Money, Banks and Finance in Economic Thought

A study of the nature of the Wicksellian rate of interest on capital from technical to social issues

Guillot Léon , University Paris 1 Panthéon-Sorbonne

Even though political economy used to emphasize the significance of the role played by the interest rate in the accumulation of capital, Knut Wicksell claims that “even from a theoretical perspective”, the “exact determination” of the interest rate’s level is one of the hardest determination political economy has to make (Wicksell 1898, 120). He depicts the rate of interest on capital – the natural rate – as “an expected rate of return on real capital”. This rate “is not fixed or unalterable in magnitude” (Wicksell 1898, 106). To address this indeterminacy, I argue that understanding the fundamental properties and nature of “capital” – or the “ontology” (Endres 2011) – is essential. These past twenty years, historians of economic though have gained interest for Wicksell’s thought and legacy. Since the works of Woodford (2001), DSGE models use an interest rate close to Wicksell’s natural rate (Trautwein and Zouache 2009). Those models aim to determine the rate’s level while adopting a very narrow conception of what is “capital” (Laubach and Williams 2003; Mesonnier 2005; Couppey-Soubeyran 2016). Moreover, even though they separate Wicksell’s monetary and capital theories, the introduction of money changes “the very essence of capital” (Wicksell 1898, 135). I show why an inquiry of the “ontology” of capital allows understanding the fundamental instability of interest rate. Entrepreneurs ground their expectations on their own evaluation of this rate. Hence wrong anticipations are frequent and discrepancies between ex ante investment and ex post actual production arise. In this article, I argue first that one must study the “period of investment” to understand the nature of capital as being fundamentally time-related. Second, I show that the nature of capital has to be reconsidered as being heterogeneous both in a quantitative and qualitative way. Although Wicksell’s hypothesis of a stationary state seems to be at odds with his own definition of the nature of capital, the structure of capital is an analysis through time. Finally, I argue that once Wicksell’s monetary economy is reckoned, it sheds light on the unstable nature of the capitalistic production as the rate of interest derives mainly from psychological motives taking place in an uncertain world. Consequently, the level of the interest rate can only be known ex post.

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Keywords: Wicksell, Macroeconomics, interest rate, capital theory

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