6th Conference of the International Walras Association
How Did Economists Respond to Walrasian Theory?
– The Cases of the Wicksell Connection and Two Japanese Economists
Toshiaki Hirai (Sophia Univ.)
I. Introduction
Walrasian General Equilibrium Theory (hereafter WGE) has had extraordinary and lasting impact on the course of economic theory. As we know, from its beginnings in the early 1870s the Marginal Revolution had spread throughout the countries of Europe by the end of the 19th century (cf. Wicksell (1893. Hereafter VCR, p.17); Walras (1900, p.44)). WGE, one of the three pillars of the Marginal Revolution, was elaborated by Pareto and Barone, popularized by Cassell and endorsed by Wicksell and Schumpeter, while the same idea was was independently worked out by Irving Fisher. We also know that WGE was used by Lange for the Socialist Economy in the Socialist Calculation Debate in the 1920s and 30s.
In the postwar world WGE as represented by the Arrow- Debreu model together with Keynesian Theory as represented by the IS-LM model dominated the economics scene (the so-called “Neoclassical Synthesis”), the former to such an extent that the latter model was formulated on the basis of it. It should be noted that WGE has not come in for criticism from the neoclassical orthodoxy (albeit the leading movement has shifted to the Mechanism Design Theory), while the Keynesian theory has come under heavy fire. It should be added, moreover, that WGE has been constantly attacked by scholars doubtful of the neoclassical way of thinking, for it has been regarded as representative of the neoclassical orthodoxy.
Of these various powerful influences exerted by WGE on modern economics, we will focus on a limited number of topics in the present paper.
To begin with, let us examine the views of Wicksell and the Wicksell Connection in relation to WGE. Wicksell (1898) put forward a theory known as the theory of cumulative process (hereafter TCP), which was to have great influence over the monetary economics of the following generation of economists in the 1920s-30s (now called the “Wicksell Connection”) such as Mises and Hayek (the Austrian School), Lindhal and Myrdal (the Stockholm School) and Keynes [as the author of the Treatise] (the Cambridge School). Here we will see how they viewed WGE, taking up Wicksell, Hayek, Myrdal and Keynes. Wicksell endorsed WGE (except for the capital theory). Myrdal and Hayek put forward their own monetary economics, criticizing WGE while Keynes developed his own one, putting criiticism on the quantity theory of money but making no reference to WGE (Section II)1.
The second and third topics examined have to do with studies by two eminent Japanese economists – Professors Hideo Aoyama and Takashi Negishi.
In Section III we will examine how Aoyama, a contemporary of the Wicksell Connection, evaluated the Wicksell Connection, WGE and Keynes’s theory. Aoyama studied them in great depth, advancing his own view. On the one hand, he rated Robertson’s theory highly because it can be regarded as a pioneering work of the “dynamic general equilibrium theory” (created by Volpe, Frisch and Hicks), criticizing Keynes’s theory. On the other hand, he endorsed Keynes’s theory of money which cannot be addressed within the framework of Robertson’s theory. This reflects the academic circumstance that in prewar Japan WGE was studied at the highest of levels (prompted by Schumpeter (1908)).
In Section IV we will examine how Negishi developed his theory of Keynesian microfoundations. Although Negishi is famous for his contribution to WGE, here we will deal with his theory only in the context of the so-called “Disequilibrium Economics” as represented by Clower=Leijonhufvud.
II. Wicksell and the Wicksell Connection
– In Relation to Walrasian General Equilibrium Theory
We will concentrate on the views of Wicksell and the Wicksell Connection on the state of contemporary economics, especially in relation to Walrasian economics and the quantity theory of money.
1. Wicksell
On the one hand Wicksell is a neoclassical economist who argues that a successful economic theory should comprise a theory of relative prices and one of absolute prices, the two being separable. On the other hand, he holds that the theory of absolute prices has serious flaws.2
On the theory of relative prices, Wicksell (1893) regards WGE as accurately describing the system of production, distribution and exchange, except for the theory of capital3 (Wicksell supported Böhm-Bawerk’s theory of capital instead4).
Wicksell was one of the first to recognise the importance of WGE. Let us take as an example of Wicksell’s work the case of the (indirect) exchange of several goods (see VCR, pp. 76-82). Here he considers the case of three goods and n persons, and explains how relative prices are determined, using Walras’s Law and a numéraire (see VCR, pp. 82-92). It is with regard to the theory of production that Wicksell is critical of WGE, questioning Walras’ concept of capital. 5
Wicksell develops this theory of production, using a model based on two goods (see VCR, pp. 153-161). He first describes how the economy would work if it produced only one commodity - what he calls a “completed version of Böhm-Bawerk’s theory of capital”. Wicksell then proceeds to explore how the economy would work if it were in fact composed of two economies, each of which operated according to a system of equations such as in the one commodity case. He then attempts to construct a mathematical model of the combined economy in such a way that the number of equations is the same as the number of unknowns.6
As for the theory of absolute prices, Wicksell (1898) sees the quantity theory as erroneous and puts forward TCP7, which is a theory of how fluctuations in the price level are caused by the divergence between the natural rate and money rate of interest in the organized credit economy.
Wicksell criticizes the quantity theory on three points8:
(i) it assumes constancy in the velocity of money;
(ii) it assumes that the medium of exchange consists of notes and coins only, so that the quantity of money is inelastic if the quantity of currency remains constant;
(iii) it holds that an increase in the quantity of money induces an increase in money prices and a fall in the money rate of interest.9
We value TCP positively because it enabled Myrdal, Hayek and Keynes (as author of the Treatise) to abandon the quantity theory of money, and opened the way for them to construct their own brand of monetary economics, advancing somewhat further than Wicksell himself.
All of them rated Wicksell’s theory highly in the evolution of monetary economics, and regarded their theories as pertaining to Wicksell’s line of thought. They did not, however, accept the dichotomy, arguing that monetary theory should not be confined to the determination of absolute prices only. They proposed their own brand of monetary economics through immanent criticism of Wicksell’s theoretical system. It should be noted that their models are dynamically constructed.
However, although they concurred in rejecting the above dichotomy, they differed as to how and on what points they should or should not accept TCP.
2. Myrdal
Myrdal took his criticism of neoclassical orthodoxy further than Wicksell. He noted the then growing dissatisfaction over the lack of internal integration between price theory and monetary theory in WGE10, where the problem of production and exchange is dealt with as a theory of relative prices, while the quantity theory is used as an appendix for the determination of absolute prices.
How did orthodox economics come to incorporate a sharp division between the two theories? Myrdal describes neoclassical marginal utility theory as overthrowing the classical production cost theory, with the result that money came to be regarded as merely representing the power to purchase goods and services.
He deems closer integration of the quantity theory with general price theory to be logically impossible, for they are based on different principles.11
The quantity theory, he argues, has serious defects12:
(i) During a dynamic process the velocity of money varies, which rules out any simple relation between the quantity of money and the price level.
(ii) The relation between the quantity of money and the price level cannot be one-way, for both simultaneously depend on factors outside the mechanism of payment proper.
(iii) The price level in the theory cannot be defined in the form of providing the multiplicative factor required by the theory of relative prices.
(iv) Although the quantity theory stresses movements of the price level, no homogeneous price level exists. It ignores change within the price level.
(v) The price level merging in the theory is a curious concept including the prices of pecuniary rights.
(vi) The quantity theory challenges practical possibility by adopting total sales as price index weighting principle.
Points (i) and (ii) are made by Wicksell, but not points (iii) and (iv), for he takes the autonomy of relative prices for granted.
Myrdal goes on to criticize the central price theory:13
(i) In failing to provide the “multiplicative factors”, the price theory remains abstract and unreal.
(ii) In that the theory has prices relating to a single point in time, and is therefore inapplicable to time contracts14. Thus the problem of credit is relegated to the quantity theory, which in turn proves unfit for the task, dealing only with the price level. Credit is crucial not only to the price level but also to price relations.
(iii) Because the price theory embodies Say’s Law, it cannot be applied to analyze business cycles.
In the credit problem Myrdal pinpoints a serious defect brought into economics with the separation of monetary theory from the price theory.
Through the immanent criticism of TCP, Myrdal put forward his own monetary economics15 to the effect that a divergence between investment and saving (free capital disposal) induces a change in the roundabout production structure, which brings about a change in the prices of consumption goods and expectations; this, in turn, widens the divergence between investment and saving. It should be noted that Myrdal reached his investment theory through his critical examination of the natural rate and market rate of interest.
3. Hayek
Hayek classifies the development of monetary theory in four stages, arguing the need to attain the fourth stage. Hayek (1931, pp. 4-5) criticizes the quantity theory as the first stage from the point of view of methodological individualism, arguing that aggregate concepts such as the quantity of money, the general price level, and the amount of production can have no influence on the decision-making of individuals.
Even when quantity theorists refer to relative prices, Hayek (1931, pp. 6-7) argues, changes in these prices are attributed to “disturbing factors”.
Hayek criticizes the quantity theory on the grounds that even when it discusses the influences of prices upon production, it does so only in terms of the general price level and total production.12
Hayek is also dissatisfied with the neoclassical system per se, arguing that monetary theory is by virtue of the quantity theory detached from general economic theory, which means a theory of relative prices.
In the case of Hayek, what matters is the case of forced saving which takes place through injection of money. Although the effects differ according as to whether money is injected into the investment goods or consumption goods sector, he argues, analysis of roundabout production proves the sovereign approach17.
4. Keynes as the Author of the Treatise18
In order to see how Keynes regarded the state of economics, we shall examine his views on bank rate theories, investment/saving and the quantity theory of money.
Keynes identifies four bank rate theories so far developed, variously regarding the bank rate as;
(i) the means of regulating the quantity of bank money;
(ii) the means of protecting a country’s gold reserves: Keynes evaluates and uses it in his open system;
(iii) a psychological influence on price levels;
(iv) influencing investment and savings: Keynes regards this as the essence of the bank rate. He sees Wicksell(1898) as representing this idea and coming close to his “fundamental equation”19.
Although the bank rate plays a pivotal role in Keynes’s theory, money supply also has a part to play. This may have something to do with Wicksell’s construction of his theory in an “organized credit economy”20, and Keynes’s criticism that Wicksell does not succeed in “linking up his theory of bank rate to the quantity equation” (TM.1, p.167).
Keynes explains his “general theory of bank rate” as an extension of (iv) as follows:
(i) Suppose that the market rate of interest, say, rises above the natural rate, which causes the demand price of investment goods to fall, resulting in a decrease of the volume of investment. A rise in the market rate of interest also causes savings to increase, though not by an equal amount. Thus investment decreases more than savings increase.
(ii) A fall in the price level of investment goods causes production to decrease (which means a decrease in the value of investment). In addition, since an increase in savings means a decrease in consumption, the price level of consumption goods decreases. Thus, the price level as a whole falls.
(iii) When producers incur losses, they cut the level of employment at the existing rate of earnings. If this continues, unemployment increases until the rate of earnings is reduced (TM.1, p.171).
Keynes argues (i) with the second fundamental equation in mind. The first point in (ii) is based on the TM supply function (to be explained later) in the investment goods sector, the second on the first fundamental equation.
Keynes stresses that investment is not usually equal to savings, offering two reasons: those who determine the division of the total output are not the same as those who determine that of the total income; earnings and savings do not include entrepreneurs’ profits (or losses), while the value of investment does.
Keynes criticizes the quantity theory21 as follows:
(i) it deals with various kinds of ambiguous price levels;
(ii) it fails to distinguish between income, business, and savings deposits, so that disturbances arising from changes in the relative proportions of deposits cannot be explained;
(iii) it cannot analyze a dynamic process in which the price level changes from a divergence between saving and investment.
Underlying his criticism is an important conviction: unless the influence of the bank rate upon investment and saving and the distinction between earnings and profits are introduced into analysis, the dynamic process of price formation cannot be captured. He arrives at this conviction asserting the advantage of the “fundamental equations” over the quantity theories (see TM.1, pp. 198-199).
Keynes offers two reasons for giving priority to the bank rate over the quantity of money.22
(i) A change in the bank rate influences various factors such as the volume of output and the rate of profits, which means that we cannot estimate the quantity of money related to any one of them.
(ii) The direction of causation is as follows: changes in the bank rate cause the market rate of interest to shift relative to the natural rate, which in turn causes the quantity of money, and consequently the price level, to move.
As far as Keynes is concerned, Wicksell’s cumulative process theory seems to have been accepted most faithfully. However, what matters in the Treatise should be not so much this point as “Keynes’s own theory”. This runs as follows23.
It consists of two parts, one of which addresses the determination of variables relating to consumption goods and investment goods in “each period”.
(Mechanism 1) The cost of production and the volume of output are determined at the beginning of the current period. Once the expenditure for consumption goods is determined on the basis of earnings, it is automatically realized as the sale proceeds of consumption goods, and the price level and the profit amount are simultaneously determined.
(Mechanism 2) The cost of production and the volume of output are determined at the beginning of the current period. The price level of investment goods is determined either in the stock market or as the demand price of capital goods. Profit is determined as a result.
The other part deals with the determination of variables between one period and the next.
(Mechanism 3) The behavior of entrepreneurs is such that, if they make a profit (loss) in the current period, they expand (contract) output in the next.
We will refer to this behavioral function as the TM supply function.
Now, “Keynes’s own theory” can be expressed as the dynamic process consisting of Mechanisms 1 and 2 working through Mechanism 3.
Ⅲ. Aoyama’s Studies in the Interwar Period
Aoyama, Professor at Kyoto University, has some claim to a creditable place in the history of economic thought as a Japanese scholar who studied the Cambridge School and the Stockholm School at the highest level in the interwar period24. His ingenious argument on Robertson’s theory and Keynes’s theory in relation to the theories of the Wicksell Connection and WGE was impressively developed (let us recall here that Robertson’s theory was highly rated by the Wicksell Connection on the grounds that it analyzes a similar problem by means of a similar method).
1. Aoyama’s Evaluation of Robertson’s Theory
Aoyama studied the Cambridge School and the Stockholm School in great detail. What attracted him most was a new theory, “a dynamic general equilibrium theory” (hereafter DGE). This is a dynamic version of WGE as initiated by Volpe, Frisch and Hicks.
From this point of view Aoyama argues that Robertson (1926) was a pioneering theory of business cycles constructed on DGE25. For Robertson’s model, he holds, is distinguished by a feature to the effect that the variables, determined at each point of time in a simultaneous equations system incorporating “period analysis” together with the distinction between “ex-ante” and “ex-post” concepts, move on over time. It was this in particular that led Aoyama to take a keen interest in Robertson’s theory, rating it highly. He also regarded Lindal (1930) as elaborating on Robertson’s theory.26
In consequence Aoyama was not concerned with the critical stance the Wicksell Connection took, as we saw above, on WGE, the quantity theory of money and the classical dichotomy. It was, therefore, hardly surprising that he focused on the natural rate of interest in the framework of WGE rather than TCP when he examined Wicksell’s theory, and saw Myrdal as a general equilibrium-cum ex-ante concepts theorist rather than a harsh critic of WGE. 27
Robertson developed his theory by dynamizing the Cambridge-type quantity theory by means of “period analysis”. Aoyama clarifies Robertson’s model most elegantly, by analyzing how the price level goes up or down in terms of the relation between the money circulation period and the average production period. He convincingly explains Robertson’s theory with the four co-efficiencies, as well. 28
On the other hand, Aoyama sees some difficulty or limitation in Robertson’s theory. As we saw above, Aoyama regarded Robertson’s theory as a dynamic extension of the quantity theory. According to him, however, this cannot deal with a monetary aspect of the actual economy. In this respect Keynes’s bearishness function theory (in the Treatise) and liquidity preference theory (in the General Theory) were considered to be major contributions.29 Aoyama argued that Robertson’s attempt to extend his period analysis so that savings account might be taken into consideration was fundamentally flawed. He also argued that the period analysis could not deal with the problem of the rate of interest.30
2. Aoyama’s Evaluation of Keynes’s Theory
Aoyama’s evaluation of Keynes’s theory may be seen as reflecting his assessment of Robertson’s theory.
On the one hand, Aoyama did not regard the General Theory as revolutionary. He argued that although Keynes criticized Say’s Law from his theory of effective demand, the General Theory is not a theory of under-employment equilibrium31. He maintained that DGE can effectively be applied to criticize Say’s law, and that this stance was, rather, to be discerned in Robertson’s analysis.
On the other hand, Aoyama evaluated Keynes’s theory of money — the bearishness function theory (in the Treatise), and the liquidity preference theory (in the General Theoy). He argued that Keynes’s bearishness function theory is, by its very nature, against the quantity theory, and emphasized the approach that takes account of the influence of portfolio selection on the price level of goods.
IV. Negishi’s Theory of Microfoundations32
Negishi’s theory aims at explaining why a ‘representative firm’ or a ‘representative household’ will make quantity adjustment while keeping price or money wage intact, given the macroeconomic situation. It might be said, in a sense, to be a precursor of the ‘New Keynesian’ theories which explain the rigidities of prices, wages, and interest rates at the microeconomic level.
This section addresses the following topics: (1) Negishi’s grasp of the relation between Marshallian microeconomics and Keynesian macroeconomics, and his understanding of Keynesian macroeconomics; (2) Negishi’s theory of microfoundations; (3) Comparison between his theory and the DA.
1. Marshallian Microeconomics and Keynesian Macroeconomics
A. The Relation
Negishi argues that Wicksell’s system is composed of TCP and WGE, endorsing tâtonnement and the classical dichotomy. Negishi’s major concern here is to distinguish between those who support tâtonnement and the classical dichotomy and those who aim at non-tâtonnement and monetary economics. He places Wicksell and Walras in the former camp, assigning Marshall and Keynes to the latter.
Negishi argues that unlike Walras, Cassel, Wicksell, Pigou and Fisher, Marshall analyzes the real world, introducing money from the start and refusing the classical dichotomy. Because, he continues, the Principles (Marshall, 1890) presents a theory based on non-tâtonnement and includes, in substance, a kinked demand curve of a “representative” firm, it could provide the microfoundations for Keynesian macroeconomics, the essence of which lies in quantity adjustment under the fixed-pricing system.33
He sees the relation between the two in terms, as it were, of division of labor. The level of employment and output is determined through effective demand by Keynesian macroeconomics, while, given the macroeconomic situation, the behavior of a “representative firm” or a “representative household” is explained in terms of Marshallian microeconomics.
B. Keynesian Macroeconomics
Negishi stresses three points as characterizing Keynesian macroeconomics: (a) monetary economy; (b) stability of the real wage; (c) asymmetrical change in prices and wages with respect to excess demand.34
Points (b) and (c), he argues, come from empirical studies (point (b) is derived from the studies of Dunlop and Tarshis; point (c) from the Phillips curve), and are connected with Negishi’s rejection of “the first postulate of classical economics”. Whatever Keynesian macroeconomics might be, Negishi maintains, it should satisfy these points.
Negishi argues that Keynesian economics – both at the macro and micro level – should be a theory which explains the possibility of “Keynesian equilibrium” accompanying involuntary unemployment.
He considers that Keynesian macroeconomics should be (seen as??) a theory which determines the total quantity of output in a state of disequilibrium, and uniquely determines the output of an individual industry, which means assuming a unique correspondence between a set of the volumes of output of individual industries and the aggregate volume of output. In addition, he deems, there exists a discrepancy between the volume of output of an individual industry and the volume of output of the individual firms within this industry.35
He further argues that because of a great discrepancy between Keynesian macroeconomics and Keynesian microeconomics, the former cannot be derived through an aggregation procedure from the latter.
Negishi might be seen, although he does not explicitly say as much, to accept the IS-LM approach as determining the total level of employment and output in a state of disequilibrium under the fixed-pricing system.
2. The Theory of Microfoundations
A. The Theory
In the case of the goods market, according to Negishi, a representative firm has its inverse perceived demand function which has a kinked point (the fixed price, the output realized). Applying this concept, he explains why prices tend to be fixed in a perfectly competitive market with imperfect information in a state of disequilibrium. He maintains that the Keynesian microfoundations should be constructed on this basis. Although he extends this idea to the labor market, the problem of marketing costs, and so on, we will take here the case of the goods market.36
Suppose that an inverse perceived demand function of a representative firm is expressed as p = f (y, p*, y*), and the total cost function as g(y, w). The profit function is expressed as π= py – g (y, w).
Then the equilibrium condition is obtained, given the wage rate w, by maximizing the profit with regard to y, subject to y = y* (the realized condition of output). The inverse perceived demand function is assumed to pass the point (p*, y*).
(y is the volume of output, p the price, y* the volume of output at an initial point, and p* the price at an initial point.)
The solution at the point (p*, y*) is
p* (1 −e+) – ∂g/∂y ≦ 0 …(1)
p*(1 −e -) – ∂g/∂y ≧ 0 … (2)
where e+, e - are an inverse of demand elasticity at the point (p*, y*), respectively, from the right-hand side and the left-hand.
Equation (1) is the right-hand side condition at the point (p*, y*), showing that the marginal revenue should be less than or equal to the marginal cost, while equation (2) is the left-hand side condition at the point (p*, y*), showing that the marginal revenue should be more than or equal to the marginal cost.
If the two equations are in a state of inequality, p* (= p) remains independent of y* (=y), which means that even if the activity level of a representative firm changes, the price would remain unchanged.
B. Two Features
Negishi’s theory of microfoundations has two remarkable features worth considering.
(i) The rigidity of prices at the micro level expounded in Negishi’s theory has the effect of reinforcing the rigidity of prices at the macro level. That is, if transactions in the economic system are made in a state of disequilibrium under the fixed-pricing system, the microeconomic behavior of a representative firm or household contributes to strengthening the rigidity of prices.
Negishi’s theory presupposes price rigidity at the macro level, but why this occurs is not gone into, being left to Keynesian macroeconomics, whatever that might be.
(ii) Negishi’s theory supposes a unique relation between macroeconomics and microeconomics. According to this theory, the volume of output of an individual industry (or a representative firm) is to be determined by means of Keynesian macroeconomics. However, the demand and supply there should be naturally derived from some microeconomic situation; otherwise, they would not correctly reflect the behavior of individual decision-makers, with the result that no decision-maker would be able to judge, on the basis of the quantity demanded and the quantity supplied, whether the market concerned was or was not in excess demand. It would be difficult, then, for a firm to perceive an inverse demand function.
3. Comparison with the DA37
Negishi rates the DA highly. Whenever he refers to it, no critical comment seems to be forthcoming, in contrast with his comments, for example, on real economics.
We might compare Negishi’s theory with the DA on three points.
(i) The DA insists that the revolutionary nature of Keynes’s economics lies in having demonstrated the “partiality” of WGE, which is characterized by the absence of money, and the assumption of tâtonnement, and in having established a general disequilibrium theory, which includes WGE as a special case.
(i') Negishi does not argue the relation between Keynesian economics and WGE in terms of generality or partiality. Although he uses the absence of money and the assumption of tâtonnement as a criterion of judgment, what he earnestly maintains is a complete difference between the two in their approach towards economic analysis.
(ii) The DA argues that Keynes’s theory aims at analyzing the market economy in which quantity (or income) adjustment works under the fixed-pricing system.
(ii') Negishi shares this view.
(iii) The DA distinguishes Keynes’s economics from Keynesian economics (or the IS-LM model).
(iii') Negishi makes no distinction between Keynes’s economics and Keynesian economics. It may in fact be that he sees the IS-LM model as effective in analyzing the macroeconomic situation.
V. Conclusion
WGE has exerted deep-reaching influences on modern economics. In this paper we have seen how economists responded to it, confining our attention to two areas — (i) Wicksell, the Wicksell Connection and Aoyama in relation to WGE and (ii) Negishi in relation to Disequilibrium Economics. And yet these fields cannot be said to be unimportant, for TCP and the Wicksell Connection were among the most important economic theories in the interwar period, while Disequilibrium Economics was one of the most brilliant economic theories of the 1970s.
In Section II we examined how Wicksell and the Wicksell Connection saw the state of economics, including their evaluations of WGE.
Wicksell greatly admired WGE except for the capital theory, and took the classical dichotomy for granted. It was TCP that Wicksell put forward as an alternative to the quantity theory.
TCP greatly influenced the younger economists. All of them rated Wicksell’s theory highly in the evolution of monetary economics, and regarded their theories as pertaining to Wicksell’s line of thought. They did not, however, accept the dichotomy, arguing that monetary theory should not be solely confined to the determination of absolute prices.
Myrdal and Hayek put forward their own version of monetary economics, criticizing WGE, the quantity theory and the classical dichotomy. Keynes was not aware of WGE due to the particular academic circumstances in Cambridge. His main criticism was against the quantity theory, while TCP seems to have been accepted most faithfully.
In our view (stated elsewhere38), however, Keynes showed partial acceptance of TCP. When we trace his theoretical development from the Treatise on it is nonetheless essential to keep the main focus on how he proceeded with “Keynes’s own theory”. It was through his self-critical reflection on this that he eventually arrived at the General Theory. His harsh criticism of the Wicksellian way of thinking as set out in the General Theory epitomizes the nature of the painstaking journey that he labored on for five years. 39
In Section III we examined Aoyama’s analysis, showing how just original his interpretation of Robertson’s theory and Keynes’s theory was. It also reflects the earnest study that went into dynamic extension of WGE in the interwar period.
In Section IV we examined Negishi’s theory of the microfoundations of Keynesian macroeconomics as well as his understanding of WGE. What he set out to do was to explain why Keynesian underemployment equilibrium occurs in terms of kinked demand curves.
In conclusion, a few words need to be said about developments over these thirty years. We now have the New Classical Economics and the New Keynesian Economics as a new orthodoxy. Both of them adopt an assumption of rational expectations, an assumption of the representative agent, and a dynamic stochastic general equilibrium. The only difference hinges on whether the market system could attain equilibrium or not in terms of prices. In this context we have modern version of Wicksellian theory, Woodford (2003) 40. How should we evaluate this phenomenon in relation to WGE and Keynesian macroeconomics? This remains a hot issue in economic theory.
1) The theoretical models put forward by Wicksell and the Wicksell Connection are not dealt with in the present paper. For these models, see Hirai (2008), Ch.2 “Wicksell’s Influences on Keynes and His Contemporaries”.
2) On this see Chiodi (1991, pp.48-50). The difference between Wicksell and Mises is examined in Bellofiore (1998, pp. 549-554) in great detail.
3) Wicksell argued that because Walras’s capital theory fails to take advanced capital into account, the interest rate is not appropriately treated (cf. VCR, p.167; Wicksell (1906, 1, p.101). For the difference between Wicksellian and WGE, see, for example, Rogers (1989, Chapter 2).
4) Cf. VCR, p.22.
5) Cf. VCR, p.95. Schumpeter was the earliest of the Vienna scholars to rate WGE very highly, attempting to graft an imputation theory onto Walrasian theory (Yasui judges this graft unsuccessful). Unlike Wicksell, Schumpeter regards Walrasian theory as a theory for a static economy, putting forward his own as the theory for a dynamic economy, as the genuine capitalistic system should be. For Schumpeter’s static and dynamic theories, see Schumpeter (1908, Book2, Ch.3).
6) In this area there arose a discussion on how Wicksell’s “missing equation” should be formulated. See Sandelin (1980) and Negishi (1982).
7) See Wicksell (1898, p.135). For the debates between Wicksell, Davidson and Åkerman on Wicksell’s cumulative process theory which took place in Sweden in the early 20th century, and which influenced Lindahl’s and Myrdal’s monetary economics in the 1920s and 1930s, see Siven (1998). Wicksell (1913) is a rejoinder to Davidson. For modern interpretation of Wicksell’s influences, see Hirai (2008, pp.29-30).
8) Lindahl (1930 [1939] p.141) criticizes the quantity theory from a point of view of Wicksell’s “organized credit economy”.
9) See Wicksell (1898, pp.165-167).
10) See Myrdal (1939, pp.10-11).
11) See Myrdal (1939, pp.11-12).
12) See Myrdal (1939, pp.14-15).
13) See Myrdal (1939, pp.16-17).
14) This criticism is also seen in Lindahl ([1939] pp.141-142), in which he stresses dynamization of a general theory of prices.
15) Lindahl also worked out his own monetary economics (cf. Ch.2) through the immanent criticism of TCP.
16) See Hayek (1931, pp.6-7). Mises (1935/1912) criticizes the quantity theory from a point of view of subjective value (pp.120-122) and dynamism (pp.131-132).
17) Mises (1935/1912) puts forward his own monetary theory (pp.380-385), criticizing the classical dichotomy (pp.148-149).
18) We regard Hawtrey (1913) and Robertson (1926) as pertaining to the Wicksellian stream of thought, although they do not undergo Wicksell’s direct influence.
19) See TM.1, pp.176-177. Kahn (1984, p.74) denies Wickell’s influence on the Treatise.
20) Myrdal, Lindahl and Mises also assume an organized credit economy. This aspect of Mises is emphasized as an “ultra-Wicksellian idea” by Bellofiore (1998).
21) See TM.1, pp.205. We identify three types of interpretation: the Treatise accepts it; the Treatise criticizes it; and the Treatise stands in between.
22) See TM.1, pp.196-197. This shows why the Treatise regards money supply as endogenous. For exogeneity/endogeneity in Keynes’s economics, see Moore (1988).
23) For details, see Hirai (2008), Ch.5 “The Treatise”.
24) For the Japanese academic background to his studies as it was then, see Ikeo (1994; 2006). For Aoyama as an economist, see Negishi and Ikeo (1999).
25) See Aoyama, 1949 [1944], Vol. 1, pp.7-8. [ ] indicates the first publication year of the paper concerned.
26) See Aoyama, 1999 [1940], p.304.
27) See Aoyama, 1949, [1944], Vol.1, pp.14-15.
28) Aoyama points out three advantages (see p.212) of Robertson’s theory.
29) See Aoyama, 1999, Ch.7 [1939].
30) See Aoyama, Work 3, pp.236-237.
31) See Aoyama, 1949, Vol.2 Ch. IV [1942].
32) This is mainly based on Negishi (1979), Negishi (1981, Chs.10-12) and Negishi (1989, Ch.10). For Negishi’s achievements as historian of economic thought, see Hirai and Noguchi (1955).
33) See Negishi (1989, Ch. 10).
34) See Negishi (1979, p.31-3).
35) See Negishi (1974b, p.11).
36) The following model comes from Negishi (1974a).
37) For a recent evaluation for DA, see, for example, Backhouse and Boianovsky (2005).
38) Keynes, in the German preface (22 October 1931) to the Treatise, explains the main difference between his theory and other Wicksellian theories including those of Mises, Schumpeter, Hayek and Robertson. See TM.1, pp. xxii-xxiv.
39) For my interpretation of Keynes’s developmental process from the Tract to the General Theory, see Hirai (2008).
40) See the reviews (see Woodford (2003) in the references).
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