Science Fair Project Encyclopedia
Wicksell was born at Stockholm, Sweden on December 20, 1851. His father was 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 died when he was fifteen. His father's considerable estate allowed the now fatherless child 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 1887, Wicksell received a scholarship to study on the continent where he heard lectures by the economist Carl Menger in Vienna. In the following years, his interests began to shift toward the social sciences, and in particular, economics.
As a lecturer at Uppsala, Wicksell had attracted attention for his opinions about labor. At one lecture, he condemned drunkenness and prostitution as alienating, degrading, and impoverishing. Although he was sometimes identified as a socialist, his solution to the above problem 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 had taken a common-law wife, Anna Bugge, in 1887, although he found it difficult to support his family on his irregular positions and publications. 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 until he was awarded a law degree. He returned to the University of Uppsala where he completed a four-year law degree in two years, and subsequently became an associate professor at that university in 1899. The next year, he became a full professor at the University of Lund, where he would endeavor in his most influential work.
After a lecture in 1908 satirizing the Immaculate Conception, Wicksell was briefly imprisoned for two months. Eight years later, 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 associated himself with other future great economists of the so-called "Stockholm School ," such as Bertil Ohlin and Gunnar Myrdal. He also taught a young Dag Hammarskjöld, the future Secretary-General of the United Nations.
Wicksell died in 1926 while writing a final work on the theory of interest . Elements of his 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, including Mark Blaug , as fundamental to modern macroeconomics.
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 Wicksell's predecessors had predicted. Instead, Wicksell posited, 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.
Wicksell's main intellectual rival was the American economist Irving Fisher, who espoused a more succinct explanation of the quantity theory of money, resting it almost exclusively on long run prices. Wicksell's theory was considerably more complicated, beginning with interest rates in a system of changes in the real economy. 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.
- Akamac entry
- Article on Knut Wicksell from the Federal Reserve Bank of Dallas
- Concise encyclopedia of economics entry
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