Theoretical origins and evolution of the Purchasing Power Parity in Gustav Cassel’s economic thought: A Lakatosian Interpretation
In this article I review the main aspects underlying the development of the Purchasing Power Parity (PPP) theory in Gustav Cassel’s work based on Lakatos framework of Methodology of Scientific Research Programmes (MSRP). Although the origins of this idea have been traced back to the XVI century and to the workings of the Salamanca School, the development of the Purchasing Power Parity concept has been closely associated with economic thought of Cassel, who first coined the term in 1918. At a time of high levels of inflation and volatility in exchange rates the formulation of PPP theory elevated Cassel’s name to world fame. The early 1920’s was a period when Cassel’s work became highly influential in both academic and policy circles. His expertise was highly regarded as he sat in expert panels, writing policy memorandums for the Swedish government and international institutions such as the League of Nations. Nevertheless, by the end of decade the enthusiasm around Cassel work, in general, and with PPP theory, in particular, had declined to a considerable extent. Furthermore, it’s important to highlight that, over the course of more than a decade in which he wrote on the topic, Cassel’s formulations of the theory and how himself interpreted the theory went through significant changes. The paper traces these shifts introduced by Cassel back to critiques emerging from the contemporary academic debate. It claims that while, on the one hand the introduction of these adjustments made his formulation of the theory ‘internally’ more consistent. On the other, it also insulated the core proposition from falsification with strategies that reduced empirical-content of theory without being able to satisfactorily incorporate the emerging counter-examples within the ‘hard-core’ of the theory. Thus, the use of MSRP framework enables one to better understand how these changes can be related to the rise and eventual decline of PPP theory in academic and policy debates of the 1920’s.
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Keywords: PPP, Cassel, Exchange Rates, Lakatos, MSRP