KNUT WICKSELL AND THE CLASSICAL ECONOMISTS ON MONEY, CREDIT, INTEREST AND PRICE LEVEL : A COMMENT ON AHIAKPOR

Introduction James Ahiakpor's paper on "Wicksell on the Classical Theories of Money, Credit, Interest and the Price Level" argues that Wicksell's contributions have been assigned a greater degree of originality and value in advancing twentieth century monetary and macroeconomic thought than they deserve. He states that the classical economists in the first half of the nineteenth century had already explained the essential connections between money, interest and movements in the general price level for which Wicksell has come to be credited. He also suggests that Wicksell's formulation of the connection between money, interest and the general price level was erroneous in certain places because of misconceptions concerning the nature of capital and interest. And, finally, he believes that Wicksell's formulation influenced a number of macroeconomic thinkers, including Keynes, in a direction that was wrong in comparison to the classical economists' original conception. That the classical economists had a clear and insightful understanding of the effects of changes in the quantity of money has long been understood by historians of economic thought (Viner 1937; Rist 1940). It is true that some historians have attempted to characterize and judge proponents of the quantity theory of money on the basis of whether or not they believed in the proportionality theorem between changes in the quantity of money and a general rise in prices (Hegeland 1951). But the fact is that many of the quantity theorists of the nineteenth century understood quite well that changes in the money supply were inevitably non-neutral in their short-run effects on prices, wages, interest, profits, and production (Stirling 1853, 256-268; Cairnes 1873, 1-165; Jevons 1884, 13-118). Most especially, money's non-neutrality lead some of the prominent monetary theorists of this time to appreciate the potential for the process of "forced savings" to occur, as the result of which resources might be redirected towards additional capital formation (Hayek 1932, 183-197; Machlup 1943, 213-240). But the dispute between the Currency and Banking Schools in Great Britain in the middle of the nineteenth century had created serious disagreements among economists about the influence of bank credit on the general price level (Walker 1878, 395-457; Mints 1945, 74-100). Many prominent economists of the time adopted anti-quantity theory positions, arguing it was the level of prices and "the needs of business" that determined the amount of credit issued by the banks. In other words, the money supply was a passive and not an active element in relation to the general level of prices (Laughlin 1903; Scott 1910). It is in this context, I would suggest, that Wicksell's arguments in Interest and Prices (1898) should be understood. On the first page of his preface, Wicksell states that his studies lead him to the conclusion that "there is no complete and coherent theory of money" other than the quantity theory. And "If the Quantity Theory is false-to the extent that it is false-there is so far available only one false theory of money, and no true theory." And he goes on to say that his starting position is Ricardo's that "an excess of money" shows itself through an increase in prices in general and a temporary fall in the rate of interest. But that the rate of interest will rise again once prices in general have adjusted to the increase in the quantity of money. The only a way that a temporary decrease in the rate of interest could be maintained would be through further increases in the quantity of money at an increasing rate (Wicksell 1898, xxii-xxiv). About the same time as Interest and Prices was published Wicksell emphasized in a lecture that, "Reading Ricardo's works on money, in particular the little pamphlet The High Price of Bullion and its sequel Reply to Mr. Bosanquet. . .we find a perfectly clear and exhaustive, logically coherent treatment of the subject which does not seem to leave room for doubt or dissenting opinion" (Wicksell 1899, 68). …