Thomas Humphrey wrote:
> I'm submitting this message for posting by SHOE.
> ---Thomas Humphrey
>
> *
> *
>> *Subject: **Ahiakpor on Humphrey on Wicksell*
>>
>>>> I completely agree with the thrust of James Ahiakpor's complaint. 
>>>> Namely that it serves no useful purpose, and indeed generates 
>>>> needless controversy, when one attempts invidiously to rank 
>>>> prominent economists and assign them grades as if they were school 
>>>> pupils vying for the honor of being the smartest kid in the class. 
>>>> We can agree that all the economists James mentions contributed 
>>>> significantly to the subject. We don't need further to try to rank 
>>>> them as first-, second-,third-, and nth-best.
>>>>

Tom is here agreeing with a position I did not take.  I was not 
complaining about the usefulness of rating prominent economists. Rather, 
I was pointing out that his highly rated, prominent economist, Knut 
Wicksell, has several weaknesses in his monetary analysis that others, 
including myself, have noted or documented.  I mentioned chapter 7 of 
/Classical Macroeconomics/ for those who would like to read some more of 
those weaknesses as well as Don Patinkin's (1965) lower rating of 
Wicksell as compared with David Hume, David Ricardo, J.S. Mill, and 
Alfred Marshall.  I could have mentioned the 1999 /American Journal of 
Economics and Sociology/ article that first carried my documentation of 
Wicksell's less than impressive contributions to monetary analysis that 
forms chapter 7 in the book.
>>>> On another matter, James argues that Wicksell obtained much of his 
>>>> cumulative process (CP) model from Ricardo. But James overlooks 
>>>> that Henry Thornton, not Ricardo, can lay claim to being the true 
>>>> father of the CP model. In his 1802 An Enquiry Into the Nature and 
>>>> Effects of the Paper Credit of Great Britain, Thornton writes that 
>>>> when the rate of profit on capital (Thornton's version of 
>>>> Wicksell's natural rate) exceeds the going rate of interest on bank 
>>>> loans (the cost of capital or Wicksell's market rate) 
>>>> borrower-investors, seeking to exploit the rate differential, will 
>>>> besiege banks with loan requests. Banks, in accommodating these 
>>>> requests, will create extra bank money for the borrowers, who upon 
>>>> spending it will drive up the price level just as Wicksell later 
>>>> claimed. Thornton noted that the process will continue as long as 
>>>> the rate differential persists, and will end only when the 
>>>> differential vanishes. And vanish it must as the diminishing 
>>>> marginal productivity of accumulating capital drives down the rate 
>>>> of profit on capital at the same time that the inflation-induced 
>>>> drain of coin into internal circulation threatens bank cash 
>>>> reserves forcing bankers to increase their loan rates. All the 
>>>> elements of Wicksell's 1898 CP already are in Thornton's 1802 
>>>> formulation.
>>>>
>>>> When Wicksell penned his 1898 Interest and Prices he was unaware 
>>>> that Thornton already had scooped him ninety six years before. He 
>>>> didn't learn of Thornton's formulation of the CP model until his 
>>>> Swedish colleague David Davidson told him about it in the early 
>>>> twentieth century. For this reason, Wicksell erroneously cited 
>>>> Ricardo, rather than Thornton, as his forebear in the development 
>>>> of the CP model.
>
>            Thomas Humphrey
>
I have a problem with this argument.  Wicksell didn't learn the 
cumulative process principle from Henry Thornton, but from David 
Ricardo.  Why is it a mistake for him to have said so?

Alfred Marshall acknowledges Henry Thornton's 1802 /Paper Credit of 
Britain/ in his monetary analysis, besides David Ricardo's analyses.  
But Marshall relied more on Ricardo than on Thornton. Since Wicksell was 
trying to understand classical economics through Marshall, he may have 
picked up the Ricardo principle from Marshall.  Indeed, Marshall applied 
the limitation of bank lending and the rise of interest rates, following 
the rise of prices, in his 1887 "Memorandum and Evidence before the Gold 
and Silver Commission," but which Wicksell did not incorporate into his 
version of the cumulative process argument.  Wicksell (1898, xxiii-xxiv; 
1906, 190) was willing to argue that "banks could maintain the low rates 
of interest" and provoke a series of endless price increases. 
Furthermore, Ricardo, J.S. Mill, and Marshall all understood the 
classical "capital" supply and demand theory of interest rate 
determination.  Wicksell had trouble with that theory, besides the 
Quantity Theory of Money that should form the basis of classical 
monetary theory.  How Wicksell would rank high in anyone's estimation as 
a great monetary theorist with such defects just baffles me.

James Ahiakpor

--
James C.W. Ahiakpor, Ph.D.
Professor
Department of Economics
California State University, East Bay
Hayward, CA 94542

(510) 885-3137 Work
(510) 885-7175 Fax (Not Private)