Knut Wicksell was a Swedish economist. In any ranking of economists who were active in the 100 years following Wicksell’s birth, his name would surely appear in the top 10. Wicksell’s work included substantial contributions both to the Austrian theory of the business cycle and the theory of public choice. Wicksell followed Eugen von Böhm‐​Bawerk in treating production as a sequence of stages, where the production of consumer goods was supported by a hierarchical structure of capital goods. To this structure of production, Wicksell attached the idea of two distinct rates of interest: a natural rate and a loan rate. A divergence between the natural rate and the loan rate would induce a change in the structure of production. For instance, a fall in the natural rate of interest through a decline in time preference would lead to a more capital‐​intensive structure of production. In contrast, a rise in interest and time preference would lead to a less capital‐​intensive structure of production.

Wicksell’s work on capital and money centered on securing macrolevel coordination among savers and investors, and Wicksell’s significance to contemporary theorizing about coordination was stressed especially strongly by Axel Leijonhufvud in 1981. Among other things, Wicksell’s coordinationist orientation set the stage for the Austrian theory of the business cycle that subsequently was developed by Ludwig von Mises and F. A. Hayek. Wicksell maintained that an expansion in bank credit would drive the loan rate below the natural rate. This initial effect of the credit expansion is identical to a fall in time preference and will produce an economic expansion, the first manifestation of which would be an expansion in capital goods. Because time preferences will not have fallen, however, voluntary saving will be insufficient to sustain this lengthened structure of production. Hence, the credit‐​financed boom will subsequently bust.

In 1896, Wicksell published his Investigations in the Theory of Public Finance. The core of this work emphasized consensus and unanimity in place of majority rule as a standard of governance and became the guiding framework for the theory of public choice and constitutional economics, particularly as illustrated by James Buchanan and Gordon Tullock’s Calculus of Consent. In this work, Wicksell asked what kind of institutional framework for parliamentary governance would make it possible for people in their capacities as taxpayers reasonably to say that their tax monies were directed as they wished. Wicksell assumed that, through proportional representation, it would be possible to select a parliament that would serve reasonably well as a miniature model of the Swedish population. If this parliament were then bound by a rule of unanimity, its decisions would conform closely to unanimity within the underlying population.

Wicksell subsequently relaxed this principle of unanimity to something approximating unanimity, three quarters or seven eighths of the total. Wicksell recognized that this shift to approximate unanimity involved a trade‐​off. True unanimity would ensure that people would not have to pay taxes for activities they were not willing to support. But it also would prove too costly to any effort of trying to work out arrangements for collective support. Some modest movement away from unanimity might, Wicksell thought, be a reasonable compromise to expediency.

Further Readings

Buchanan, James M., and Gordon Tullock. The Calculus of Consent. Ann Arbor: University of Michigan Press, 1962.

Gardlund, Torsten. The Life of Knut Wicksell. Stockholm: Almqvist & Wiksell, 1958.

Leijonhufvud, Axel. “The Wicksell Connection: Variations on a Theme.” Information and Coordination. New York: Oxford University Press, 1981. 131–201.

Wagner, Richard E. “The Calculus of Consent: A Wicksellian Retrospective.” Public Choice 56 (February 1988): 153–166.

Wicksell, Knut. Lectures on Political Economy. 2 vols. London: Routledge, 1901, 1906.

Richard E. Wagner
Originally published