Interest and Prices - A Study of the Causes Regulating the Value of Money by Knut. Wicksell

by Knut Wicksell

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Genres: Economics, Business

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Reviews

[Fábio Miguel Santos · Rating 5 out of 5]

Knut Wicksell's insight of a possible divergence between the contractual and natural rates of interest eventually paved the way for the development of a robust theory of the business cycle in the Misesian branch of the Austrian tradition. However, some technical difficulties emerge from Wicksell's exposition of his cumulative process in chapter IX.

First, the lower order good market clearing only after the market for the factors of production is a specious proposition. Drawing from the work of Fetter (and, implicitly, from Turgot), prices of the factors of production represent the capitalized future stream of the marginal revenue product, which invariably requires a market-clearing price for the final good.
Second, it appears there are two distinct pricing dynamics: a classical mechanism— supply and demand adjust to produce a market-clearing price— between the owners of factors of production and capitalists/dealers and a subsequent fixed-price, predicated on the former, between dealers and entrepreneurs. If one indeed allows for competitive pricing in both moments, entrepreneurs are unable to earn profits in kind, and the cumulative process becomes infeasible.
Finally, Wicksell neglects the impact of "forced savings" arising from an exogenous increase in productivity on capital accumulation, depressing the natural rate of interest without procurement of the regulator of money prices.

IP still holds tremendous importance today for anyone aiming to think more clearly about the purchasing power of money.