Stockholm School Research Paper

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The Stockholm School was a macroeconomic school that was parallel to but independent of the employment theory developed by John Maynard Keynes during the 1930s. It consisted of a number of Swedish economists who were all influenced by Knut Wicksell’s theory of the cumulative process of 1898. In Wicksell’s theory, increases in the price level are followed period by period, and inflation is assumed to be driven by the gap between the natural rate (profitability of investments) and the loan rate of interest. If the natural rate exceeds the loan rate of interest, investments and consequently demand for goods and labor will increase and so will the price level. This is in contrast to the quantity theory of money, which says that increases in the price level are caused by increases in the supply of money. Gunnar Myrdal’s analysis of expectations in his dissertation of 1927 forms a second influence on the Swedish economists.

The Stockholm School developed in three stages. In the first stage Myrdal and Erik Lindahl in the early 1930s discussed Wicksell’s criteria of monetary equilibrium (macroeconomic equilibrium), namely, that the natural rate of interest should equal the loan rate of interest, that saving should equal investments, and that the price level should be constant. One outcome of the discussion was that the second condition for monetary equilibrium should be formulated as equality between planned saving and planned investments—that is, ex ante, not between realized saving and investments, that is, ex post.

The second stage is connected with the unemployment commission of the Swedish government and the fact that Sweden during the 1930s was hit by the worldwide Great Depression. Myrdal (1934) wrote a report in which he discussed how fiscal policy (variations of government expenditure and of taxes) could be used to even out the business cycle. Bertil Ohlin (1934) discussed how monetary policy and custom duties could be used for the same purpose. The analyses of Myrdal and Ohlin are rather similar to that of Keynes in The General Theory of Employment, Interest and Money of 1936. For example, Ohlin’s contribution discusses multiplier effects of public expenditure (i.e., increased public expenditure may increase gross national product more than the original increase of expenditure).

The Swedish government took the advice of members of the Stockholm School, which some believe is the main reason Sweden was comparatively mildly affected by the Great Depression. However, the devaluation by 30 percent of the Swedish krona in 1931 probably had a much greater impact.

The third stage took place in the end of the 1930s when the analysis of the Stockholm School was refined. One example is Erik Lundberg’s dissertation from 1937; in anticipation of Paul Samuelson’s mathematical analysis of 1939, Lundberg demonstrated numerically that a combination of the acceleration principle (a theory that says that investments depend on the change of consumption) and the multiplier theory can be used to explain the business cycle.

The creative phase of the Stockholm School lasted to the end of the 1930s. After that only a few contributions were published. Like the Austrian business cycle theory of Mises and Hayek, the Stockholm School was surpassed by Keynesian economics. Whereas the Keynesian equilibrium theory was easy to use and to generalize, this was not the case for the Swedish analysis.

Bibliography:

  1. Jonung, Lars, ed. 1991. The Stockholm School of Economics Revisited. Cambridge, U.K: Cambridge University Press.
  2. Lundberg, Erik. 1937. Studies in the Theory of Economic Expansion. London: P. S. King.
  3. Myrdal, Gunnar. 1927. Prisbildningsproblemet och föränderligheten [The Pricing Problem and Change]. Uppsala and Stockholm: Almqvist & Wicksells Förlag.
  4. Myrdal, Gunnar. 1934. Finanspolitikens ekonomiska verkningar [Economic Effects of Fiscal Policy]. SOU 1934:1. Stockholm: P. A. Norstedt & Söner.
  5. Ohlin, Bertil. 1934. Penningpolitik, offentliga arbeten, subventioner och tullar som medel mot arbetslöshet [Monetary Policy, Public Works, Subsidies and Custom Duties as Means Against Unemployment]. SOU 1934:12. Stockholm: P. A. Norstedt & Söner.
  6. Siven, Claes-Henric. 2006. Monetary Equilibrium. History of Political Economy 38 (4): 665–709.

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