Something I have been doing for several years now is serving as Senior Coeditor of the Fourth Edition of the New Palgrave Dictionary of Economics, with the original one published back in 1894 in London (my coeditors are Matias Vernengo and Esteban Perez). As part of this effort, a multi-year project, I have been reading cover-to-cover, the entire Third Edition, co-edited by Steve Durlauf and Larry Blume, which came out several years ago. It is 15 volumes, just shy of 15,000 pages, with about 3800 entries, with at least 37 Nobel Prize winners contributing to them. I have been at this for two and a half years and am nearing the end, possibly finishing even before New Year’s, although maybe just a bit shy.
Entries are still there from the 1890s, with quite a few written by F.Y. Edgeworth. Some of these old ones are biographical entries about now totally obscure figures from Britain in the late 1800s. Even for ones not by Nobel Prize winners, there are many entries that are written by people about things that are named for those people themselves, e.g. “Bowen’s cost disease,” and many more. Certain topics, obvious prominent ones, have multiple entries as updates have been added to later editions. This new one will definitely have some of those. Probably in the coming year, this project will become my leading professional research activity, although I shall not completely shut down other activities, and I shall continue to edit the Review of Behavioral Economics.
Anyway, from time to time I have come across entries by prominent people from which I have learned a lot. Often I do not see those coming. One did yesterday along those lines, a biographical entry on Knut Wicksell written by none other than the late Paul Anthony Samuelson, last thing I expected. But Wicksell is a curious and complicated figures, and I learned a lot from this entry, although I have increasingly heard or seen various people citing him for this and that. It seems he was both at the fountainhead of many intellectual streams as well as combining apparently contradictory ideas.
Why Samuelson came to write this entry I think has to with Wicksell’s primordial role in the Cambridge capital theory controversies. Dating back to the 189s, and essentially predating both J.B. Clark and Cobb and Douglas, Wicksell thought seriously about aggregate production functions and their connections with income distribution. Clark, of course, famously posed the marginal productivity theory of factor income distribution, and Cobb and Douglas cooked theirs up in the 1920s as a way to supposedly explain the then apparent constancy of capital and labor shares in the US economy (which has not held for some time now as the capital share has risen, see Piketty among others). Wicksell actually had an early version of the Cobb-Douglas production function, but also independently developed the marginal productivity theory of factor income distribution. However, unlike Clark or Cobb and Douglas, he was aware of potential problems with all this. ones that were later highlighted in the Cambridge capital theory controversies.
In particular that controversy involved much discussion of “Wicksell Effects” (which has its own separate entry written by Edmund Burmeister). These arise from the problem that any aggregate of capital must be a value category, price times quantity, as there is no such thing as “leets” or an actual aggregate capital, unless one wants to make capital simply be time, or something like that. But Wicksell was onto that issue as well, as we shall see shortly. In any case, he was aware of the possibility of “capital paradoxes,” if not precisely the reswitching case that got much attention later due to Sraffa and Joan Robinson. He had the more general case, that there could be a “perverse” relation between the rate of interest (or marginal rate of profit) and the aggregate capital-labor ratio. This would be due to price effects going “the wrong way.” These perverse price effects are what have come to be called “Wicksell effects” and if they are strong enough, they can bring about the overall capital paradox.
I give Samuelson credit for pulling lots of pieces together in a fair-minded and largely sympathetic way, even though he was viewed as the big “loser” in the Cambridge capital theory debates. But indeed, Wicksell did more than I was aware of. although knew about some of what Samuelson wrote about, and he managed to show how it all sort of hangs together in an odd sort of way.
So, Samuelson argues that in his first book in 1893 Wicksell produced a micoeconomic general equilibrium model that essentially combined Walras and Bohm-Bawerk, especially the latter’s average-period-production version of capital, which would become the main Austrian theory of capital, and which Bohm-Bawerk used to criticize Marx’s labor theory of value, which Wicsell also rejected. Samuelson argued in effect that along with Alfred Marshall and his fellow countryman and professional rival, Gustav Cassel, he was one of the big three essential founders of neoclassical economics, although with Irving Fisher following in his footsteps on some of this quite closely.
More than either of those, Wicksell would use his microeconomic theory to develop his macroeconomics theory, which was hugely influential on both the proto-Keynesian “Swedish Svhool” (or “Stockholm School”) as well as on major Austrian business cycle theories especially those of von Mises and Hayek. This came about as he derived the idea of the “natural rate of interest” out of his micro theory (something I had not previously realized fully), that which is an equilibrium in which the financial markets are stable (assuming no government action), with this part of a general equilibrium. From this it was easy to argue that a “too low” interest rate could “overstimulate” the macroeconomy while a “too high” one could depress it, and indeed the Austrians would use this to blame central banks for causing business cycles by pushing interest rates up and down arbitrarily, thus leading to fluctuations that did not need to happen.
The “Swedish School” focused less on that and more on forms of aggregate demand, with Wicksell’s input to this coming from seeing that there could be endogenous unemployment, which would reduce production. He was playing in a lot of ballparks and combining theories that others later would separate to argue about: Keynesians versus Austrians effectively.
A completely separate strand I was unaware of but of great interest to Samuelson personally had to do with the concept of public goods, or more properly speaking “collective consumption goods,” with Samuelson writing the definitive textbook papers on this topic in 1954. But he long argued that this idea came from certain Swedish economists, notably Erik Lindahl. But Lindahl apparently got it originally from Wicksell, with Lindahl one of Wicsell’s few students. So Wicksell was also the originator of this idea.
Indeed, apparently for all his ultimate influence, for most of his career, in contrast to his rival Cassel, he was an outsider, only briefly holding a professorship at Lund when Lindahl was his most prominent student. He was constantly in trouble for his radical leftist political activism, despite not being a Marxist. He was a strict pacifist and involved with many social causes, including women’s rights. At the end of his life in the 1930s, he apparently lived in Stockholm where he became a kind of informal hovering influence over the Stockholm School and an advocate of its expanding welfare state, although with no professional position at that time. He was himself poor much of his life due to his poor employment situation arising from his political activism, a real outsider, and also because so many of his economic ideas were so far ahead of anything anybody around him knew of or understood for so long.
Indeed, looping back to the capital theory debates, Samuelson emphasizes for all his Walrasian and Austrian neoclassicism, and his analysis of the marginal productivity theory of factor income distribution, he did not see this as showing any sort of “optimality” much less social justice. He was well aware that a laissez-faire equilibrium outcome might be not only inefficient because of problems like no markets for public goods, but because of unfair and unequal income distribution.
Addendum, Dec. 29: I have now read three more entries on Wicksell in the Palgrave, and I must correct certain comments I made in the above post, which I shall do here without changing that post.
Samuelson’s entry is titled, “Wicksell and Neovlassical Economics.” This was followed by Ed Burmeister’s entry, “Wicksell Effects,” then the actual rather long biographical entry by G.C. Uhr, the person who in 1951 coined the term “Wicksell effects,” and then an entry on “Wicksell’s Theory of Capital” by Massimo Pivetti. I shall add both corrections as well as additional material from these entries and going back to look again closely at Samuelaon’s entry.
On his life, my biggest mistake was to claim he lived into the 1930s. He lived from 1851 to 1926, so he did not serve in person as an adviser to the leaders of the “Stockholm School who would advise the Swedish Social Democratic governments in bringing about modern Swedish welfare state, which Wicksell fairly well predicted in a book on socialism published in 1905 (never translated into English). He proposed a mixed economy, along with the welfare state and fair taxation, he allowed for nationalizations of monopolistic firms while supporting private firms or cooperatives in more competitive markets such as agriculture.
He was 50 years old before he got his professorship at Lund in 1901, where he remained until retirement in 1916, when he moved to Stockholm. Thus it was this final decade of his life, ending in 1926, when he acted as the senior adviser to the rising economists such as Hammerskold, Palander, Lundberg, and Ohlin, who would in the 1930s become famous and influential as the Stockholm School. Prior to 1901 Wicksell was indeed barely able to make ends meet, and had trouble publishing his various books due to his outsider political and religious radicalism and activism, which extended to issues of population control as he was a fan of Malthus and also Mill’s feminist positions. He actually did not get his PhD in economics at Uppsala until 1895, with some objecting to allowing his extremely important 1893 book as a thesis.
I have three further comments on his ideas. One is that indeed he was aware of environmental issues as part of his critique of laissez-faire capitalism.
Another is that he only occasionally allowed for aggregate capital. He viewed labor and land as the fundamental factors of production, and his production theory involved dated quantities of these factors, with capital arising heterogeneously in each period as tied to these dated quantities of those factors, this drawing on his Austrian influence, which came from Carl Manger whose lectures he attended in Vienna in the 1880s. The role of time and the rate of interest thus arose as the necessary component tying all this together.
Finally, I need to slightly modify the matter of how he saw aggregate demand varying. His theory of changes in employment involved variations in land-labor ratios, with him drawing critically on Ricardo’s theory of rent. Indeed, his major work translated into English in the 1930s (along with his influential Lectures in Political Economy from 1906) was titled Rent, Value, and Capital. As it was, while much of his focus in his discussion of the natural rate of interest was on the price level, he also recognized that it was only when the economy was in full general equilibrium with the interest rate at its natural rate that there would also be full employment. If the interest rate was above that then indeed there could be unemployment. His followers in the Stockholm School, such as Ohlin, would extend this to more clearly formalize this as involving fluctuations in aggregate demand in a proto-Keynesian way.