Thomas Cate, ed., Encyclopedia of Keynesian Economics
Aldershot, England: Edward Elgar, 1997, pp. 90-93.
Karl Gustav Cassel
by Roger W. Garrison
Karl Gustav Cassel
(1866-1945) was a founding member, along with Knut Wicksell and David Davidson,
of the Swedish school of economics. Cassel came to economics from mathematics.
After earning an advanced degree in mathematics from the University of
Uppsala, he taught in Stockholm during the late 1890s but went to Germany
before the turn of the century to study economics. His publications in
economics date from 1899 and span a period of nearly four decades. He taught
economics at the University of Stockholm from 1903 until 1936. Gunnar Myrdal
and Bertil Ohlin were his most prominent students.
Despite the formal training
in Germany, Cassel's perspective on economic reality, and especially on
the role of interest, was rooted in British neoclassicism and in the nascent
Swedish school, which was given shape by Wicksell's early writings. Cassel's
facility with mathematics and his use of it to describe the interconnectedness
of markets created a strong kinship between his theories and those of Leon
Walras. In addition to his major works on interest-rate determination and
general-equilibrium theory, Cassel popularized the purchasing power parity
theory of exchange rates and contributed to the ongoing debates on monetary
stability and currency reform. (Keynes incorporated the idea of purchasing
power parity in his Tract on Monetary Reform (1923). And in 1922
Cassel and Keynes, along with two other economists, were signers of the
majority report of a commission on currency reform submitted to the German
government.) Cassel also wrote extensively for the popular press and was
a staunch supporter of free markets and free trade. A summary of his ideas
is offered in his own Fundamental Thoughts in Economics (1925).
The Nature and Necessity
of Interest (1903) advanced and soon came to exemplify Swedish thought
on the fundamental economic realities that underlie the relationship between
saving and investment. If the interest rate is conceived as a price, it
is the price of a factor of production called "waiting." Casselian waiting
has the dimensions of value and time, as might be measured in dollar-years.
Two hundred dollars relinquished to a borrower for a period of three years
constitutes, if compounding is ignored, six hundred dollar-years of waiting.
A positive rate of interest entices income earners to wait to consume what
they could in fact consume now; it entices investors to economize on resource
utilization that involves waiting. Alfred Marshall had used the term "waiting"
to similar effect—preferring it to the older term "abstinence" (which has
moral connotations); William Stanley Jevons had introduced the units of
pound-years as the basis of his own dimensional analysis. Critical of Böhm-Bawerk's
time-preference theory for its special treatment of intertemporal exchange,
Cassel drew on Marshall and Jevons to emphasize that the theory of interest
was on equal footing with price theory in general.
Cassel's most ambitious
work, Theoretische Sozialökonomie (1918), translated into English
in 1923 as The Theory of Social Economy, sets out the conditions
for a general equilibrium in the sense of Walras. Cassel's formulation
was simpler than Walras's in that money prices rather than the underlying
values or utilities served as the basic building blocks of the system.
(Critics, including Wicksell, held that this analytical simplicity came
at the expense of economic understanding and that the strong link to Walras's
system of equations was never sufficiently acknowledged.) Cassel dealt
first with the static state, in which secular change is ruled out by assumption,
and then with the progressive state, which is characterized by uniform
growth. Considerations of dynamics, including cyclical variation, were
offered as a supplement to the more fundamental economics of the static
and progressive states. Cassel was an eclectic on the issue of the trade
cycle: money, credit, trade flows, and speculation in securities markets
were all accorded causal roles. In the final analysis, however, movements
in the interest rate and corresponding changes in the profitability of
fixed capital are central, according to Cassel, to our understanding of
trade cycles in modern times.
In several respects, Cassel's
theory of general equilibrium—more so than Walras's—represents the relevant
foil against which Keynes's own ideas were presented. When Keynes dealt
on an exegetical level with alternative theories of interest, he categorized
the theories of Marshall, Cassel, and Walras as "classical" in the sense
that they took interest to be a real, rather than monetary, phenomenon
and took the interest rate as the market's device for bringing saving and
investment into equality. Cassel's formulation was the more obvious foil
if only because it was a clear and direct outgrowth of Marshall's. Also,
the theory of interest, so central to Keynes's thinking, was given due
prominence in Cassel's. The system of general-equilibrium equations, as
set out in Cassel's 1918 work, was built up around the theory of interest
he had developed a decade and a half earlier. By comparison, Walras's
Elements of Pure Economics, as first published in 1874, contained no
theory of interest at all. The utility theory of saving and a treatment
of capital-goods pricing were not introduced until the fourth edition,
which appeared in 1900. Finally, Walras was neither well-received nor even
widely read in England at the time that Keynes's ideas were developing;
there was no English translation of Elements until 1954.
One of Keynes's objections
to the classical theory of interest makes direct use of Cassel's treatment
of the relationship between saving and the interest rate. The saving function
may be backward bending—and will be if people save with an eye toward
accumulating a set amount by some future date. (This point is also made
by Marshall.) Keynes argues that a downward-sloping demand for loanable
funds and a backward-bending supply may have no intersection, a possibility
that, in his judgment, should have warned the classical economists away
from Cassel's (and Marshall's) supply-and-demand approach.
Probably the most sweeping
contrast between Cassel's and Keynes's frameworks derives from differing
perceptions of the scope for a general theory of the particular phenomena
that give macroeconomics its subject matter. According to Cassel, there
can be no such thing as a general theory of unemployment. The system of
equations of a truly general theory determine simultaneously all prices
and quantities in both product and factor markets and provide a full solution
in which, e. g., unemployment and distribution of income have no independent,
or separate, existence—and hence in which demand management policies have
no justification. This was Cassel's summary judgment in his 1937 review
of Keynes's General Theory. For Keynes, however, the inherent unknowability
of the future and the inherent subjectivity of expectations about the future
were enough to render Cassel's system of equations irrelevant and give
scope for the "dark forces of time and ignorance" to affect the performance
of real-world market economies.
Cassel, Gustav (1903), The Nature and Necessity of Interest.
New York: Macmillan.
Cassel, Gustav (1918), Theoretische Sozialökonomie. Leipzig:
C. F. Winter. English translation 1923: The Theory of Social Economy,
London: T. F. Unwin.
Cassel, Gustav (1921), The World's Monetary Problems. London:
Constable and Co.
Cassel, Gustav (1922), Penningväsendet efter 1914. Stockholm:
P. A. Norstedt. English translation 1922: Money and Foreign Exchange
after 1914, London: Constable and Co.
Cassel, Gustav (1925), Fundamental Thoughts in Economics. London:
T. F. Unwin.
Cassel, Gustav (1936), The Downfall of the Gold Standard. Oxford:
Cassel, Gustav (1937), "Keynes' General Theory," International
Labor Review 36: 437-445.