Wicksell On Classical Theories Essay Research Paper

James Ahiakpor in his essay, WICKSELL ON THE CLASSICAL THEORIES OF MONEY, CREDIT, INTEREST AND THE PRICE LEVEL: PROGRESS OR RETROGRESSION? started up the argument which was followed by the number of replies. His treatment of Wicksell place in the history of monetary economics is kind of biased, as we shall see further. As he states in the Abstract to his essay:

Knut Wicksell occupies a significant place in the history of monetary economics as the developer of the “cumulative process” by which deviations between the market and “natural” rates of interest cause the price level to change persistently. A more accurate version of the same argument is a part of classical monetary analysis but there the process originates from a change in base money or central bank credit while Wicksell’s version may be initiated by banks capriciously setting their lending rates. Wicksell’s version arises from his difficulties in correctly interpreting the classical quantity theory of money and interest rate determination from Hume down to Marshall, but has not been so noted in the literature.

As Ahiakpor points out further in his introduction:

Indeed, the cumulative process argument typically attributed to Wicksell is part and parcel of classical monetary analysis,(n2) as entailed in their forced-saving doctrine, except that the classical version is not as open-ended as Wicksell’s. The tendency of commentators not to contrast Wicksell’s monetary analysis directly with that of the classics appears to have obscured recognition of this fact.

Ahiakpor s critique of Wicksell is not so much consistent with the views of the other writers who replied to his essay. Their views differ from highly opposed, to just opposed and to simply neutral that points out that there are some goods and bads to Wicksell s theory. Thomas Humphrey starts his reply with those words: It takes a bold person to challenge the intellectual achievements of a giant figure in the history of economic thought. The challenger runs the risk that his objections, far from being accepted, will meet an impenetrable wall of skepticism and disbelief. Others just asses the way that Ahiakpor went on with his argument and give theirs opinion on this issue, as Joseph Aschheim and George Tavlas asserted in the introduction to their reply:

Ahiakpor presents an interesting assessment of Knut Wicksell’s contributions to monetary economics. We welcome Ahiakpor’s approval of Wicksell’s contributions and we commend him for venturing to probe important elements of Wicksell’s analysis. We do, however, encounter analytical difficulties in Ahiakpor’s endeavor and we are therefore impelled to counsel caution in drawing comfort from the refreshingly thoughtful thrust of Ahiakpor’s critique of Wicksell.

Ahiakpor in his essay goes onto the review of the classical theories of money, credit, interest and price level determination. After asserting the main issues of the classics such as: David Hume, Adam Smith, Henry Thornton, David Ricardo and others, he goes on by discussing Wicksell s reactions to classical theories and his deviation from the Classics.

He goes in with a long passage on the Wicksell s reaction, which to his view summarizes Wicksell s point of view:

IN HIS ATTEMPTED IMPROVEMENT OVER THE CLASSICAL QUANTITY THEORY of money in explaining changes in the price level, Wicksell also adopts the classical definition of money to be currency or specie. But he believes that several assumptions underlying the quantity theory bear no relation to reality: “The Theory provides a real explanation of this subject matter, and in a manner that is logically incontestable; but only on assumptions that unfortunately have little relation to practice, and in some respects none whatever” (Wicksell 1898, 41). These assumptions, according to him, include:

(a) “an almost completely individualistic system of holding cash balances. In fact,…the individual balance has become…replaced by a kind of collective holding of balances, out of the acceptances of banks of deposits”;

(b) that “the velocity of circulation of money is, as it were, a fixed, inflexible magnitude, fluctuating about a constant average level; whereas in practice it expands and contracts quite automatically and at the same time is capable…of almost any desired increase, while in theory its elasticity is unlimited”;

(c) that “an almost constant proportion of all the business of exchange, even if not the whole of it, is transacted by means of money in the sense of coin or notes”; and

(d) that “the proportion of the total stock of metal which is employed in actual circulation can be sharply differentiated from the portion which is kept in the form of hoards against future needs or which, in the form of ornaments and jewellery, is withdrawn from use as money” (Wicksell 1898, 41-42; italics original).

But none of these bases for Wicksell’s criticism of the classical quantity theory is valid.

As he goes on he goes over Wicksell s concept of interest rates, he states that it wasn t at all classical view of interest rate but instead it was the following that of the Bohm-Bawerk theorizing about capital and interest as the explanation. Ahiakpor connects Wicksell definition of money to the fact that his definition can t support his issues:

according to Wicksell, banks have an unlimited power to supply as much “money” as demanded:

Money is continually becoming more fluid, and the supply of money is more and more inclined to accommodate itself to the level of demand … No matter what amount of money may be demanded from the banks, that is the amount which they are in a position to lend (so long as the security of the borrower is adequate)… The ’supply of money’ is thus furnished by the demand itself. (Wicksell 1898, 110).

But surely Wicksell’s argument cannot be correct if money is defined as currency or specie. Even bank credit, which is the lending of depositors’ savings, has to have a limit on its supply. Yet it is from this perspective that Wicksell believes that, by their extension of credit, “banks can raise the general level of prices to any desired height” (Wicksell 1898, 111).

Ahiakpor finishes his paper with restating Wicksell short comings:

In terms of relevance to a real economy, the classical theories score high above Wicksell’s, dealing as they do with financial intermediation by banks involving both cash and credit instruments. One does not have to assume a cash-less economy, only circulating capital goods, imagine “capitalists” as those who possess consumption goods, or that factor incomes are paid before production begins, as Wicksell’s formal model does, to derive his principal conclusions.

Finally, given the historical precedence of the classical arguments to Wicksell’s and the fact that he misrepresented some of the classical propositions after having studied them, Wicksell hardly deserves to be accorded the position of having advanced the classical theories of money, credit, interest and the price level rather than having retarded their understanding.

We see from Ahiakpor view Wicksell didn t achieved anything special for the classical monetary theory that he was credited with.

But Let us now turn to the replies for this essay and other writings on Wicksell. Most of the replies credit him with well stated explanation on money, credit, interest and price level. Richard Ebeling states in his reply: I would suggest, that Wicksell’s arguments in Interest and Prices (1898) should be understood. On Wicksell quantity theory Robert Ekelund and Robert H bert state: Despite his innovations, Wicksell s monetary analysis did not depart from that of classical economists. He set out, in fact, to defend the quantity theory against its critics, and this he did for the long-run variant of that theory. Yet he elaborated a process of adjustment better than anyone had done before.

Thomas Humphrey starts his reply with a beautiful passage where he gives as his view of the Ahiakpor writing:

It takes a bold person to challenge the intellectual achievements of a giant figure in the history of economic thought. The challenger runs the risk that his objections, far from being accepted, will meet an impenetrable wall of skepticism and disbelief. For experience teaches us to be suspicious of allegations that a great theorist-renowned for his sagacity, brilliance, consistency, and originality-committed egregious blunders in certain parts of his economic reasoning. Too often those accusations prove to be unfounded. How many times, for example, have we seen Adam Smith and David Ricardo falsely accused of letting simple errors enter their otherwise logically watertight systems of thought? This is not to deny that they might have been guilty of such slips. But one’s initial inclination is to doubt that they would do something so inconsistent and out of character. It strains credulity that an analyst, meticulous to a fault in most of his work, would be sloppy in other parts of it. To allege such sloppiness is to court disbelief.

He goes on with the critique of the Ahiakpor. Then restates classical contribution to this matter, where he asserts that Ahiakpor correctly credits classics on their view, and goes on with showing Wicksell s pioneering contributions, especially for his contribution to the cumulative process. He points out four innovations: First, Wicksell applied the model to a whole spectrum, or range, of alternative monetary regimes. These regimes included (1) the pure cash economy in which the money stock consists solely of gold coin, (2) the mixed cash-credit economy in which checking deposits and banknotes supplement coin as exchange media, and finally (3) the hypothetical pure credit economy in which hard money ceases to exist and all transactions are effected by check. He goes on: Second, Wicksell incorporated into the classical model a new self-equilibrating mechanism to close the two-rate differential and bring the cumulative process to a halt. Third: Third, and most important, Wicksell applied his cumulative process model to analyze how the central bank might achieve its crucial policy goal of price level stability. And last: Fourth, Wicksell’s analysis of money demand went beyond anything his classical counterparts had to offer.

Interestingly enough Michael Gootzeit in his reply goes on just with the opposite view to that of Ahiakpor: Wicksell, , did not misinterpret the classical quantity theory, rather he refined it, noting certain details that he believed were left out by earlier writers in his quest to explain an inflationary cycle.

We see that that article by Ahiakpor caused a lot of replies and different views. But most of the people where amplifying the achievements of the Wicksell on the classical theory analysis. Having read all those articles and some of the other sources, that explain in a bigger detail everyone could see that there is some ambiguity as to Wicksell s use of words. Especially great interest was given to his natural rate of interest, as different writers interpret it in different ways. But apart from this ambiguity, his ideas are very strict and clearly stated. Ahiakpor comment on his works does also have some points in it, although he was to strict, considering classics as the only right way to do it.

References

Ahiakpor, James C.W., WICKSELL ON THE CLASSICAL THEORIES OF MONEY, CREDIT, INTEREST AND THE PRICE LEVEL: PROGRESS OR RETROGRESSION? American Journal of Economics & Sociology 58 (Jul 1999)

Aschheim, Joseph; Tavlas, George S, ON THE ANALYTICS OF WICKSELL: A COMMENT ON AHIAKPOR, American Journal of Economics & Sociology 58 (Jul 1999)

Blaug, Mark, Economic Theory In Retrospect, 3rd ED (Cambridge University Press), pp 591-591, pp 650-657

Ebeling, Richard M., KNUT WICKSELL AND THE CLASSICAL ECONOMISTS ON MONEY, CREDIT, INTEREST AND PRICE LEVEL: A COMMENT ON AHIAKPOR, American Journal of Economics & Sociology 58 (Jul 1999)

Ekelund, Robert B. Jr., H bert, Robert F., A History of Economic Theory and Method, 4th ed, (The McGraw-Hill Companies, Inc., 1997)

Gootzeit, Michael J., WICKSELL VS THE CLASSICS ON THE MECHANICS OF THE QUANTITY THEORY: A COMMENT ON AHIAKPOR, American Journal of Economics & Sociology 58 (Jul 1999)

Humphrey, Thomas M., EXONERATING WICKSELL: A COMMENT ON AHIAKPOR, American Journal of Economics & Sociology 58 (Jul 1999)