Richard Ebeling is the Ludwig von Mises Professor of Economics and chairman of the economics department at Hillsdale College.

In the early months of 1889 a 37-year-old Swedish student named Knut Wicksell was walking through the streets of Berlin in Germany when he happened to notice in the window of a bookstore a recently published volume by the Austrian economist Eugen von Böhm-Bawerk: The Positive Theory of Capital.

Wicksell later wrote to a friend that,

I procured a copy and was soon lost in the book. I understood most of it rather imperfectly, as can be seen from my notes in the margin. . . . Nonetheless the book came to me as a revelation. I had already tried on my own, with little success, to penetrate the phenomenon of interest and the general problem of economic distribution, when complicated by the existence of capital (as well as labor and natural resources). . . . It was as though I now saw with my own eyes the roof being put on a scientific construction, which no economist since the days of Ricardo had managed to raise above its lower floors.1

This discovery put Knut Wicksell on an intellectual path that led to his becoming one of the great economists of the twentieth century. Through his writings and personal influence Wicksell provided a framework for monetary and business-cycle analysis that has served as the starting point for several generations of Swedish and Austrian economists. Knut Wicksell was born on December 20, 1851, in Stockholm. The sesquicentennial of his birth offers an appropriate occasion for an appreciation of some of his important contributions to economics.

Wicksell was born into a middle-class Swedish family. His father ran a grocery business and wisely invested the profits in real estate. Knut’s mother died when he was seven years old, and his father when he was 15. But he and his four siblings were left financially comfortable enough for them to get through high school and for Knut and his brother to attend the University of Uppsala, not far from Stockholm. He graduated with a bachelor of science degree, cum laude, after only two, instead of the usual four, years, having specialized in mathematics, physics, and astronomy.

But he began having doubts about his future. First, after an intense devotion to his Christian faith following his father’s death, he increasingly came to have doubts, and at the age of 23 became a “free thinker,” a position from which he never wavered for the rest of his life. Second, he doubted whether he could make any meaningful contributions to mathematics, if he chose that direction for his graduate studies.

At the same time, he began to be interested in the social and economic issues of the day, especially the relationship between drunkenness, prostitution, the condition of the poor, and overpopulation. The poor were driven to drink because of the apparent hopelessness of their economic condition. Many men in the lower middle class turned to alcohol and the services of prostitutes because they had no hope of earning a sufficient income that would make early marriage possible.

Wicksell concluded, therefore, that if these vices were to be ameliorated, population growth had to be slowed down so that the rate of capital formation would exceed the rate of increase in population, resulting in a relatively greater scarcity of labor in comparison to capital. This would raise the value of labor and wages relative to the value and price of capital. But Wicksell rejected Thomas Malthus’s famous prescription of “moral restraint” on the part of the members of society. Instead, he made the case for a wide distribution of contraceptives, and in later years advocated the legalization of abortions during the first three months of pregnancy.

For these and other “radical” social views that he put into print in the early 1880s, Wicksell was condemned by the professors at the University of Uppsala, censured by the Uppsala medical association, and warned that he was following a dangerous path in publicly advocating these ideas.

He made his living during these years as a journalist and read economics on his own. But in the mid-1880s and then again late in the decade he was awarded travel grants to study abroad that took him to London, Strasbourg, and Vienna. In Vienna he attended the lectures of Carl Menger, founder of the Austrian school of economics. It was on the second of these travels that Wicksell came across Böhm-Bawerk’s work in a Berlin bookstore.

When he returned to Sweden he applied for a lectureship in economics at the University of Uppsala, but was turned down because of his political and social views. Nevertheless, he was recommended to apply to the university law school, where he was told that he could teach economics only if he had a law degree. So at the age of 45 he did what he had done as an undergraduate and crammed four years of study into two. He passed the law examination in 1899 and was appointed a lecturer in economics at the University of Uppsala the same year. The following year he accepted a professorship at the University of Lund, a position he held until his retirement in 1917 at age 65.

At Lund he continued to make controversial statements. At a May Day demonstration in 1904 he suggested that it was futile to imagine that Sweden could ever successfully defend itself against a determined, more powerful foreign enemy. Instead, he suggested that Sweden should abolish all military spending and invite Imperial Russia to annex the country. Russia would supply all necessary defense against would-be attackers, and the role of the Swedes would be to educate and civilize the rough and backward Russians in the ways of social freedom and democracy. He stepped back from this radical position after the First World War and became a strong proponent of the League of Nations.

Then in 1908 Wicksell took up the cause of an “anarchist agitator” who had “disturbed the religious peace” of the country with remarks declared to be blasphemous for which he was sent to prison. Insistent that this was a blatant and serious violation of freedom of expression and personal liberty, Wicksell delivered a public lecture in which, as an act of peaceful civil disobedience, he satirized the story of the Immaculate Conception. Wicksell was tried and convicted of blasphemy and after several appeals spent two months in prison in 1910.

He wrote widely on the problems of wartime inflation and postwar monetary problems following the First World War and suggested how the negative effects of the war could be minimized in neutral Sweden. He also turned out a string of seminal books on capital, money, interest, and public finance. On May 2, 1926, at the age of 74, he died from a stomach disorder that was complicated by pneumonia.

Major Works

Wicksell’s first major work was Value, Capital and Rent published in 1893.2 The classical economists, from Adam Smith through David Ricardo to John Stuart Mill, had attempted to show that the relative prices of goods and the distribution of income among the factors of production (land, labor, and capital) were all ultimately determined by the quantity of labor (along with a few auxiliary assumptions) that was required for the manufacture of goods and the production of food. The “marginalist revolution” of the 1870s had shown that the value of goods and factors of production are ultimately based on the subjective valuations of demanders. Their marginal (or incremental) decisions concerning tradeoffs between units of commodities determine relative prices in the market.

What Wicksell did in his first book was to synthesize the mathematical general equilibrium theory of Léon Walras with Böhm-Bawerk’s theory of capital as a time-consuming, multistaged process of production. He explained how each factor of production received an income equal to its contribution (or marginal product) to the manufacture of a good. He also showed that even in a stationary equilibrium, interest income had to be earned as the incentive for replacing the capital consumed in the processes of production through time.

In his next major work, Studies in the Theory of Public Finance (1896), Wicksell innovatively applied the theory of marginal cost-benefit analysis to the process of government taxing and spending.3 Nobel laureate James Buchanan has emphasized Wicksell’s original and important contribution to political decision-making on fiscal matters:

Among fiscal theorists, Knut Wicksell holds the unique position of having carried his theoretical ideas through to an examination of the political structure within which fiscal decisions must be made and implemented. . . . Wicksell proposed, first of all, that the bridge between tax and expenditure sides of the fiscal account be made explicit. When a specific expenditure project was presented, a whole array of possible distributions of the required tax bill were also to be presented, with each array estimated to produce revenues sufficient to cover the outlay. The expenditure project was then to be voted on in the legislature, along with each one of the tax allocations, and when one such combination secured the unanimous approval of the assembly, it was to be adopted. If no single combination received unanimous support, the expenditure project was not to be undertaken and no tax was to be levied.4

Wicksell stepped back from the full unanimity principle to a less restrictive super-majority rule. But Buchanan highlighted that what was crucial to Wicksell’s contribution was his focusing on government fiscal issues in terms of the individual members of society who would either receive the expenditure benefits or bear the taxation costs. The preferences of real people affected by government fiscal policy could no longer be ignored, and economists could not simply view themselves as “proffering advice to nonexistent benevolent despots.”5

But the contribution for which Wicksell has received the most international recognition among economists for over a century now is his book Interest and Prices: A Study of the Causes Regulating the Value of Money (1898).6 In the first half of the nineteenth century a number of leading classical economists, including David Ricardo, had defended “the quantity theory of money” in understanding the inflation experienced during the Napoleonic Wars. They reasoned that a general rise in prices could not occur unless there was a sustained increase in the quantity of money. And they further argued that the only way to restrain government’s temptation to abuse the printing press was to link the currency to a commodity, such as gold. Thus they advocated the gold standard as an institutional means to prevent government-caused inflations. For a variety of reasons many economists had turned away from the logic of the quantity theory of money by the end of the nineteenth century.

Wicksell set about the task of rehabilitating it.7 He used Böhm-Bawerk’s idea of a period of production between the application of inputs and the availability of outputs to serve as the framework for restating his version of the theory. In a nutshell, Wicksell argued that if goods were traded directly in barter, there would be a tendency for market forces to establish an interest rate that balanced the supply and demand for real capital for investment purposes. And this equilibrium rate of interest is what Wicksell called the “natural rate.”8

However, in a complex economy goods are traded through a medium of exchange—money. If lenders lent their savings to borrowers in the form of money at a similar equilibrium rate of interest, then money would be “nothing more than a cloak” for the savings and investing of real resources for productive purposes. However, Wicksell says, “Liquid real capital (i.e., goods) are never lent. . . . [I]t is money which is lent, and then the commodity capital is then sold in exchange for this money.”9

Depressed Interest Rate

Since it is money that is lent, and not real capital, the monetary authority is able to increase the supply of money available for lending and lower the money rate of interest below the “natural rate” to attract borrowers. Anticipated yields or profits on potential investments will now seem greater than before the fall in the money rate of interest, meaning that at the margin some production projects will now appear attractive that did not seem profitable at the previous higher rate of interest. However, not all types of investments are affected equally by the change in the rate of interest. Those with longer time horizons—longer periods of production before their completion—will be influenced to a greater degree because the lowering of the rate of interest increases the present value of these longer-term investment projects.

Developing several different models using slightly different assumptions, Wicksell presents his theory of how this lowering of the interest rate affects market processes.10 But the crucial one that served as a springboard for later developments of the theory by other Austrian and Swedish economists is his two-period model.

Suppose, he says, that production processes normally take one year. But with the fall in the rate of interest because of the monetary expansion, two-year investment projects now appear profitable to some entrepreneurs. Using borrowed money, these entrepreneurs purchase and hire factors of production by bidding them away from their present employment in one-year projects. This means that at the end of the first year fewer goods and services will have been produced than would have been, because the required resources were drawn into projects that will not be completed for another year.

This greater scarcity of consumer goods, reflected in higher prices, “forces” society to save—that is, do without consumption goods they normally would have desired to purchase, but which are not available. But according to Wicksell, at the end of the second year, when the longer-term projects have been completed, society will be rewarded for this forced waiting with more and better goods made possible by the longer period of production.

Wicksell argued that if the monetary authority were to keep the money rate of interest constantly below the “natural rate” through continuous monetary expansion, a “cumulative process” of rising prices would be generated. The additions to the money supply would be borrowed by entrepreneurs who bid up the prices of the factors of production to keep or add them to their sectors of the economy. The workers and resource owners receiving those higher money incomes period after period would in turn, and in sequence, bid up the prices for the consumer goods they desire. Only an end to the monetary expansion and a rise in the rate of interest back to its “natural” level could bring the process to an end.

A few years later Wicksell restated his formulation of the Austrian theory of investment and the period of production, as well as his theory of money and how monetary changes influence production processes in his two-volume Lectures on Political Economy.11

Wicksell’s outline of the way in which changes in the money supply modify the market rate of interest and influence the allocation of resources through the processes of production became the starting points for the Austrian and Swedish schools of economics in monetary and business-cycle theory. Ludwig von Mises in The Theory of Money and Credit, Monetary Stabilization and Cyclical Policy, and Human Action, and F.A. Hayek in Monetary Theory and the Trade Cycle and Prices and Production adopted Wicksell’s framework for developing a theory of the business cycle.12

Mises’s and Hayek’s innovation was to demonstrate that there were market forces set in motion in Wicksell’s “cumulative process” that would bring it to an end before many of the longer-term investment projects could be brought to completion. Thus the inflationary upturn in investment activity carried with it the seeds for an eventual downturn and correction when these capital projects were shown to be malinvestments resulting from misdirection of resources due to the lack of real savings needed to bring them to, and maintain them after, completion.13

In the 1930s Wicksell’s ideas were developed in a slightly different direction by the Stockholm school of economists.14 Two of the most important contributors from this period were Gunnar Myrdal and Erik Lindahl. Myrdal formulated a theory of “monetary equilibrium,” in which he suggested the conditions that were required for avoiding Wicksell’s cumulative process.15 Lindahl accepted Wicksell’s basic framework and then analyzed the change in the cumulative process if there were less-than-full employment in either the consumer-goods or investment-goods sectors of the economy or both; Lindahl also developed a “period analysis” of sequential change over time.16 And in the late 1930s Bertil Ohlin defended the Swedish Wicksellian approach against the emerging Keynesian theory.17

Both the Austrian and Swedish variations and developments of Wicksell’s seminal ideas on money and the business cycle were submerged in the tidal wave of Keynesian macroeconomics during most of the post-World War II period.18 But in recent years there has been a renewed interest in Wicksell and his continuing relevance as found in the Austrian and Swedish variations on his themes.19 And most especially the new generation of Austrian economists has begun a revival of this insightful tradition.20

Thus on the 150th anniversary of Knut Wicksell’s birth, his ideas have as much interest and offer as much insight at the beginning of the 21st century as when he was first penning them at the start of the twentieth.


  1. Torsten Gardlund, The Life of Knut Wicksell (Stockholm: Almqvist & Wiksell, 1958), p. 118. The following account of Wicksell’s life and career are taken from Gardlund’s book and Carl G. Uhr, Economic Doctrines of Knut Wicksell (Berkeley: University of California Press, 1962).
  2. Knut Wicksell, Value, Capital and Rent (New York: Augustus M. Kelley, 1970 [1893]).
  3. This work has been partly translated as, Knut Wicksell, “A New Principle of Just Taxation” [1896], in R.A. Musgrave and A.T. Peacock, eds., Classics in the Theory of Public Finance (London: Macmillan, 1958), pp. 72–118.
  4. James M. Buchanan, Public Finance in Democratic Process: Fiscal Institutions and Individual Choice (Chapel Hill: University of North Carolina Press, 1967), pp. 115–16; see also Duncan Black, “Wicksell’s Principle in the Distribution of Taxation,” in J.K. Eastman, ed., Economic Essays in Commemoration of the Dundee School of Economics, 1931–1955 (London: Economists Bookshop for the LSE), pp. 20–21: “Inside Parliament Wicksell’s principle, by requiring a high majority for an increase of expenditure and a very small minority for a reduction, would make increases of expenditure far more difficult and reductions far easier than with the normal requirement of a simple majority. The bias would be toward curtailment and reduction.”
  5. James M. Buchanan, Better than Plowing and Other Personal Essays (Chicago: University of Chicago Press, 1992), p. 6.
  6. Knut Wicksell, Interest and Prices: A Study of the Causes Regulating the Value of Money (New York: Augustus M. Kelley, 1965 [1898]). The ideas in this work were also summarized by Wicksell in journal form in “The Influence of the Rate of Interest on Commodity Prices” [1898] in Selected Papers on Economic Theory (New York: Augustus M. Kelley, 1969 [1958]), pp. 67–89, and “The Influence of the Rate of Interest on Prices,” Economic Journal, June 1907, pp. 213–20.
  7. See Richard M. Ebeling, “Knut Wicksell and the Classical Economists on Money, Credit, Interest and the Price Level” American Journal of Economics and Sociology, July 1999, pp. 471–79.
  8. Wicksell’s use and meaning of the “natural rate” of interest is not without ambiguity. See Arthur W. Marget, The Theory of Prices, Vol. 2 (New York: Augustus M. Kelley, 1966 [1942]), pp. 201–204. Marget discerned at least eight different definitions of the concept in Wicksell’s writings.
  9. Wicksell, Interest and Prices, pp. xxvi, 135.
  10. A detailed breakdown of Wicksell’s analysis of different “periods” under “stationary” and “cumulative” conditions, as well as some of the inconsistencies to be found in his exposition, is presented in Uhr, pp. 235–45.
  11. Knut Wicksell, Lectures on Political Economy, 2 vols. (Fairfield, N.J.: Augustus M. Kelley, 1977 [1901 and 1906]).
  12. Ludwig von Mises, The Theory of Money and Credit (Indianapolis, Ind.: Liberty Classics, 1981 [1912; 2nd ed.,1924; 3rd ed., 1953]); “Monetary Stabilization and Cycle Policy” in Percy L. Greaves, ed., Ludwig von Mises, On the Manipulation of Money and Credit (Dobbs Ferry, N.Y.: Free Market Books, 1978 [1928]) pp. 57–171, and in Israel M. Kirzner, ed. Classics in Austrian Economics: Samplings in the History of a Tradition (London: William Pickering, 1994), pp. 33–111; and Human Action: A Treatise on Economics, 4th ed. (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1996), pp. 538–86; F.A. Hayek, Monetary Theory and the Trade Cycle (New York: Augustus M. Kelley, 1966 [1929]); and Prices and Production (New York: Augustus M. Kelley, 1967 [1931; 2nd ed., 1935]).
  13. For an exposition of the Austrian theory of the business cycle in contrast to the traditional Keynesian theory of the Great Depression, see Richard M. Ebeling, “The Austrian Economists and the Keynesian Revolution: The Great Depression and the Economics of the Short-Run,” in Richard M. Ebeling, ed., Human Action: A 50-Year Tribute (Hillsdale, Mich.: Hillsdale College Press, 2000), pp. 15–110.
  14. For an overview of the Swedish economists and their literature, see Richard M. Ebeling, “The Stockholm School of Economics: An Annotated Bibliography,” Austrian Economics Newsletter, Winter 1981, vol. 3, no. 2.
  15. Gunnar Myrdal, Monetary Equilibrium (New York: Augustus M. Kelley, 1965 [1933; 1939]).
  16. Erik Lindahl, Studies in the Theory of Money and Capital (New York: Augustus M. Kelley, 1970 [1939]).
  17. Bertil Ohlin, “Some Notes on the Stockholm Theory of Savings and Investment” [1937], reprinted in Howard S. Ellis, ed., Readings in Business Cycle Theory (London: George Allen & Unwin, 1950), pp. 87–130.
  18. For a comparison and contrast of the Swedish and Austrian contributions on the basis of Böhm-Bawerk’s and Wicksell’s theories, see Richard M. Ebeling, “Money, Economic Fluctuations, Expectations and Period Analysis: The Austrian and Swedish Economists in the Interwar Period,” in Willem Keizer, Bert Tieben, and Rudy ven Zijp, eds., Austrian Economics in Debate (London/New York: Routledge, 1997), pp. 42–74.
  19. See David Laidler, Fabricating the Keynesian Revolution: Studies of the Inter-war Literature on Money, the Cycle, and Unemployment, Part I on “The Wicksellians,” (Cambridge: Cambridge University Press, 1999), pp. 25–75.
  20. Most recently, Steven Horwitz, Microfoundations and Macroeconomics: An Austrian Perspective (London/New York: Routledge, 2000); and Roger W. Garrison, Time and Money: The Macroeonomics of Capital Structure (London/New York: Routledge, 2001).
Richard Ebeling
Richard M. Ebeling is BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina. He was president of the Foundation for Economic Education (FEE) from 2003 to 2008.