In this article we will discuss about John Gustav Knut Wicksell:- 1. History of John Gustav Knut Wicksell 2. Main Ideas of John Gustav Knut Wicksell 3. Appraisal.
History of John Gustav Knut Wicksell:
John Gustav Knut Wicksell was the founder of the Swedish School of Economics. He studied the economic theories of Mill, Karl Menger and Bohm-Bawerk for five years. After obtaining his Ph.D. degree in 1895, he became the professor of Economics in 1901 of the University of Lund. Wicksell’s main writings are: Interest and Prices (1898), Value, Capital and Rent (1893), Studies in Finance Theory (18%), Lectures on Political Economy Vol. I & Vol. II (1906).
“Value, Capital and Interest” contains Wicksell’s theories of value and distribution. “Studies in Finance Theory” shows his views on public finance and “Interest and Prices” deals with his views regarding the relationship between rate of interest and price level. “Lectures on Political Economy” is a systematic restatement of the theories of value and distribution and price level.
Main Ideas of John Gustav Knut Wicksell:
1. Economic Science:
Wicksell used the term ‘Political Economy” in a wider sense. It has been considered both as a theoretical and practical science. As a theoretical science, it is a statement of economic laws, based on simple assumptions. As a practical science, it examines the question of application of these laws to solve practical problems of real life. It deals with economic policy.
Wicksell considered perfect competition as good as far as it leads to an optimum allocation of resources and reduces the prices of commodities to its marginal cost. Further the rewards of the productive factors should be determined according to their marginal productivity. At the same time, Wisksell felt that the welfare of the society depends on an equal distribution of income and wealth. So in this regard he welcomed state-intervention.
3. Economic Policy:
Even though most of Wicksell’s writings contained theoretical analysis, he had a definite attitude towards economic policy. He was a strong socialist.
He was of the opinion that the welfare oriented economic policy must aim for:
(a) An optimum allocation and full utilisation of resources and
(b) Equality of income, wealth and economic opportunities. For achieving these, he suggested that a ‘revolutionary programme’ must be adopted.
This programme includes:
(a) expansion of public sector,
(b) development of trade union movement and extension of free education facilities and
(c) introduction of progressive tax system and reduction of excise and tariff duties.
Wicksell in his theory of production analysed only three factors of production—land, labour and capital. He left the fourth factor of production namely, organisation due to difficulties of quantitative measurement. Like Bohm-Bawerk, Wicksell also regarded capital as a product of co-operation of the two original factors—labour and land.
All the factors of production are subject to the law of diminishing returns. But Wicksell defined wrongly the law of diminishing returns. It was considered to be a matter of diminishing average rather than marginal returns.
Wicksell presented a general marginal productivity theory of distribution. According to this theory, the reward of each factor of production is determined according to the marginal productivity of that factor.
6. Theory of Capital:
Wicksell defined capital as the intermediate good used in production. Capital was not a separate factor of production. But it received remuneration for its services, in the form of interest. Thus interest was the difference between the value of annual product and profit plus payment for land and labour.
Wicksell distinguished between natural rate of interest and bank rate of interest. The natural rate was that rate at which the demand for capital and supply of savings are equal. In other words, at the natural rate of interest, savings and investment would be equal.
7. The Wicksell Effect:
The Wicksell effect demonstrates that Von Thunon’s marginal productivity principle, which is applicable to labour and land, is applicable to real capital only at the micro level, and not at the macro level. At the macro level, when capital increases, the marginal productivity of capital declines and real savings is absorbed in rising real wages and rent. Thus, the social marginal productivity of capital is smaller than the rate of interest. However at the micro level, the marginal productivity of capital is equal to the rate of interest.
8. Cumulative Process:
Wicksell criticised the traditional quantity theory of money and attempted to explain its method of operation through the cumulative process. Cumulative process is a stale of disequilibrium in which a discrepancy arises between the natural rate of interest and market rate of interest.
If the natural rate of interest is more than the market rate, investment will be more than savings and there will be a cumulative rise in prices. On the other-hand, if natural rate is less than the market rate, investment will be less than savings and there will be a cumulative fall in prices.
9. Monetary Policy:
Monetary authorities can play an important role in price stability by changing the bank rate. In order to equate the market rate and natural rate of interest, bank rate can be manipulated.
10. Trade Cycle:
Wicksell regarded trade cycle as a real phenomenon and not a monetary one. According to him the main cause for trade cycle is the changes in investment and not in prices. In trade cycle theory, the important contribution of Wicksell is the idea that, “technical progress does not increase in perfect simultaneity with the increase in population”.
Appraisal of John Gustav Knut Wicksell:
J.F. Bell remarks, “Wicksell’s craftsmanship is at its best in the clarity of expression showing the interdependence of economic factors”. His marginal productivity theory of distribution is one of his important contributions to economic theory. His theory of interest shows his originality.