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Gunnar Myrdal, a Swedish economist and 1973 Nobel Prize winner for his early work on monetary theory, made major contributions to macroeconomic theory, international economics, development economics, economic methodology, and social and economic policy. He was a critic of mainstream neoclassical economics and a proponent of institutionalist economics.
Myrdal’s early work on money was theoretical in nature. As a leading contributor to the Stockholm school, he followed Knut Wicksell’s (1851–1926) cumulative process analysis, in which cumulative inflation occurs when banks hold the loan rate of interest below the natural rate of interest (at which saving out of full-employment income is equal to investment), resulting in a high level of investment demand. In a 1931 work (published in English in 1939 as Monetary Equilibrium), Myrdal examined the implications of banks maintaining a high loan rate, which results in low investment, low aggregate demand, and unemployment. This analysis is sometimes seen as a precursor of Keynesian analysis. However, it focuses more on expectational issues and dynamics rather than on equilibrium with unemployment, which is arguably central to Keynesian analysis.
Following this, Myrdal and his wife, Alva, became actively involved with politics and policymaking, playing a major role in the creation of the Swedish welfare state in the 1930s. In the 1940s Myrdal served in the Swedish parliament, as chairman of the Planning Commission, as minister of Trade and Commerce, and as executive secretary of the United Nations Economic Commission for Europe.
Following his purely theoretical work on money, his scholarly contributions became increasingly critical of mainstream neoclassical economics, leading him to adopt what may be called the institutionalist approach. In addition to giving real-world institutions a central role in his analysis, Myrdal’s approach emphasized the role of values and the importance of noneconomic factors. He saw an interdependence between economic and noneconomic factors, and criticized the neglect of noneconomic factors by most economists. In addition, he was critical of the tendency of many economists to hide their values under the guise of objectivity, and he argued that economists should make their value premises explicit; his own values emphasized equity and concern for the poor and the underprivileged, in addition to efficiency. Although these aspects of his writings mark a departure from his earlier work, his emphasis on cumulative processes and dynamics, in contrast to the static equilibrium analysis of neoclassical economics, reveal continuity.
In his An American Dilemma (1944), Myrdal applied the cumulative causation approach to the study of race relations in the United States, explaining discrimination and the poor conditions of African Americans in terms of the interplay of low opportunities, low incentives, and hence low effort (for instance, in obtaining a better education). In Economic Theory and Under-developed Regions (1957), he examined the problem of inequality among nations, and explained increasing international inequality in terms of cumulative causation. He pointed out that although there are spread effects from rich to poor countries—due, for example, to economic expansion in the former increasing the demand for products from the latter—backwash effects, involving increasing returns and external economies leading to a high level of profitability in rich countries and the siphoning of capital from poor countries, tend to outweigh them. While the cumulative causation concept provides a fruitful approach to analyzing vicious circles and rising inequality, it is problematic because it does not distinguish between unstable cases and situations in which the cumulative process converges to a stable equilibrium.
Myrdal’s monumental three-volume Asian Drama (1967) provides an excellent example of the institutionalist, interdisciplinary approach to the study of the problems of less-developed countries. Among the many contributions of this work are: the analysis of the implications of dysfunctional land tenure systems, such as sharecropping, on agricultural productivity and growth; the crisscrossing of interest groups based on caste, religion, and economic status, which stands in the way of organizing the poor in favor of land reforms; and the concept of the “soft” state that is unwilling to employ coercion to implement its declared policy goals, reflecting the power structure and the gap between the declared and real intentions of the state (rather than its gentleness).
Myrdal’s analysis of economic problems caused him to question the ability of the market to produce equitable growth and development. This view, and his concern for economic and social justice, made him a strong advocate of interventionist government policies and planning. He was also in favor of applying the concept of the welfare state to the world as a whole, for instance, through increases in foreign aid to poor nations. However, his discussion of soft states and his criticism of foreign aid because of its diversion to corrupt politicians suggest that he was not blind to the problems of the interventionist approach.
- Appelqvist, Orjan, and Stellan Andersson, 2005. The Essential Gunnar Myrdal. New York and London: The New Press.
- Myrdal, Gunnar.  Monetary Equilibrium. London: Hodge.
- Myrdal, Gunnar. An American Dilemma: The Negro Problem and Modern Democracy. New York: Harper.
- Myrdal, Gunnar. Economic Theory and Under-developed Regions. London: Duckworth.
- Myrdal, Gunnar. Asian Drama: An Inquiry into the Poverty of Nations. 3 vols. New York: Twentieth Century Fund.
- Streeten, P 1990. Gunnar Myrdal, World Development, July, 1031–1037.
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