1. Contributions to price theory Consumption indifference curves/”utils” + Production possibilities frontier Market equilibrium: MRT = dy/dx = p x / p y = MU x / MU y = MRS Contributions to monetary economics Ideal index numbers: geometric mean of Paasche and Laspeyres Fisher effect: Nominal interest rate = Real rate + expected inflation (  e ) Quantity Theory of Money: MV = PT »VTM »Velocity and Transactions independent of Money »If M up, P up, ceteris paribus »expectations lag  sticky nominal interest rate (stickier than Price)  M up  Real rate down  Investment spend up  EXPANSION Irving Fisher 1867 – 1947 Rags – Riches – Rags (not quite) Top Yale graduate and Professor Married rich  Europe tour – networking/New Haven house Illness  Health fetish Inventor (card index system) – merged into Remington Rand  $$$$ Stock market speculation  Crash  $ Crusader: stable money, League of Nations, calendar reform, spelling reform, Esperanto, environmental protection, prohibition Leading US economist/Public advocate/Government advisor

2. Monetary Theory David Hume – specie flow, prices, and trade balance David Ricardo – The High Price of Corn : : kAlfred Marshall – Cambridge oral tradition: M = k PY Professor Irving Fisher has been the first, in several instances, to publish in book form ideas analogous to those which had been worked out by Marshall at much earlier dates. J.M. Keynes, Alfred Marshall, 1842 – 1924, p. 336 fn. Irving Fisher – Quantity Theory and Real Interest Rate Knut Wicksell – Natural rate of interest Gustav Cassel – Quantity Theory  Purchasing Power Parity Gunnar Myrdal – Monetary Equilibrium John Maynard Keynes –Tract on Monetary Reform –Treatise on Money –General Theory of Employment, Interest and Money

3. Cumulative processInterest and Prices, 1924: Cumulative process in (Say’s Law) full-employment economy using bank money i = market rate of interest set by banks…credit and M s adjust to M d at market rate i r = “normal” rate of interest that keeps P steady = “natural rate” = rate of return on capital I/Y = Investment/Real GDP = F(i – r)  demand for credit $Y = $C + $I = PY Steady-state equilibrium ($I = 0): $Y = $C = $Y t-1 Disequilibrium (r rises; i steady): $Y = $C + $I = $Y t-1 + $I  $I = Δ$Y = ΔPY = $S  Investment is financed out of forced saving owing to inflation $I = PI = ΔPY  ΔP/P = I/Y = F(i – r) If i<r, firms demand credit to finance investment, banks create money to meet demand for credit, and prices (and wages) rise and rise. Monetary equilibrium requires i = r. Knut Wicksell 1851 – 1926 Professional student – first job as economist at age 48 Career at University of Lund Social radical serving conservative (neoclassical) science Champion of birth control, women’s rights, free love Established marginal productivity theory of distribution Proposed Pareto optimal log-rolling before Pareto  Fiscal packages where everyone gains

4. Wicksell’s interest rate rule for monetary equilibrium So long as prices remain unaltered the (central) bank’s rate of interest is to remain unaltered. If prices rise, the rate of interest is to be raised; and if prices fall, the rate of interest is to be lowered; and the rate interest is henceforth to be maintained at its new level until a further movement of prices calls for a further change in one direction or another. Wicksell, Interest and Prices, p. 189 quoted in Michael Woodford, Interest and Prices: Foundations of a Theory of Monetary Policy, p. 38

5. Gustav Cassel 1866 – 1945 The Stockholm School Eli Heckscher 1879 – 1952 Economic historian at University of Stockholm Ohlin-Hecksher Trade Theory (Factor Endowments) Purchasing Power Parity General equilibrium … extension of Walras A writer less generous than Cassel would be hard to find. Marx at least paid tribute to Quesnay and Ricardo. Cassel paid tribute to nobody. Walras had written the first system of simultaneous equations of general equilibrium. Pareto had purged it of any measure of sensations. Cassel followed both but mentioned neither… “Classical” theory of interest: rate that equates saving & investment Foil for Keynes in General Theory Teacher of Myrdal, Ohlin

6. The Stockholm School, 1927 – 1937 Extending Wicksell’s Cumulative Process Eric Lindahl, 1891 – 1960 General equilibrium theory Myrdal, Monetary Equilibrium, 1933 Ex ante intentions drive macro-performance. Ex post results are basis for next period’s intentions. S = I ex post, but not necessarily ex ante. Dag Hammarskjöld 1905 – 1961 UN Secretary General Gunnar Myrdal 1898 – 1987 Bertil Ohlin 1899 – 1979 Autonomous changes in consumption Extension of Wicksell model.

7. The Stockholm School Beyond Macrodynamics Dag Hammarskjold – Secretary General of UN Gunnar Myrdal … extensions of cumulative process Cumulative causation – vicious circles »An American Dilemma, 1944  Brown v. Board of Education »Rich Lands and Poor, 1957 »Asian Drama, 1968 Wife, Nobel Laureate Alva Myrdal »Director of UNESCO »Swedish Ambassador to India Bertil Ohlin Transfer problem (1929): income adjustment »Keynesian analysis vs. pre – General Theory Keynes Head of opposition social – liberal People’s Party

8. Sweden’s Commission on Unemployment 1924: Return to gold standard at overvalued rate 1927: Recession … formation of Commission Ohlin (1934) Monetary Policy, Public Works, Subsidies and Tariffs as Means for Reducing Unemployment Focus on Aggregate Demand, not wage reduction to get out of depression Deficit finance of Public Works + Easy Money for Investment + Price Supports for Farmers Spending Multiplier and Investment Accelerator Myrdal (1934) The Effects of Fiscal Policy Countercyclical policies … balance budget over cycleCountercyclical policies … balance budget over cycle »Build infrastructure in depression … not US “leaf-raking” »Easy money in recession … tight money in expansion 1936: Swedish depression ended