Knut Wicksell The Criticism

Knut Wicksell The Criticism, Wicksell Efect

In criticism of Wicksell's thought, it is first to be noted that he hardly succeeded in synthesizing the time­less ("simultaneous") economics of Walras with the timeful (roundabout) economics of Bohm-Bawerk. On the whole, he leans toward the timeless mathematics of Walras, in his premises concerning normality and the mutual determination of prices. But his "natural" interest is based on time differences, and in. his application he introduces inconsistent lags in time, as between savings and investment.

More concretely, he held that a market money rate which clears the market of voluntarily accumulated funds keeps prices stable. But (1) this fails to allow for conditions of supply, such as risk and the stream of savings; and (2) it does not allow for time, and the differences in interest rates which exist on loans for different periods of time and different degrees of uncertainty.

In general, Wicksell shows the weakness of "price economics." His margins are often price-determined. He virtually assumes the existence of capital, and falls back on opportunity cost — the opportunity of the lender to use his own funds. He treats interest as a price which affects other prices, and so may be treated as a cause, rather than as a result. He shifts from a study of the cause and determination of interest, to the manip­ulation of interest rates to control prices. Thus he is led into the error of assuming that the processes which occur when voluntary choices in saving and investing govern interest rates can be reversed; that manipulated interest rates can be used to govern choices in saving and investing. This has been disproved by the repeated failure of open market operations of central banks during the great depression of the thirties.

And, finally, the logical outcome of such economics appears in the omission of the entrepreneur and profits, as distinct from capital and interest. Wicksell even criticizes Marshall for trying to set up "management" as a distinct factor of production.

Final Appraisal

But Knut Wicksell was a first rate econ­omist. He was eclectic; but only in the best sense, and shows masterly ability in synthesis, resembling Marshall in this respect. In a word, he was a true scientist, and showed his power by creating a general system of economic theory that is consistent enough to have resulted in a vigorous school of thought.

Not the least important result of Wicksell's thought was its influence on J. M. Keynes, some of whose basic ideas appear to have come directly from the Swedish professor. But let it be remembered that Wicksell himself sought no "revolution" in economic theory or terminology. Nor did he abandon the work of his predecessors. This is seen, in his basic theory, in his emphasis on population and on time. He gives attention to technological progress and population growth in his treatment of crises. His concept of "equilibrium" is the scientific one of a balance between demand and supply forces in which economic friction plays a part. He hesitated to apply his idea of using the interest rate as a control, and his "school" has dropped that idea.

Wicksell at bottom was a true scientist.