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On the Analytics of Wicksell: A Comment on Ahiakpor - response to article by James C.W. Ahiakpor in this issue, p. 436
American Journal of Economics and Sociology, The, July, 1999 by Joseph Aschheim, George S. Tavlas
Introduction
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.
Two distinct, albeit interrelated, issues arise in the course of examining Ahiakpor's exposition. The first is whether he has exercised sufficient grasp of the essentials of Wicksell's contributions. The second issue is whether Ahiakpor's overall assessment of Wicksell's contribution does justice to the totality of the legacy that Wicksell has imparted to his many notable pursuers and followers.
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Briefly to anticipate, we shall point out that Ahiakpor's critique falls short of sufficiency in terms of grasp of certain crucial concepts in Wicksell's contribution and that therefore the task of assessing Wicksell's influence on the evolution of monetary theory at the hands of those who acknowledge stimulus by Wicksell's work. In brief, Ahiakpor should not be dismissed in his seriously questioning of Wicksell, but the outcome of said questioning calls for further analysis as we propose in the following three sections.
II
Juxtaposing Money Rate with Natural Rate
Ahiakpor points out that Wicksell was not careful to distinguish between money, income and credit, nor between credit from capital and capital goods. In expressing this reprobation, Ahiakpor has put his finger on an essential element, but not the only essential element, of the renowned Wicksellian cumulative process in terms of which Wicksell was modeling his theory of general price-level determination. According to this theory, the general price level is the outcome of the ongoing interaction between the money rate and the natural rate of interest.
The money rate is essentially the discount rate set by commercial banks in their mainstream lending activity that is at the heart of their profit-seeking activities. Thus, the money rate is directly observable as the hallmark of commercial bank business. The natural rate of interest, in contrast, is, strictly speaking, only an abstraction; it can only be deduced by inference. Specifically, according to Wicksell the natural rate is that interest rate that would be determined by supply and demand in the absence of money and if all lending and borrowing were effected in real capital goods. Hence, it turns out that the conceptual flaw in Wicksell's administration of the cumulative process is not his lack of care in distinguishing between money and income and credit, or between credit from capital and capital goods, as Ahiakpor charges. Rather the conceptual flaw in Wicksell's analysis inheres in his juxtaposition of the money rate that is empirically observable in a money-exchange economy and the natural rate that is inferentially deducible only by abstracting from money and assuming exchange in kind, i.e., barter. It is Wicksell's commingling of a barter economy with a money economy that encumbers the Wicksellian cumulative process (Aschheim and Tavlas, 1996). The juxtaposition of the market rate of interest with the natural rate involves a switch of exchange regimes that necessarily obscures the meaning of a comparison between the money rate and the natural rate that the Wicksellian cumulative process involves.
III
Monetary Neutrality
Ahiakpor is at pains to point out that Wicksell, and other more recent writers, have failed to recognize classical precursors of the cumulative process of price-level changes and thereby to have made it appear that the argument is Wicksell's creation. Our point, in contrast, is that the quest for monetary neutrality is highlighted by the distinctiveness of Wicksell's adumbration of his cumulative-process model. In other words, Wicksell's particular version of the cumulative process of price-level movement, regardless of its precursors in the classical literature, offers us the expository benefit of highlighting the conceptual pitfall that any explanation of price-level movements involves when the commingling of barter-exchange with money exchange economies animates the analysis. Wicksell's contribution is, at the minimum, to expose the problematics of dealing with generalized purchasing power as the circulating medium without the realization that the unit-of-account function is necessarily absent in the barter economy (Aschheim and Tavlas, 1997). Without a numeraire, the conceptualizing of price-level movements is impossible, and no cumulative-process modeling exposes this conceptual pitfall more starkly than Wicksell's own modeling methodology.
IV
Pure Credit System
A further important point in Ahiakpor's critique of Wicksell pertains to the strategic role of commercial banks as the trigger of cumulative price-level movements. As Ahiakpor correctly recognizes, Wicksell infers from this money-creating capacity of commercial banks that the demand for money creates its supply. But Ahiakpor maintains that this argument cannot be correct if money is defined as currency or specie. While Wicksell was assuming as the institutional context for his cumulative-process modeling the existence of the gold standard, the definition of money as specie is relevant to his analysis and Ahiakpor does not recognize that Wicksell was enamored of the demand for money creating its own supply for a special reason. That reason is Wicksell's propounding of the notion of the pure credit system. In the pure credit system Wicksell posits the commercial banking industry within a closed-economy framework as a pure monopoly. By definition, in a single bank multi-branch system without an external cash-reserve constraint, the money creating capacity of the pure-monopoly bank is without limit. Ahiakpor's argument that a Wicksellian inflation in the absence of a circulating medium is meaningless does not overturn Wicksell's proposition that in a closed economy framework (i.e., without an external cash-reserve constraint) a pure-monopoly bank bears no resemblance or analogy to a barter-exchange economy. Thus, Wicksell's idealized pure-credit system is spared the conceptual pitfall of inflation without a circulating medium. In other words, Wicksell's idealized pure credit system can be logically reconciled with his law of the demand for money creating its own supply.
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