Wicksell On Classical Theories Essay Research Paper

Wicksell On Classical Theories Essay, Research Paper

James Ahiakpor in his essay, WICKSELL ON THE CLASSICAL THEORIES OF MONEY, CREDIT, INTEREST AND THE PRICE LEVEL: PROGRESS OR RETROGRESSION. started up the argument which was followed by the number of replies. His treatment of Wicksell place in the history of monetary economics is kind of biased, as we shall see further. As he states in the Abstract to his essay:

Knut Wicksell occupies a significant place in the history of monetary economics as the developer of the “cumulative process” by which deviations between the market and “natural” rates of interest cause the price level to change persistently. A more accurate version of the same argument is a part of classical monetary analysis but there the process originates from a change in base money or central bank credit while Wicksell’s version may be initiated by banks capriciously setting their lending rates. Wicksell’s version arises from his difficulties in correctly interpreting the classical quantity theory of money and interest rate determination from Hume down to Marshall, but has not been so noted in the literature.

As Ahiakpor points out further in his introduction:

Indeed, the cumulative process argument typically attributed to Wicksell is part and parcel of classical monetary analysis,(n2) as entailed in their forced-saving doctrine, except that the classical version is not as open-ended as Wicksell’s. The tendency of commentators not to contrast Wicksell’s monetary analysis directly with that of the classics appears to have obscured recognition of this fact.

Ahiakpor s critique of Wicksell is not so much consistent with the views of the other writers who replied to his essay. Their views differ from highly opposed, to just opposed and to simply neutral that points out that there are some goods and bads to Wicksell s theory. Thomas Humphrey starts his reply with those words: 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. Others just asses the way that Ahiakpor went on with his argument and give theirs opinion on this issue, as Joseph Aschheim and George Tavlas asserted in the introduction to their reply:

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.

Ahiakpor in his essay goes onto the review of the classical theories of money, credit, interest and price level determination. After asserting the main issues of the classics such as: David Hume, Adam Smith, Henry Thornton, David Ricardo and others, he goes on by discussing Wicksell s reactions to classical theories and his deviation from the Classics.

He goes in with a long passage on the Wicksell s reaction, which to his view summarizes Wicksell s point of view:

IN HIS ATTEMPTED IMPROVEMENT OVER THE CLASSICAL QUANTITY THEORY of money in explaining changes in the price level, Wicksell also adopts the classical definition of money to be currency or specie. But he believes that several assumptions underlying the quantity theory bear no relation to reality: “The Theory provides a real explanation of this subject matter, and in a manner that is logically incontestable; but only on assumptions that unfortunately have little relation to practice, and in some respects none whatever” (Wicksell 1898, 41). These assumptions, according to him, include:

(a) “an almost completely individualistic system of holding cash balances. In fact,…the individual balance has become…replaced by a kind of collective holding of balances, out of the acceptances of banks of deposits”;

(b) that “the velocity of circulation of money is, as it were, a fixed, inflexible magnitude, fluctuating about a constant average level; whereas in practice it expands and contracts quite automatically and at the same time is capable…of almost any desired increase, while in theory its elasticity is unlimited”;

(c) that “an almost constant proportion of all the business of exchange, even if not the whole of it, is transacted by means of money in the sense of coin or notes”; and

(d) that “the proportion of the total stock of metal which is employed in actual circulation can be sharply differentiated from the portion which is kept in the form of hoards against future needs or which, in the form of ornaments and jewellery, is withdrawn from use as money” (Wicksell 1898, 41-42; italics original).

But none of these bases for Wicksell’s criticism of the classical quantity theory is valid.

As he goes on he goes over Wicksell s concept of interest rates, he states that it wasn t at all classical view of interest rate but instead it was the following that of the Bohm-Bawerk theorizing about capital and interest as the explanation. Ahiakpor connects Wicksell definition of money to the fact that his definition can t support his issues:

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