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Wicksell vs the Classics on the Mechanics of the Quantity Theory: 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 Michael J. Gootzeit
I
Introduction
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James C. W. Ahiakpor would have us believe that Wicksell misinterpreted the classical economists' ideas, especially on the quantity theory, but also generally on "monetary analysis," which seems to include the theory of credit and interest. I will focus on Wicksell's ideas on the quantity theory, showing that they may be viewed as an evolution from the classical or orthodox views of the simple quantify theory, which at least some earlier 19th century economists such as Ricardo and Mill described. Wicksell, therefore, 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. It will specifically be shown that he was quite sophisticated about his views on variable velocity which appears to be pro-cyclic and on how money demand would respond to an initial increase in money supply, thus moving the money market toward an equilibrium, which would never quite be reached as the inflationary cycle played itself out. If Marshall may be regarded as a classical economist as Professor Ahiakpor continues to suggest, then Wicksell's ideas on how the money market would adjust to a disequilibrium are different from Marshall's because of their different concepts of money demand, not because Wicksell misinterpreted Marshall. All in all, I find Ahiakpor's analysis wrong, in attempting to justify his position that Wicksell was making errors by stating that earlier writers had ideas on monetary and interest theory which they did not have and attempting to substitute his oversimplified ideas in their place. Instead, Wicksell's ideas were equally as or more realistic than these earlier writers, but they were applied to a context in which the character of money and banking had changed substantially from one in which money was almost exclusively specie to one in which many "near" monies had come to predominate in credit transactions between businesses and banks. I believe that Ahiakpor focuses too much on Wicksell's earlier Interest and Prices (I & P); if he had examined Lectures (2) [L(2)] in more detail, some of these realistic arguments would have been more obvious, even though Wicksell still hinted at them in the earlier volume.
II
Marshall's Short Run Sophisticated Quantity Theory
One of Ahiakpor's major points is that Wicksell misinterpreted the classics, including Marshall, in I & P (41-42), because they "assume[d] a fixed proportion of money to business transactions. . .or a constant velocity of the circulating medium." This section of I & P is criticizing what Wicksell perceived as the simple quantity theory, which was described by the literature of his time, not what he thought all 19th century economists believed. He wanted to improve on its ideas, which he did, especially in L (2), by taking into account how the definition of the transaction medium had evolved from pure cash (specie) to one in which credit created in financial institutions would dominate the marketplace. Marshall, even before Wicksell, was improving the money theory of the early 19th century, but he focused more than did Wicksell on the "real" implications of the newly evolving monetary transmissions process, not on variations in velocity. Hence, my objection to Ahiakpor's characterization of Marshall as part of the classical tradition. Both of these writers were therefore creating a version of the quantity theory, which was much more sophisticated than the one emerging from the early 19th century.
The manner in which Marshall and Wicksell described the evolution of the quantity theory was different, however, and this is what is important, not whether Wicksell had misinterpreted Marshall and the monetary writers before him. According to Laidler, Marshall did not focus on variations of velocity during short run real movements of the economy. Instead, "Marshall. . .substituted for it the concept of 'the amount of commodities over which. . .people keep command in a ready form'. . .their demand for a stock of real balances" (Laidler 1991, 59; emphasis Laidler's; quote within from Marshall 1871, 171). Marshall tended to neglect velocity variations in his analysis of cycles and substituted for it a real money demand concept which might change in the short period if real income (the source of real purchasing power) were also allowed to change. Real money demand would be dependent on the amount of "total resources, expressed in terms of wheat," available in the "community", (See Pigou 1917, 165; also quoted in Laidler 1991, 61) which was a surrogate for the stock of real income. The implication was that if real income would stay constant, so would the stock of real money demand, with individuals holding at any given time a constant proportion of real income as real money balances. The value of money, it was implied, would also depend at least partly on this constancy of the desire of individuals to hold a given proportion of real income in the form of money balances.
