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Exonerating Wicksell: A Comment on Ahiakpor
American Journal of Economics and Sociology, The, July, 1999 by Thomas M. Humphrey
Introduction
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.
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II
Ahiakpor's Critique
Yet James Ahiakpor is willing to take that risk. He argues that the great Swedish economist Knut Wicksell completely misinterpreted the monetary theory of his classical predecessors and, in so doing, inadvertently denied them recognition for the true value of their work. So influential was Wicksell that, according to Ahiakpor, later economists accepted his misrepresentation of the classical theory as the correct one and consequently neglected to give the classicals their due. Ahiakpor is particularly concerned that classicals receive credit for their correct formulation of the quantity theory of money and for the cumulative process analysis that embodies that theory. Now the cumulative process analysis-which connects money stock movements to price level changes through the intervening link of a differential, or gap, between the natural (equilibrium) and market (loan) rates of interest - is of course associated invariably with Wicksell. Indeed, it constitutes his main claim to fame as a monetary theorist. But Ahiakpor contends that commentators err in attributing that analysis to Wicksell since the classicals had already anticipated it long before him. Moreover, Ahiakpor maintains that the classical version of the cumulative process is superior in many respects to Wicksell's, making it advisable to bypass Wicksell's model and to go directly to its original classical counterpart.
Ahiakpor undeniably makes some telling points. Ultimately, however, his attempt to dislodge Wicksell from the pantheon of monetary greats is unsuccessful. For even if Wicksell did misread the classical quantity theory, his positive contributions to monetary economics are so substantial and original as to outweigh this oversight. Far from being surpassed by the classicals, he augmented and improved upon their work. The result is that Wicksell emerges from Ahiakpor's criticisms with his reputation intact.
III
The Classical Contribution
Ahiakpor is absolutely correct in insisting that the classicals developed cumulative process models before Wicksell. Indeed, both Henry Thornton (1939, pp. 253-56) and David Ricardo (1951-55, vol. 1, p. 364) explained that an expected rate of return on new capital projects in excess of the loan rate of interest renders those projects profitable and stimulates the demand for bank loans to finance them. When banks accommodate the loan demands by creating new money, the extra money, when spent, puts upward pressure on prices, which continue to rise as long as the rate differential persists. Following Thornton and Ricardo, banker and writer Thomas Joplin (1823, 1828, 1832) then incorporated investment and saving schedules into the model. As Wicksell was later to do, Joplin did three things. He defined the natural rate as the rate that equilibrates the two schedules. He asserted that inflationary or deflationary money stock changes fill any gaps between the schedules. He attributed all such gaps to divergences between the natural and market (loan) rates of interest. Finally, Thornton (1939, pp. 244, 253-54, 342) used the model to refute the real bills doctrine, according to which money could never be excessive as long as banks lend against the collateral of sound commercial paper arising from real transactions in goods and services. Thornton noted that when the expected profit rate on capital exceeds the loan rate of interest the demand for loans becomes insatiable, the corresponding supply of eligible paper becomes inexhaustible and the real bills doctrine offers no bar to overissue.
Likewise, Ahiakpor is on target in asserting that certain aspects of the classical version of the cumulative process were superior to Wicksell's version. Unlike Wicksell, the classicals recognized that monetary injections which accompany the two-rate differential produce temporary nonneutral effects on real output and unemployment. By contrast, Wicksell assumed that full employment prevails throughout the entire process such that money exerts no temporary real effects. Moreover, Thornton (1939, p. 239) also recognized a point later raised by Ludwig von Mises (1953, pp. 360-1), namely that the capital accumulation induced by the two-rate differential could, in principle, be the equilibrating force that brings the process to a halt. Owing to the law of diminishing returns, the marginal productivity of - and hence the expected profit rate on - the additional capital would fall until it reached the loan rate thus bringing the process to an end. Having recognized this outcome as a theoretical possibility, however, Thornton made nothing of it in his practical policy analysis. And Ricardo (1951-55, vol. 3, pp. 318-9: vol. 6, pp. 16-7) explicitly denied it could be anything more than a trifling, or momentary, occurrence. Even so, however, the classicals definitely outshone Wicksell on a few points.
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