Transcript The Stockholm School

Rags – Riches – Rags (not quite)
•Top Yale graduate and Professor
•Married rich  Europe tour – networking/New Haven house
•Illness  Health fetish
•Inventor (card index system) – merged into Remington Rand  $$$$
•Stock market speculation  Crash  $
•Crusader: stable money, League of Nations, calendar reform, spelling
reform, Esperanto, environmental protection, prohibition
•Leading US economist/Public advocate/Government advisor
Irving Fisher
1867 – 1947
• Contributions to price theory
• Consumption indifference curves/”utils” + Production possibilities frontier
• Market equilibrium: MRT = dy/dx = px / py = MUx / MUy = MRS
• Contributions to monetary economics
• Ideal index numbers: geometric mean of Paasche and Laspeyres
• Fisher effect: Nominal interest rate = Real rate + expected inflation (e)
• Quantity Theory of Money: MV = PT
» Velocity and Transactions independent of Money
» If M up, P up, ceteris paribus
» expectations lag  sticky nominal interest rate (stickier than Price)
 M up  Real rate down  Investment spend up  EXPANSION
Monetary Theory
• David Hume – specie flow, prices, and trade balance
• David Ricardo – The High Price of Corn
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• Alfred Marshall – Cambridge oral tradition: M = k PY
Professor Irving Fisher has been the first, in several instances, to publish in book form
ideas analogous to those which had been worked out by Marshall at much earlier dates.
J.M. Keynes, Alfred Marshall, 1842 – 1924, p. 336 fn.
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Irving Fisher – Quantity Theory and Real Interest Rate
Knut Wicksell – Natural rate of interest
Gustav Cassel – Quantity Theory  Purchasing Power Parity
Gunnar Myrdal – Monetary Equilibrium
John Maynard Keynes
– Tract on Monetary Reform
– Treatise on Money
– General Theory of Employment, Interest and Money
•Professional student – first job as economist at age 48
•Career at University of Lund
•Social radical serving conservative (neoclassical) science
•Champion of birth control, women’s rights, free love
•Established marginal productivity theory of distribution
•Proposed Pareto optimal log-rolling before Pareto
 Fiscal packages where everyone gains
Knut Wicksell
1851 – 1926
• Interest and Prices, 1924: Cumulative process in (Say’s Law)
full-employment economy using bank money
i = market rate of interest set by banks…credit and Ms adjust to Md at market rate i
r = “normal” rate of interest that keeps P steady = “natural rate” = rate of return on
capital
I/Y = Investment/Real GDP = F(i – r) demand for credit
$Y = $C + $I = PY
Steady-state equilibrium ($I = 0): $Y = $C = $Yt-1
Disequilibrium (r rises; i steady): $Y = $C + $I = $Yt-1+ $I  $I = Δ$Y = ΔPY = $S
 Investment is financed out of forced saving owing to inflation
$I = PI = ΔPY  ΔP/P = I/Y = F(i – r)
If i<r, firms demand credit to finance investment, banks create money to meet
demand for credit, and prices (and wages) rise and rise.
Monetary equilibrium requires i = r.
• Wicksell’s interest rate rule for monetary equilibrium
• So long as prices remain unaltered the (central) bank’s
rate of interest is to remain unaltered. If prices rise, the
rate of interest is to be raised; and if prices fall, the rate of
interest is to be lowered; and the rate interest is
henceforth to be maintained at its new level until a further
movement of prices calls for a further change in one
direction or another.
Wicksell, Interest and Prices, p. 189
quoted in Michael Woodford, Interest and Prices:
Foundations of a Theory of Monetary Policy, p. 38
The Stockholm School
Gustav Cassel
1866 – 1945
Purchasing Power Parity
General equilibrium … extension of Walras
A writer less generous than Cassel would be hard to find.
Marx at least paid tribute to Quesnay and Ricardo. Cassel
paid tribute to nobody. Walras had written the first system of
simultaneous equations of general equilibrium. Pareto had
purged it of any measure of sensations. Cassel followed both
but mentioned neither…
Eli Heckscher
1879 – 1952
Economic
historian at
University of
Stockholm
“Classical” theory of interest: rate that equates saving & investment
Foil for Keynes in General Theory
Ohlin-Hecksher
Trade Theory
Teacher of Myrdal, Ohlin
(Factor Endowments)
The Stockholm School, 1927 – 1937
Extending Wicksell’s Cumulative Process
Eric Lindahl, 1891 – 1960 General equilibrium theory
Dag Hammarskjöld
1905 – 1961
UN Secretary General
Gunnar Myrdal
1898 – 1987
• Myrdal, Monetary Equilibrium, 1933
• Ex ante intentions drive macro-performance.
• Ex post results are basis for next period’s
intentions.
• S = I ex post, but not necessarily ex ante.
Bertil Ohlin
1899 – 1979
•Autonomous changes in consumption
Extension of Wicksell model.
The Stockholm School
Beyond Macrodynamics
• Dag Hammarskjold – Secretary General of UN
• Gunnar Myrdal … extensions of cumulative process
• Cumulative causation – vicious circles
» An American Dilemma, 1944  Brown v. Board of Education
» Rich Lands and Poor, 1957
» Asian Drama, 1968
• Wife, Nobel Laureate Alva Myrdal
» Director of UNESCO
» Swedish Ambassador to India
• Bertil Ohlin
• Transfer problem (1929): income adjustment
» Keynesian analysis vs. pre – General Theory Keynes
• Head of opposition social – liberal People’s Party
Sweden’s Commission on Unemployment
• 1924: Return to gold standard at overvalued rate
• 1927: Recession … formation of Commission
• Ohlin (1934) Monetary Policy, Public Works, Subsidies
and Tariffs as Means for Reducing Unemployment
• Focus on Aggregate Demand, not wage reduction to get out of
depression
• Deficit finance of Public Works + Easy Money for Investment
+ Price Supports for Farmers
Spending Multiplier and Investment Accelerator
• Myrdal (1934) The Effects of Fiscal Policy
• Countercyclical policies … balance budget over cycle
» Build infrastructure in depression
… not US “leaf-raking”
» Easy money in recession … tight money in expansion
• 1936: Swedish depression ended