Knut Wicksell Main Theory

Wicksell's Main Theories, Wicksell Theory

Wicksell correlated his theories of value and of distribution, so that it may be said that marginal productivity occupies the center of his system: " It governs every part of the political economy." His general marginal-produc­tivity theory, he applies under the condition of such employ­ment of all the factors of production that no economies from a larger-scale of production are possible. (Thus he considers only economically productive employment, and so avoids the problem of an equilibrium at less than full employment.)

The main part of his thought, however, as judged by its influence, is the theory of capital and interest. From this, springs Wicksell's famous treatment of money rates as related to the "natural" rate of interest, and the bearing of this relation on the general price level.

Capital is defined as a "coherent mass of stored-up labor and saved-up land." And the importance of the time element is duly recognized. Indeed, Wicksell considers the mass of capital as stratified through time, and this leads him at once into a sort of "period analysis." Along with the labor and land of one year, there function the saved-up resources [capital goods] of the preceding year. These capital goods, he assumes to be used up in the production of the current year. Therefore, he assumes that, in order to obtain the advantages of capital use, a corre­sponding part of the current year's resources must be saved up for the next year's capital. And so on. Thus we see the problem of saving beginning to emerge.

Interest, in its pure form, is the "marginal productivity of waiting." Time is its essence. More precisely, Wicksell defines interest (and thereby states his theory of interest) as follows: It is the difference between (1) the marginal productivity of saved-up labor and land, and (2) the marginal productivity of currently:used labor and land. This difference is not a mere function of time or waiting, however, for he says that current labor and land are relatively abundant, while saved-up labor and land are "not adequate in the same degree for the many purposes in which they have an advantage."

Wicksell thinks that interest may disappear if the foregoing "difference" disappears, but that this is unlikely: before interest could fall to zero, the problem of investing for a longer period than the next year would arise. In other words, declining rates will be attended by a longer investment period and increased capital values, thus tending to counteract the declining spread between current and future goods. But this general thought At various points, he states that rising interest rates stimulate saving, and that low rates discourage saving.