Wicksell’s Monetary Theory

One of the most recurrent features of Wicksell’s monetary theory cannot escape even the least careful reader: his ‘schizophrenia’ in treating the quantity theory of money, particularly the Ricardian monetary theory. As regards the former, in fact, he maintains on the one hand that ‘indeed, it is the only one which attempts in some degree to provide a rational explanation’ (Wicksell, 1898b, p. 50);¹ and that it is ‘the only specific theory of the value of money which has been propounded, and perhaps the only one which can make any claim to real scientific importance’ (1906, p. 141). On the other, Wicksell tones down those statements by saying ‘under given conditions the Quantity Theory is capable of being correct’ (1898b, p. 38); and it is ‘theoretically valid so long as the assumption of ceteris paribus’ holds (1898b, p. 42); and he goes so far as saying, at the same time, that it is based on ‘assumptions that unfortunately have little relation to practice, and in some respect none whatever’ (1898b, p. 41) and gives rise to ‘too many objections, as pointed out by later writers, to be accepted without modification’ (1898b, p. xxxiii). In addition:

That a large and a small quantity of money can serve the same purposes of turnover if commodity prices rise or fall proportionately to the quantity is one thing. It is another thing to show why such a change of price must always follow a change in the quantity of money and to describe what happens. (Wicksell, 1906, p. 160)

The aim of this chapter is to provide a schematic reference-framework of Wicksell’s monetary theory. The ‘reference’ feature should be constantly remembered. In fact, the task of the present work is limited to pointing out and discussing some critical points in Wicksell’s monetary theory whose further development could furnish new elements for a critique of the traditional monetary theory. Within the boundaries so defined no systematic alternative theory will be formulated — this task could perhaps be pursued at a subsequent stage.

Most of the literature dealing with Wicksell’s monetary theory has interpreted it from a different viewpoint from that of Wicksell — as will be maintained in the present work. Moreover, that literature has quite frequently had a highly critical attitude, sometimes hostile, toward a theoretical approach which, in retrospect, can surely be taken as a milestone in laying the foundations of modern monetary theory.¹

In comparing the formal structure of Wicksell’s treatment of the ‘theory of production and distribution’, on the one hand, and ‘monetary theory’, on the other, one thing appears quite evident: the very different methods adopted in tackling and exposing the respective problems of the two theories. As regards the former, Wicksell arrived on the scene at a time when three separate strands of thought, quite different from each other in approach, had just replaced that of the classical economists: (i) English marginalist, (ii) Walrasian, (iii) Austrian (Böhm-bawerkian).

Soon after the Second World War a revival took place in the analysis of the foundations of monetary theory, which had its peak, after several articles, in the well-known work of Patinkin, Money, Interest and Prices (1965). This work is of the utmost importance for the topic here considered: it contains in fact an interpretation of Wicksell’s monetary theory, summing up in an extremely clear way many other interpretations, which all follow — Patinkin’s included of course — a certain and definite viewpoint (as well as a certain and definite ‘vision’ of the economic system) concisely centered on the notions of ‘equilibrium’ and ‘stability’ of equilibrium.¹

In Wicksell’s ‘scientific programme’ a vision of the economic system seems to emerge which precludes reading economic phenomena either in terms of ‘equilibrium’ or as a mere transitory phase; this should be understood in the sense that these phenomena can neither possess any precise meaning nor operate in unequivocal direction without at the same time making reference to the institutional and political relationships existing in the economic system considered. So the money rate of interest, for example, is not the outcome of ‘free play’ between demand and supply — as it would be in a primitive system of exchange taking place among individuals; it it fixed by the banks. The fact that the latter may afterwards change their decision is both possible and probable; this, however, will essentially depend upon ‘external conditions’ (Wicksell, 1906, p. 461), certainly not on automatic mechanisms already contained inside the system. There emerges then a new attitude towards economic problems. The kernel made up by the set of ‘economic relationships’ seems to be broken by the introduction of ‘power relationships’. This remark is of a crucial importance not only for Wicksell’s monetary theory but also for economic theory in general.

The interpretation of Wicksell offered by Patinkin, discussed in the previous chapter, can be said to represent the most ‘orthodox’ neoclassical interpretation found in the literature. It is, however, possible to trace a more ‘flexible’ version of it, in Hicks.

Lindahl, Myrdal and Ohlin are usually known in the literature as the most outstanding economists of the so-called Swedish School of the first generation after Wicksell’s death. If, however, by the denomination of Swedish School one means a strand of thought almost homogeneous and compact, having in common some cultural roots, it is crucially important to note the reference assumed. Compared with Keynes, for example, there is no doubt that the above-mentioned economists do constitute a group or a ‘school’, often viewed as alternative and generally in opposition to him. But compared with Wicksell, it does not seem legitimate, strangely and paradoxically enough, to treat the Swedish School in terms referred to above. Lindahl and Ohlin, in fact, far beyond their own formal declarations have substantially given a content and a development to their contributions which seem quite different from the Wicksellian ‘base’ from which they start. Moreover their respective works are profoundly different from each other, not only in approach but also in their interpretation of Wicksell. In what follows, then, an attempt will be made to give evidence to such statements.