Wicksell's work on creating a synthetic economic theory...

Wicksell was enamored with the theory of :

-Léon Walras (the Lausanne school),
-Eugen von Böhm-Bawerk (the Austrian school), and
-David Ricardo,

and sought a synthesis of the three theoretical visions of the economy.

Wicksell's work on creating a synthetic economic theory earned him a reputation as an "economist's economist."

For instance, although the marginal productivity theory—the idea that :
"payments to factors of production equilibrate to their marginal productivity",
had been laid out by others such as John Bates Clark,
Wicksell presented a far simpler and more robust demonstration of the principle,
and much of the present conception of that theory stems from Wicksell's model.

Extending from Ricardo's investigation of income distribution,
Wicksell concluded that even a totally unfettered economy was not destined to equalize wealth as a number of Wicksell's predecessors had predicted.

Instead,Wicksell posited :
"wealth created by growth would be distributed to those who had wealth in the first place."

From this, and from theories of marginalism,
Wicksell defended a place for government intervention to improve national welfare.

INTEREST and PRICES

Wicksell's most influential contribution was his theory of interest, published in his 1898 work, Interest and Prices.
He made a key distinction between the natural rate of interest and the money rate of interest.

The money rate of interest,
to Wicksell, was merely the interest rate seen in the capital market.

The natural rate of interest,
was the interest rate that was neutral to prices in the real market, or rather, the interest rate at which supply and demand in the real market was at equilibrium – as though there were no need for capital markets. This connected to the theory of the Austrian School, which theorized that an economic boom happened when the natural rate of interest was higher than the market rate.

CUMULATIVE PROCESS

This contribution, called the "cumulative process,"
implied that if the natural rate of interest was not equal to the market rate,
demand for investment and quantity of savings would not be equal.

If the market rate is beneath the natural rate,
an economic expansion occurs,
and prices, ceteris paribus, will rise.

ENDOGENUS MONEY

This gave an early theory of endogenous money – money created by the internal workings of the economy, rather than external factors, and various theories of endogenous money have since developed.

AUSTRIAN SCHOOL
BUSINESS CYCLE
CENTRAL BANK POLICY
NATURAL RATE

This idea would be expanded upon by the Austrian school,
which used it to form a theory of the business cycle based on central bank policy – changes in the level of money in the economy would shift the market rate of exchange in some way relative to the natural rate, and thus trigger a change in the relative proportion of the production of consumer goods to investment, which would ultimately result in an economic correction, or recession, in which the proportion of production of consumption goods to investment in the economy is pushed back towards the level that the natural rate of interest would result in.

JOHN MAYNARD KEYNES
THE GENERAL THEORY OF EMPLOYMENT,INTEREST,AND MONEY
CUMULATIVE PROCESS

The cumulative process was the leading theory of the business cycle until John Maynard Keynes' The General Theory of Employment, Interest, and Money.

JOSEPH SCHUMPETER
CREATIVE DESTRUCTION

Wicksell's theory would be a strong influence in Keynes's ideas of growth and recession, and also in Joseph Schumpeter's "creative destruction" theory of the business cycle.

IRVING FISHER
QUANTITY THEORY OF MONEY

Wicksell's main intellectual rival was the American economist Irving Fisher,
who espoused a more succinct explanation of the quantity theory of money,
resting it almost exclusively on long run prices.

Wicksell's theory was considerably more complicated,
beginning with interest rates in a system of changes in the real economy.

Although both economists concluded from their theories that :
"at the heart of the business cycle (and economic crisis) was government monetary policy",
their disagreement would not be solved in their lifetimes, and indeed, it was inherited by the policy debates between the Keynesians and monetarists beginning a half-century later.

SOCIAL ISSUES
STATUS QUO

Wicksell also expressed his views on many social issues and was often a critic of the status quo.

He questioned the institutions of rank, marriage, the church, the monarchy, and the military.

EQUAL DISTRIBUTION OF WEALTH AND INCOME
EDUCATOR OF THE PUBLIC

While Wicksell fought for a more equal distribution of wealth and income,
he saw himself primarily as an educator of the public.
He desired to influence more than just the field of monetary economics.