economics. The discrepancy between the demand and the supply is unfeasible in the world of Say’s law.
Wicksell showed two concepts concerning the interest rate: “monetary interest rate” and “natural interest rate.” While the former reflects the monetary side, the latter reflects the real side. Say’s law is possible only when these two interest rates are the same. Wicksell insisted that it is very special for the monetary economy in the real world. He analyzed the price change mechanism in case that these two interest rates separated.
If the monetary interest rate gets lower than the natural interest rate, most firms must increase their investment. If so, the aggregate demand will be larger than the aggregate supply. Each firm must recognize such condition as a good chance to set the price of its commodity higher. However, many firms must think in the same way, and the prices will get higher without any expected result for each firm. Firms must expect that the price level will get higher for the future. It will result in the circular and cumulative mutual relationship between the increasing investment and the higher price level; “the cumulative inflation process.” If the monetary interest rate is higher than the natural interest rate, the opposite will occur; “the cumulative deflation process.” Whenever there is discrepancy between the two interest rates, such processes continue without any ends.
In laying out this theory, Wicksell began the conversion of the old quantity theory into a full-blown theory of prices. The Stockholm school, of which Wicksell was the father figure, ran with this insight and developed its own version of macroeconomics. In some ways this version resembled later Keynesian Economics.
David Davidson
David Davidson (1854–1942) completed his doctorate in 1878 and was appointed professor at Uppsala in 1880. In the strictly geographical sense, as he was not teaching in Stockholm, he should not be regarded a member of the Stocholm School. His intensive collaboration with Wicksell and other Stockholm economist, however, makes him a bona fide Stockholm School member.
His research ranged over broad areas, primarily theory of capital, theory of value, and monetary and finance theory. His dissertation dealt with theory of capital, to which he made an extremely substantial contribution. He anticipated to a large extent the theses of the great Böhm-Bawerk, not least as regards his analysis of the foundations of interest.
Davidson's ideas never achieved an international breakthrough, probably because he wrote in Swedish. If he had written in more internationally saleable languages, he would probably have attained quite a significant place in the history of economic doctrine. In Sweden, however, he was highly appreciated both for his theory of capital and for his monetary theory, not to mention the norm of monetary policy which bears his name.
In the 1920s a famous debate raged between Wicksell and Davidson concerning the objectives of monetary policy. Wicksell maintained that the goal should be to keep the level of prices constant and, with changes in productivity, to let wages vary in proportion to productivity.
Davidson, on the other hand, promulgated the thesis that, with changes in productivity, wages should remain unchanged and that prices should vary in inverse proportion to productivity.
This "Davidson's norm" was justified partly by arguments involving business-cycle policy it was to hinder the emergence of cumulative processes of the sort Wicksell had studied and partly by arguments of equity it would mean that in periods of improved productivity people with fixed income, such as those living on pensions and on bank interest, would also benefit from this enhanced production.
In Penningpolitikens mål ("Objectives of Monetary Policy") from 1924, Erik Lindahl argue in favour of applying Davidson's norm. He based this argument primarily on the equity aspect. In the early 1930s Gunnar Myrdal subsequently took up the question of monetary equilibrium, and he too concluded that Davidson's norm should be followed. The same opinion informed the Report of the Commission on Unemployment in 1935. The same thesis was propounded in a number of publications in which, in the first half of the 1940s, were discussed the shape of economic policy after the war.
Among the advocates of the norm we notice Dag Hammarskjöld, who put forth his arguments in a 1944 article, and then minister of finance Ernst Wigfors, who was editing the Labour Movement's post-war program, and in whose lap Davidson's norm was firmly placed.
Karl Gustav Cassel
Gustav Cassel (1866-1945), a founding member, along with Knut Wicksell and David Davidson, of the Swedish school of economics, has remained a silent giant in 20th century economics. However, he also holds the unfortunate distinction of belonging to that distinct group of influential economists who are intensely disliked by everyone.
The Stockholm School, where he taught for many years, did its utmost to dissociate itself from him due to Cassel's bitter rivalry with their beloved master, Knut Wicksell. Although Walrasians applauded his general equilibrium work, they cringed at his attacks on utility theory. The Marshallians disliked him for exactly the opposite reason. The Austrians resented him for having helped bury Böhm-Bawerk's theory of capital and interest. And, finally, the Keynesians have no love for one of the most vociferous opponents of Keynesian Revolution.
All this was not helped by Cassel's abrasive personality and his refusal to acknowledge others's work. As Hans Brems noted:
A writer less generous than Cassel would be hard to find. Marx at least paid tribute to Quesnay and Ricardo. Cassel paid tribute to nobody. Walras had written the first system of simultaneous equations of general equilibrium. Pareto had purged it of any measure of sensations. Cassel followed both but mentioned neither...We must not treat Cassel the way he treated others. We must respect him as a pioneer (Brems 1986, 158)
Cassel taught economics at the University of Stockholm from 1903 until 1936. Gunnar Myrdal and Bertil Ohlin were his most prominent students. In his major work, Theory of Social Economy (1918), the marginal productivity was dumped in favor of fixed coefficient technology; utility theory, following up on his 1899 contribution, is dropped, and in his opinion:
This purely formal [utility] theory, which in no way extends our knowledge of actual processes, is in any case superfluous for the theory of prices...[T]his deduction of the nature of demand from a single principle, in which so much childish pleasure has been taken, was only made possible by artificial constructions and a considerable distortion of reality (Cassel 1918, 81).
Eli Heckscher
Eli Heckscher (1879 – 1952) was first professor of economics and later (from 1929) professor of economic history. In fact, he established economic history as an independent academic discipline in Sweden. He taught at the Stockholm School of Economics from 1909 and was a founder and director of the Stockholm Institute for Economic History. He wrote mainly on economic history, producing such works as The Continental System (1922) and Mercantilism (1935). He originated the concept of commodity points, which limit the fluctuation of paper currencies, and argued in favour of free trade, asserting that differing productive factors were responsible for differing commodities trading advantages among nations.
A few years before Heckscher’s death Svend Laursen and his wife prepared a translation from the Swedish of Heckscher’s 1919 article for the 1949 Readings in the Theory of International Trade (edited by Howard Ellis and Lloyd Metzler). This article received a revised translation in the gem of a book, Heckscher-Ohlin Trade Theory, (Flam and Flanders 1991). Although the primary objective of this latter work was to provide a translation, for the first time, of Bertil Ohlin’s 1924 dissertation, The Theory of Trade (Handelns Teori), it also served to confirm the importance of Heckscher’s pioneering article, written five years previously.
It is perhaps ironic that, as almost the entire academic career of Eli Heckscher was concerned with issues of economic history, whereas this single article on international trade theory was sufficient to award him the lead position in a “hyphen trophy” of the label, “Heckscher-Ohlin Trade Theory” (Ronald 1956).
Heckscher, in his younger days, was a social conservative, but after World War I he emerged, much like Cassel, as a full-fledged liberal with strong sympathy for British 19th century economic liberalism.
Bertil Ohlin
In 1931 Bertil Ohlin (1899-1979) succeeded Eli Heckscher, his teacher, as a professor of economics, at the Stockholm School of Economics. In 1933 Ohlin published a work that made him world renowned, Interregional and International Trade. In it, he attempted to pay more attention as to how factor supply reactions, location, taxation, social policy, and risk affect international division of labour.
The static factor proportion model was only a beginning. Ohlin built an economic theory of international trade from earlier work by Heckscher and his own doctoral thesis. It is now known as the Heckscher-Ohlin model, one of the standard model economists use to debate trade theory. The model was a break-though because it showed how comparative advantage might relate to general features of a country's capital and labour, and how these features might change through time.
The model provided a basis for later work on the effects of protection on real wages, and has been fruitful in producing predictions and analysis; Ohlin himself used the model to derive the Heckscher-Ohlin theorem, that nations would specialize in industries most able to utilize their mix of national resources efficiently. Today, the theory has been largely disproved, yet it is still a useful framework by which to understand international trade.
Later, Ohlin and other members of the "Stockholm school" extended Knut Wicksell's economic analysis to produce a theory of the macroeconomy anticipating Keynesianism.
Ohlin, a politician just as an eminent scholar, has always made clear that he counted himself as one of the liberal camp even in his youth. The keystone of his liberal outlook, exactly as with Cassel and Heckscher, was the conviction that an economic system based on individual property rights and competition would foster high growth, and that, in the long run, growth was crucial to the development of prosperity. One of his expressed goals was, just as with Cassel, to “counteract economic superstition” ( Ohlin 1972, 61-62, 184 ).
Pursuing the political angle even more, Ohlin was party leader of the liberal Liberal People's Party from 1944 to 1967, the main opposition party to the Social Democrat Governments of the era, and from '44 to '45 was minister of commerce in the wartime government.
Erik R. Lindahl
Probably the most theoretically rigorous member of the Stockholm School, Erik Lindahl (1891-1960) was the only member of that group who stayed wholly within academia. Although he obtained his degree at Lund and was highly influenced by Knut Wicksell, he was not Wicksell's student. Lindahl was a leading figure in the group that later was called the Stockholm School, compare Ohlin (1937a and 1937b) and Hansson (1982). One of the reasons for Lindahl’s importance was that he carried on the tradition from Knut Wicksell. His work formed a major link between Wicksell and younger Swedish economists.
Lindahl's contributions to economic theory, however, extend beyond his Wicksellian roots to embrace much of what is contained in modern Neo-Walrasian theory. Lindahl's formulation of the concept of sequence economies and intertemporal equilibrium (1929, 1930) is by far the first rigorous attempt to do so. Lindahl's couching of a theory of capital (1929, 1939) in intertemporal terms anticipates Malinvaud's famous attempt. The transfer of Lindahl's concepts to the anglophone world was accomplished by two of his most ardent supporters, John Hicks and Friedrich Hayek (1941). Since then, his work on "sequence analysis" has been given greater emphasis since the work of Frank Hahn and Roy Radner.
Lindahl's solution to the pricing of public goods is another noticeable achievement, brought into modern economic by Duncan Foley. Lindahl’s monetary theory provided a starting point for Myrdal’s analysis of monetary equilibrium. Myrdal started from Lindahl’s discussion of the concept of the normal rate of interest. But the purpose of Lindahl’s discussion was rather to motivate why he did not use the concept in his analysis. Furthermore, Lindahl’s application of the temporary equilibrium method to monetary analysis influenced Hicks and via Hicks theoretical developments during the 1970s and 1980s.
Gunnar Myrdal
Gunnar Myrdal (1898-1987) started his study in the current of Stockholm school. As he said, his theory of cumulative causation, also known as CC theory, was originated in Wicksellian monetary theory. However, he came to apply his theory to more practical problems after his study on the discrimination of black people in US.
The Carnegie Foundation commissioned Myrdal to produce a systematic study of American race relations. An American Dilemma( Myrdal 1944 ), the most exhaustive survey of race relations ever undertaken in the United States, is for the most part a useful source of data. In detail it presents many ingenious analyses of the materials. But it develops no hypothesis or consistent theory of race relations; and, to the extent that it employs the caste belief in interpretations, it is a bit misleading even though, according to Myrdal, the elaborate statistical techniques for generating and interpreting data often make the social research even more susceptible to bias. He argues that we need to put our value premises up front and put our research to the test of relevance and practical significance to our democratic social ideals.
His cumulative causation theory includes institutional and political factors besides the demand and supply. Concerning institutional factors in the analysis, he insisted that both economic and non-economic factors should be included in the analysis due to substantial importance equally. Myrdal argues against the hypothesis about the automatic tendency for a social system to stabilize through change. By contrast, he argues that such a change brings about other changes that intensify in a particular direction – the system becomes more polarized ( Myrdal 1957).
Myrdal's theory is pivotal to clarify the overall picture of his economics. Basing on his methodology of “explicit value premises,” he built it accordingly. He recognized the “virtuous circle” in developed countries, and the “vicious circle” in underdeveloped countries. Following his value premises, he insisted the necessity of “welfare world.”
Myrdal’s theory is the theory for “development.” By the word of “development,” Myrdal means more than mere increasing production.
Again, Myrdal’s theory allows the possibility and necessity of the social reform by introducing policies. It is different from Veblen’s standpoint of insisting “the natural selection of institutions.” On the other hand, though it is common for Myrdal and Kaldor to advocate strategic policies on the basis of each CC theory, Myrdal’s cumulative causation theory has a special methodology of “explicit value premises” and admits various value judgments or various optimal policies, so it is still different from Kaldor’s political proposals. Myrdal’s methodology on policies is so unique that it might as well be called “the political implications in the evolutionary economics.” Although Myrdal has been often introduced in the context of the history of cumulative causation theory and evaluated as a key person in its theoretical development, his position there has left quite a lot of ambiguity. Myrdal experienced three academic stages in his life: a theoretical economist or a member of Stockholm school, a politician, and an “institutional economist” as he called himself.
Besides being an economist and a sociologist, Myrdal was also a politician. He was twice elected to Sweden's Parliament as senator (1934-36, 1942-46), was minister for trade and commerce (1945-47), and served as the executive secretary for the United Nations Economic Commission for Europe (1947-57).
Legacy
Two major theories, both having brought the scientists involved Nobel Prize, were a direct product of the School. The Heckscher-Ohlin theory explains why countries trade goods and services with each other. According to the theory, a country specializes in the production of goods that it is particularly suited to produce. Countries in which capital is abundant and workers are few, therefore, specialize in production of goods that, in particular, require capital. Specialization in production and trade between countries generates, according to this theory, a higher standard-of-living for the countries involved.
Myrdal-Kaldor cumulative causation theory, on the other side, has been used for analyses of regions with uneven development. In one practical example from Estonia, it was shown that return from investment in education is bigger in economically stronger regions. Therefore, in order to overcome the effect of the CC theory, intervention on the part of government was deemed necessary. Government should finance and promote investment in labour force education. Employees’ low qualification and lack of human capital in a region determine inefficient production and economic loss.
And finally, Wicksell, a “father” of the Stockholm School, began the conversion of the old quantity theory into a full-blown theory of prices. Thus, according to many economic historian, the Stockholm school, ran with this insight and developed its own version of macroeconomics. In many ways this version resembled, and in fact predated, later Keynesian Economics.
Apart from the major scientific break-outs, such as Heckscher-Ohlin theory or Myrdal’s Cumulative Causation theory, the Stockholm School economists and sociologists were strongly politically active. In fact, with exceptions of Lindahl and, perhaps, Davidson all of them had "parallel political careers” and/or vaccilated between academia and politics. Their theories were embraced and implemented as national policy by the two powerful arms of the Swedish labor movement; the Swedish Social Democratic Party and the national labor union the Swedish Trade Union Confederation.
In the post-World War II geopolitical situation with two rival predatory political blocks, their theories also got wide international appeal as a "third way," i.e. a middle way between a capitalist economy and a socialist economy. The objective of the "third way" being to achieve high levels of social equality, without stifling private entrepreneurship.
ReferencesISBN links support NWE through referral fees
- Brems, H. 1986. Pioneering Economic Theory, 1630-1980: A Mathematical Restatement. Baltimore, MD: Johns Hopkins University Press. ISBN 0801826675
- Cassel, Gustav. Gustav Theoretische Sozialökonomie. Leipzig: C. F. Winter. English translation 1923: The Theory of Social Economy, London: T. F. Unwin, 1918.
- Cassel, Gustav. 1934. Teoretisk socialekonomi. Stockholm: Kooperativa förbundets förlag.
- Flam, Harry & M. June Flanders. 1991. "Introduction" in Heckscher-Ohlin Trade Theory. Cambridge, MA: The MIT Press. ISBN 978-0262082013
- Henriksson, R. 1979. Eli F Heckscher och svensk nationalekonomi. Ekonomisk Debatt 8: 510-520. Translated as Eli Heckscher—The Economic Historian as Economist in The History of Swedish Economic Thought ed. Bo Sandelin. New York, NY: Routledge, 141-167.
- Kaldor, Nicholas. 1970. The Case for Regional Policies. Scottish Journal of Economics.
- Magnusson, L., Gustav Cassel, popularizer and enigmatic Walrasian, in: The History of Swedish Economic Thought, ed. B. Sandelin. London and New York: Routledge, 1991:122-140.
- Myrdal, Gunnar, An American Dilemma, New York: Harper and Brothers, 1944, 2 vols.,
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- Lindahl, Erik. 1929. The Place of Capital in the Theory of Price. Ekonomisk Tidskrift.
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- Lindahl, Erik. 1939. Studies in the Theory of Money and Capital. London: George Allen & Unwin Ltd.
- Lindahl, E.(ed.), Knut Wicksell—Selected Papers on Economic Theory, London: Allen and Unwin: 1958.
- Lundahl, M., "Knut Wicksell and the Causes of Poverty: Population Growth and Diminishing Returns," in: Economists and Poverty: From Adam Smith to Amartya Sen, ed. Rauhut, D., Hatti, N. and Olsson, C-A. New Delhi: Vedams, 2005b: 138-176.
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- Ronald, Jones W. 1956. Factor Proportions and the Heckscher-Ohlin Theorem. Review of Economic Studies 24: 1-10.
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- Wicksell, Knut. [1906] 1967. Lectures on Political Economy. Augustus M Kelley Pubs. ISBN 0678065209
- Patinkin, Don. 1978. On the Relation between Keynesian Economics and the ‘Stockholm School.’ The Scandinavian Journal of Economics 80(2): 135–143.
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