Lectures on Political Economy

Introduction

In his Lectures on Political Economy, Knut Wicksell provides a comprehensive and insightful analysis of the economic system. Wicksell's work is notable for its clarity of thought, its rigor, and its originality. He develops a number of important concepts that have become central to modern economics, including the concept of the natural rate of interest, the cumulative process, and the marginal productivity theory of distribution.

The Natural Rate of Interest

One of Wicksell's most important contributions to economics is his theory of the natural rate of interest. The natural rate of interest is the rate of interest that would prevail in a free market, without any government intervention. Wicksell argues that the natural rate of interest is determined by the real demand for and supply of loanable funds. The real demand for loanable funds is the amount of money that businesses and individuals want to borrow to invest in productive activities. The real supply of loanable funds is the amount of money that savers are willing to lend.

Wicksell argues that the natural rate of interest is the rate of interest that equates the real demand for and supply of loanable funds. At this rate of interest, there is no tendency for the general price level to rise or fall. However, if the market rate of interest is above the natural rate of interest, there will be a tendency for the general price level to rise. This is because businesses will be willing to borrow more money to invest in productive activities, and this will increase the demand for goods and services. Conversely, if the market rate of interest is below the natural rate of interest, there will be a tendency for the general price level to fall. This is because businesses will be less willing to borrow money to invest in productive activities, and this will decrease the demand for goods and services.

The Cumulative Process

Wicksell also develops a theory of the cumulative process. The cumulative process is a self-reinforcing process that can lead to either economic expansion or economic contraction. Wicksell argues that the cumulative process begins with a change in the market rate of interest. If the market rate of interest is above the natural rate of interest, there will be a tendency for the general price level to rise. This will lead to an increase in profits for businesses, which will in turn lead to an increase in investment. The increase in investment will further increase the demand for goods and services, which will further increase the general price level. This process will continue until the market rate of interest reaches the natural rate of interest.

Conversely, if the market rate of interest is below the natural rate of interest, there will be a tendency for the general price level to fall. This will lead to a decrease in profits for businesses, which will in turn lead to a decrease in investment. The decrease in investment will further decrease the demand for goods and services, which will further decrease the general price level. This process will continue until the market rate of interest reaches the natural rate of interest.

The Marginal Productivity Theory of Distribution

Wicksell also develops a marginal productivity theory of distribution. The marginal productivity theory of distribution states that the income of a factor of production is determined by its marginal productivity. The marginal productivity of a factor of production is the additional output that is produced by adding one unit of that factor of production to the production process.

Wicksell argues that the marginal productivity theory of distribution is the most accurate theory of distribution because it takes into account the scarcity of factors of production. The scarcity of a factor of production means that there is a limited amount of that factor of production available. This means that the more units of a factor of production that are used, the higher the marginal productivity of that factor of production will be.

Conclusion

Lectures on Political Economy is a classic work of economic theory. Wicksell's work is notable for its clarity of thought, its rigor, and its originality. He develops a number of important concepts that have become central to modern economics, including the concept of the natural rate of interest, the cumulative process, and the marginal productivity theory of distribution. If you are interested in learning more about economics, I highly recommend reading Lectures on Political Economy.