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Johan Gustaf Knut Wicksell (December 20, 1851 May 3, 1926) was a leading Swedish economist of the Stockholm school. His economic contributions would influence both the Keynesian and Austrian schools of economic thought.
the gold standard (Woodford, 2003, p. 32). Woodford calls his own framework 'neo-Wicksellian', and he titled his textbook on monetary policy in homage to Wicksell's work.
marginal product of new capital. The money rate, in turn, is the loan rate, an entirely financial construction. Credit, then, is perceived quite appropriately as "money". Banks provide credit, after all, by creating deposits upon which borrowers can draw. Since deposits constitute part of real money balances, therefore the bank can, in essence, "create" money. Wicksell's main thesis, that disequilibrium engendered by real changes leads endogenously to an increase in the demand for money and, simultaneously, its supply as banks try to accommodate it perfectly. Given full employment, (a constant Y) and payments structure (constant V), then in terms of the equation of exchange, MV = PY, a rise in M leads only to a rise in P. Thus, the story of the Quantity Theory of Money, the long-run relationship between money and inflation, is kept in Wicksell. Primarily, Say's Law is violated and abandoned by the wayside. Namely, when real aggregate supply does constrain, inflation results because capital goods industries cannot meet new real demands for capital goods by entrepreneurs by increasing capacity. They may try but this would involve making higher bids in the factor market which itself is supply-constrained thus raising factor prices and hence the price of goods in general. In short, inflation is a real phenomenon brought about by a rise in real aggregate demand over and above real aggregate supply. Finally,for Wicksell the endogenous creation of money, and how it leads to changes in the real market (i.e. increase real aggregate demand) is fundamentally a breakdown of the Neoclassical tradition of a dichotomy between monetary and real sectors. Money is not a "veil" agents do react to it and this is not due to some irrational "money illusion". However, we should remind ourselves that, for Wicksell, in the long run, the Quantity Theory still holds: money is still neutral in the long run, although to do so, Knut Wicksell have broken the cherished Neoclassical principles of dichotomy, money supply exogeneity and Say's Law. (source:newschool.edu/~het/home.htm) Parts of Wicksells ideas 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 the relative proportion of the production of consumer goods to investment, which would ultimately result in an economic correction, or recession, in which the proportion of production of consumption goods to investment in the economy is pushed back towards the level that the natural rate of interest would result in. 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, in Gunnar Myrdal's key concept Circular Cumulative Causation 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. Wicksell also expressed his views on many social issues and was often a critic of the status quo. He questioned the institutions of rank, marriage, the church, the monarchy, and the [4] military. While Wicksell fought for a more equal distribution of wealth and income, he saw
himself primarily as an educator of the public. He desired to influence more than just the field of monetary economics.