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The Stockholm School, Ernst Wigforss and the Great Depression in : An Outline

Martin Kragh

1. Introduction

In 1937, Swedish economist and liberal politician, Bertil Ohlin, pro- claimed the existence and relevance of a specific school in economics – the Stockholm School. 1 According to Ohlin, Swedish economists had early on analysed business cycle fluctuations using a dynamic method, an approach which in important ways had not only preceded but was also (in some respects) superior to Keynes’ General Theory of Employ- ment, Interest and Money .2 This view has later been much debated, and rightfully criticized, as too anachronistic, without however underesti - mating other important contributions by Swedish economists. 3 Further, the relative inaccessibility for foreigners to the major works by the Stockholm School due to language barriers has also added to the confusion. As was noted by Hansen, ‘The Stockholm School theory was [...] for a long time relegated to the status of an almost mythological doctrine, its major works inaccessible to non-Scandinavians, with Scandinavians mostly paying lip service only to an unknown god’. 4

1 B. Ohlin, ‘Some Notes on the Stockholm Theory of Savings and Investment I’, Economic Journal , 47, 1937a, pp. 53-69; and idem, ‘Some Notes on the Stockholm Theory of Savings and Investment II’, Economi c Journal , 47, 1937b, pp. 221-240. 2 J.M. Keynes, The General Theory of Employment, Interest and Money , London: Macmillan, 1936. 3 D. Patinkin, ‘On the Relation between Keynesian Economics and the “Stockholm School”’, Scandinavian Journal of Economics , 80, 1978, pp. 135-143. 4 B. Hansen, ‘Unemployment, Keynes, and the Stockholm School’, History of Political Economy , 13, 1981, pp. 256-277. 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 68

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For a long time, perhaps the most accessible work on the Stockholm School in English was Brinley Thomas’ Monetary Policy and Crises .5 The foreword (not written by Thomas) may help to explain part of the mythology mentioned by Hansen. As was remarked, ‘Sweden is one of the world’s most civilized countries in the world. And in the field of economics, as in many other fields, both Swedish theory and Swedish practice are highly distinguished. Economists [...] seem, moreover, as a class, to have a better public reputation than elsewhere’. 6 About Sweden, one further learns, the recovery from the Depression was due ‘to internal action, based largely on the theories of , and executed with great political skill and economic insight by Ernst Wigforss, the brilliant Finance Minister in the Swedish Socialist government [...]’. A similar example is Irving Fisher, according to whom Sweden was an ‘oasis’ in the ‘desert of the world depression’. 7 Not in order to procrastinate and undermine this essay, but an instructive counterexample may be given by one of the participants in the Stockholm School, , who much later gave a slightly different interpretation of events. Strong economic growth in the 1930s, he argued, could be explained not so much by the implementation of new economic theories, as by the unplanned devaluation of the krona in September 1931. ‘The primary contribution by economic policy’, he noted, ‘was the fact that nothing really stupid was done, as in the US, France and other countries that stuck to the gold standard for too long’. 8 On the other hand, one may argue that ‘nothing really stupid was done’, because of the interaction between sound monetary thought and pragmatic policy. It is therefore still a relevant task to investigate the relation between economic thought and policy in Sweden during the interwar period.

5 B. Thomas, Monetary Policy and Crises. A Study of Swedish Experience , London: Routledge, 1936. 6 Ibid . 7 I. Fisher, Stabilised Money. A History of the Movement , London: Allen & Unwin, 1935. 8 E. Lundberg, Kriserna och ekonomerna [The Crises and the Economists], Malmö: Liber Förlag, 1984 . [ All translations from Swedish are my own.] 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 69

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Development of economic thought in the interwar period was not isolated to any one specific country. However, economists who continued to work in their native languages were many – including the British (who only happened to be endowed with a language that would later be universal). The future direction of (macro) economics was not yet settled. Austrian economists such as Hayek wielded significant influence, not least on the Continent. In countries such as Poland and Germany there were Michal Kalecki and Carl Föhl, respectively, who both paralleled the work of Keynes. That their approaches today remain known primarily to specialists on the history of economic thought only is – apart from the language issue, since everyone read Keynes but not necessarily vice versa – perhaps indicative of the huge influence Keynes’ work would later command. This article attempts to shed some light on one of those European currents which now live only among antiquarians: the contributions by the Stockholm School economists. The purpose of this essay is to study the development of economic theory and policy in the interwar period. The response by politicians and economists alike to the Great Depression has traditionally been considered a case in point. 9 Simply put, there were nations which implemented Keynesian ideas as part of their official policy, and there were nations where these ideas did not find any role to play outside of academia (if at all). Whatever happened was a result of the interaction between economic thought, policy and political philosophy in each specific nation. Of interest here is the Swedish experience during the 1930s, with special emphasis on the Stockholm School and the theoretical contributions of Ernst Wigforss, for many years Minister of Finance for the Social Democrats. The first part provides some background on the economic development in the interwar period. This setting is important in order to assess the changing views on economic policy among economists and politicians alike, which started to gain momentum in the 1930s. The second part provides a short description of the actors in our story: the

9 P.A. Hall (ed.), The Political Power of Economic Ideas. Keynesianism across Nations , Princeton: Princeton University Press, 1989 . 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 70

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Stockholm School and Wigforss. The third part summarizes the main theoretical contributions by the Stockholm School, pointing out some similarities and differences with Keynes. The penultimate part shines some new light on the theoretical work by Wigforss, especially his views on depression and economic crisis. The last part concludes.

2. Economic development in the interwar period

No ideas emerge in a vacuum, and the context of the interwar period is as important to the Swedish experience as anywhere else. Aggregate GDP growth during these years was robust with two exceptions: the W-shape recession, 1916-18 and 1920-21, and the U-shape recession, 1929-32 (see Figure 1). However, long-term evidence on performance cannot fully explain some of the most important changes that actually occurred. A complementary story is told on the micro level, where more systemic changes can be seen. The two depressions, albeit relatively short, had raised crisis awareness in banking and business. This trend stimulated

FIGURE 1 Year-on-year GDP growth in Sweden, 1914-1939

Source : (Sweden). 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 71

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consolidation and reduction in the number of market actors. As the Social Democrats rose to power in 1932-33, this policy also found political support. Larger entities were deemed more compatible with the counter-cyclical measures planned at the time. Dedicated funds, to be used in order to uphold production during recessions, were thought difficult to administrate with many small firms on the market. 10 The events leading to the Kreuger Crash in 1932 – arguably the largest financial swindle in Swedish history – and the related moratorium on German debt obligations in the same period put further pressure in this direction. So, the new economic policies in the 1930s came to be implemented in an also increasingly fragmented world. Perhaps more noticeable from our more recent experience (post-World War II) was the powerful deflation which followed the depression of 1920- 21, and then remained as a long-term phenomenon for close to 15 years. As far as policy was concerned, the overriding goal in the 1920s was price stability, achieved through the re-establishment of the gold parity. On 11 March 1920, as inflation was still raging, Eli Heckscher literally forced the Riksbank – via a newspaper editorial calling on the public to change their notes for gold – to increase the interest rate and thus offset the deflation process. One may speculate if such a sharp reduction in nominal wages had been possible only a decade later, not least considering how the deflation was followed by a far-reaching rationalization process contributing to higher unemployment in the short-term. As noted later by Lundberg, fixating the gold parity was ‘the sole, concisely expressed goal’ for economic development in the 1920s. 11 Thus, ‘It was not simply a means to achieve other ends, but an actual central end in itself.’ In 1924, Sweden became the first country in Europe to re-establish the gold parity. As the parity was set at a low level, the export sector was given a competitive advantage. was – a bit surprising, considering his otherwise radical stance – arguably the

10 H. Lindgren, Bank, investmentbolag, bankirfirma. Stockholms Enskilda Bank, 1924-194 5 [Bank, Investment Firm. Stockholms Enskilda Bank, 1924- 1945], S tockholm: Institutet för Ekonomisk Historisk Forskning, 1988. 11 E. Lundberg, Kriserna ..., op. cit. 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 72

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economist who most supported the cause of price stability. He suggested the central bank should act so as to reduce the money supply by 1% over a six-year period, thus bringing the price level back to its 1914 position. As can be seen from Figure 2, this ambitious target was never reached, even though deflationary pressure continued well into the 1930s.

FIGURE 2 Consumer price index in Sweden, 1914-1950 (1914=100)

Source: (historical statistics).

The gold parity was subsequently abandoned in 1931, with – interestingly enough – no substantial inflationary tendencies. The deflationary pressure from the early 1920s continued for a few more years. The reason for this was that the central bank was able to pursue its new target, internal price stability, with a certain level of discretion. Other explanatory factors were a continued fear of inflation, the world Depression, and – it has been argued – because the central bank remained unsure as to how to actually pursue its new target. 12 Had they pursued their new goal persistently, the central bank would have had to

12 L. Jonung, ‘Penningpolitiken p å 1930-talet’ [Monetary Policy in the 1930s], in J. Herin and L. Werin (eds), Ekonomisk debatt och ekonomisk politi k [Economic Debate and Economic Policy], Stockholm: Norstedt, 1977, pp. 22-39. 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 73

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expand its money supply. Instead, monetary policy continued to target external price stability, as under the gold regime, for at least a few years. Labour market activity followed global trends in the 1920s and 1930s. Because of depressed profits and a far-reaching rationalization process, unemployment remained high. This was important for economics in a roundabout way, since it gave impetus to the Government Committee on Unemployment in 1927 ( Arbetslöshetsutredningen ). Some of the key works which would emanate from this project were the dissertations by Dag Hammarskjöld and Alf Johansson, and important theoretical works by Gunnar Myrdal and Bertil Ohlin. We will return to the content of these contributions below. Government support for the unemployed had been expanded already in 1931 under the centre-right coalition, but due to the recession only modestly so in relative terms. The reason was the absolute increase in the number of unemployed, which mandated the programme to be soon expanded. Whereas support had reached about 45% of the unemployed in 1931, it grew to roughly 64% in 1933 in the first full year of Social Democratic rule. 13 As in other industrialized nations, unemployment remained above 10% until World War II. A fruitful comparison may be made with two nearby economies, Denmark and Germany. Here, Sweden posits itself somewhere in the middle ground in respect to unemployment. Where the German model since 1933 favoured mass mobilization and autarky, Sweden retained its export dependence and did not excessively push for public works. Many unemployed continued to rely on the rudimentary social security programmes already in place.

3. The actors

This article is loosely structured around the contributions of the Stockholm School and Ernst Wigforss. The Stockholm School as a term was coined, somewhat anachronistically, by Bertil Ohlin in 1937. There

13 B. Öhman, Svensk arbetsmarknadspolitik, 1900-1947 [Swedish Labor Market Policy, 1900-1947], St ockholm: Prisma, 1970 . 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 74

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is today no need to question the term, as it caught on quickly among the group’s proponents, as well as its critics. The School can further be divided in two periods; i.e. the older and the younger Stockholm School, respectively. The older pioneers were Erik Lindahl, Gunnar Myrdal and Bertil Ohlin, who had all defended their dissertations in the 1920s and were prominent economists before the Great Depression. The second group includes Dag Hammarskjöld, Alf Johansson, Ingvar Svennilson and Erik Lundberg, whose major contributions – including their disser - tations – emerged during or after the Great Depression. All of these economists, with the exception of Lindahl, also came to venture into careers outside of academia. Ohlin and Myrdal became members of parliament. Since 1934 Ohlin was the leader of the Liberal Party’s youth organization, and Myrdal rose in the ranks of the Social Democrats as an expert on fiscal and social policy. In participation with his wife, Alva Myrdal, Myrdal would also come to author a highly influential investigation into the economic and social consequences of race discrimination in the US – An American Dilemma .14 Hammarskjöld was Under-Secretary of the Treasury from 1936 and became Secretary- General of the United Nations in 1953, where he died in service in 1961. In 1937 Lundberg became the first director of Konjunkturinstitutet, the National Institute of Economic Research. In 1941, Svennilson was recruited as director of IUI, now known as the Research Institute of Industrial Economics. In the early stages of their academic careers, most of the Stockholm School economists were also involved in two larger research projects. The first one, financed by the Rockefeller Foundation and headed by Gösta Bagge, led to the publication of the first unified and historical National Accounts of Sweden with statistics on income, population and wages. The second was the above-mentioned Committee on Unemployment, which from 1927 to 1934 engaged a large share of all the professional economists at the time. Their most important suggestion, albeit expressed not without reservations, was that the

14 G. Mydral, An American Dilemma. The Negro Problem and Modern Democracy , New York: Harper & Bros, 1944. 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 75

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government should run deficit-financed public works during recessions, and that these counter-cyclical outlays would generate the necessary savings through an expansion of aggregate income. There was also a second group of primarily senior economists who remained sceptical of the new ideas being introduced in the 1930s. Among them, the most notable were Gustav Cassel and Eli Heckscher, though Johan Åkerman may also be said to belong to this group. They saw inherent dangers in expansionist government programmes. Left unchecked, they argued, such measures would crowd out private enterprise, and concerns over future taxes and deficits would be further detrimental to the business climate. To simplify, the group may be referred to as representing a more conservative or ‘orthodox’ view, understood sometimes as the Treasury View. Another important persona in this story is the Social Democrat Ernst Wigforss, Minister of Finance (1925-26 and 1932-49). Born in 1881, Wigforss enrolled at the University of Lund at the age of 18. In 1913 he defended his doctoral thesis and was conferred the title docent (associate professor) in Nordic languages. During the war he became more politically engaged, eventually rising in the ranks of the Social Democratic party. He drafted the highly influential Gothenburg Programme in 1919, calling for measures to cope with looming unemployment levels. When private enterprises failed to provide employment, the programme mandated the government to fill the void. Wigforss had a lifelong relationship to economics and economists. His first readings had been Marx and Marxist literature, but over time he became exceptionally well read. We know he was informed by Irving Fisher’s Purchasing Power , and he digested Austrian economics as well as the business cycle literature of the 1920s (Hawtrey, Mitchell, Hobson and Pigou). For many years, Wigforss also attended and addressed the Political Economy Club, a forum where business leaders, economists and policymakers debated current themes. 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 76

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4. The Stockholm School

Research on the Stockholm School is certainly not a new topic. It is more or less accepted that advances were made by this group of economists in the 1930s, and that this was considered – by the participants themselves – an important break with what was then the orthodox view. There is, however, less agreement on what was actually accomplished. As Jonung and Seligman provide a more thorough discussion, 15 the following section will discuss only some of the most common themes.

4.1. Keynes and the Stockholm School Probably one of the most contested topics has been the relation between Keynes and the Stockholm School. Stimulated by Ohlin’s Economic Journal articles, historians of economic thought have since searched for evidence either denying or supporting any originality on behalf of Swedish economists. Landgren 16 arguably set off the debate with a treatise critical of the claims to originality made by Ohlin and Myrdal. In his interpretation of events, reform-minded economists and politicians in Sweden had been influenced by British liberal thought in the 1920s, implying an intellectual indebtedness to, among others, Keynes. Among the Stockholm School economists, only Ohlin passed the test for having any legitimate claim to originality.

15 L. Jonung (ed.), The Stockholm School of Economics Revisited , Cambridge: Cambridge University Press, 1991; B. Seligman, Main Currents in Modern Economics , New York: The Free Press of Glencoe, 1962; L. Lewin, Planhush åll - ningsdebatten [The Debate on Planned Economies], Stockh olm: Almqvist & Wicksells, 1967; E. Lundberg, ‘The Rise and Fall of the Swedish Model’, Journal of Economic Literature , 23, 1985, pp. 1-36; O. Steiger, ‘Bertil Ohlin and the Origins of the Keynesian Revolution’, History of Political Economy , 8, 1976, pp. 341-366; idem, ‘Comment’, in L. Jonung (ed.), The Stockholm School of Economics Revisited , Cambridge: Cambridge University Press, 1991, pp. 128-138; N. Unga, Socialdemokratin och arbetslöshetsfr ågan, 1912-1934. Framväxten av den ‘nya’ arbetslöshetspo litiken [Social Democracy and the Question of Unemployment, 1912-1934. The Emergence of the ‘New’ Unemployment Policy], Sto ckholm: Arkiv för Studier i Arbetarrörelsens Historia, 1976. 16 K.-G. Landgren, Den ‘ nya ekonomien’ i Sverige. J.M. Keynes, E. Wigforss, B. Ohlin och utvecklingen, 1927-1939 [The ‘New Economics ’ in Sweden], Uppsala: Almqvist & Wick sells, 1960. 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 77

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Needless to say, such an account was deemed to provoke a reaction, with critical rejoinders from among others Wigforss, Lundberg and Gertrud Lindahl, Erik Lindahl’s widow. A well-researched Anti-Kritik was later published by Steiger, 17 subsequently reclaiming the validity of Ohlin’s original account. In Steiger’s version of events, Swedish academic economists had not only made important theoretical contri - butions, but had also influenced the economic policies implemented during the Great Depression. He agreed there had been significant foreign precursors, but held to the version that a Stockholm School of economics did arise in an indigenous Swedish tradition, with its intellectual roots traceable to Knut Wicksell. Patinkin seemingly sealed the issue, 18 concluding that by 1933 – the year Keynes had finalized the major parts of his General Theory – Swedish economists had not yet reached an understanding of effective demand as the force which determines output and employment (arguably, the core analytical contribution of the General Theory ). Alas, they could not be credited with having anticipated Keynes. Ohlin’s defence did not primarily negate Patinkin’s conclusion, but rather emphasized how the Stockholm School had simply approached the issue differently from Keynes. 19 Thus, ‘the formal mechanism’, Ohlin argued, had nevertheless been ‘the same’. Conclusions similar to those in the General Theory had been ‘self-evident’ to them already in 1932, albeit expressed with a different terminology. It was true they had ascribed price changes the primary role for discrepancies between supply and demand, rather than changes in the level of output, but this did not imply that they remained unaware of the relationship. Some distinct Stockholm School contributions may nevertheless be identified. One innovation brought forward in Myrdal was the argument

17 O. Steiger, Studien zur Entstehung der Neuen Wirtschaftslehre in Schweden. Eine Anti-Kritik , Berlin: Duncker & Humblot, 1971. 18 D. Patinkin, ‘On the Relation...’, op. cit .; and idem, Anticipations of the General Theory? And Other Essays on Keynes , Oxford: Basil Blackwell, 1982. 19 B. Ohlin, ‘Keynesian Economics and the Stockholm School: A Comment on Don Patinkin's Paper ’, Scandinavian Journal of Economics , 80/2, 1978, pp. 144- 147. 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 78

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that government spending (investments in public projects) – via a multiplier process – would generate its own necessary savings ex post .20 If the interest rate policy was adaptive, growing deficits would not cause any crowding out of private investment. In a downswing, caused primarily by variations in investments by the private sector, consumption could be upheld and would spur new growth through the accelerator principle. Myrdal’s approach was verbal and loosely structured, but it was for practical purposes a convenient exposition of a theory for counter-cyclical measures. This was important in consideration of the close affinity between theory and policy in the Stockholm School writings. There were also important differences between Keynes and the Stockholm School. According to Ohlin, one of the most important was methodological. 21 Keynes had analysed the persistence of involuntary unemployment in a static equilibrium framework, and his parameters, such as the multiplier and marginal efficiency of capital, entered the analysis as constants. The Stockholm School attempted to approach the unemployment problem from the level of the business cycle as a whole. They allowed for the existence of time lags and rigidities, and the parameters that were constant in Keynes’ system were treated as variables determined endogenously in the cycle. According to Lundberg, one of the reasons for this difference in approach was apparently the Swedes’ less dismal view on the possibilities for economic expansion; but it was also an approach which was less formalized and casuistic, investi - gating more narrow and specialized topics one at the time. 22

4.2. Economic dynamics A second issue has been the School’s attempts to introduce a dynamic approach into economic methodology, where expectations play an

20 G. Myrdal, Konjunktur och offentlig hush ållning. En utredning [Business Cycles and Public Finance], Stockholm: Kooperativa Förbundets Bokförlag, 1933a ; and idem, Finanspolitikens ekonom iska verkningar [Economic Consequences of Fiscal Policy], Stockhol m: P.A. Norstedt & Söner, 1934. 21 B. Ohlin, ‘Some Notes... Investment I’, op. cit. ; and idem, ‘Some Notes... Investment II’, op. cit. 22 E. Lundberg, Kriserna ..., op. cit. 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 79

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important role. Here the contribution of Wicksell loomed large, with his distinction between a normal (or natural) rate of interest and a real rate of interest. 23 This distinction requires some elucidation. In Fisher’s Purchasing Power of Money ,24 one finds the now commonly accepted definition of real interest as the rate adjusted for inflation (or disinflation). In Wicksell, real interest is defined as returns to investment or the marginal productivity of capital. If the normal interest rate lies below the real, investments will be profitable and a monetary disequi - librium will set off a cumulative process of credit expansion and heightened inflation. On the contrary, if the normal rate of interest is above the real, investments will be discouraged, followed by a downward cumulative process. One thus sees why Wicksell’s distinction was easy for his followers to incorporate into a theory of business cycles. Myrdal’s 1927 thesis has traditionally been considered the starting point. 25 The main purpose here ‘was to incorporate to a certain extent the factor of change in the theory of price formation, i.e. emancipate this theory from its static assumptions’. The primary reason for this was that the static equilibrium was found inadequate to deal with aspects such as time and uncertainty. Myrdal’s theories underwent a series of revisions, culminating in the English translation 26 of Der Gleichgewichtsbegriff .27 It was for the German edition that the translator suggested the concepts ex post and ex ante , to differentiate between anticipated (planned) and realized outcomes. These concepts stuck and were later described by Ohlin as one of the School’s most important contributions. Myrdal defined his concepts as follows. ‘The first method of computation’, he argued, ‘is “bookkeeping” about what has actually happened during a complete period, the second mode of computation is a

23 K. Wicksell, Geldzins und Güterpreise , Jena: Gustav Fisher, 1898. 24 I. Fisher, The Purchasing Power of Money , New York: Macmillan, 1911. 25 G. Myrdal, Prisbildningsproblemet och föränderligheten [Price Formation and Change], Uppsala: Almqvist & Wicksell, 1927. 26 G. Myrdal, Monetary Equilibrium , London: Hodge, 1939b. 27 G. Myrdal, ‘Der Gleichgewichtsbegriff als Instrument der geldtheoretischen Analyse’, in F.A. Hayek (ed.), Beiträge zur Geldtheorie , Vienna: Julius Springer, 1933b, pp. 361-487. 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 80

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business calculation founded on an estimation of what will happen in the future’. 28 The ex ante anticipations about future events determine economic action, but always with regard to ex post results, as ‘recorded experiences may regularly be decisive’. Ex ante thus denotes expected quantities (as measured, for example, in income, sales and investment), and ex post denotes how these quantities were eventually realized. It is therefore from the former one may infer causal explanations of firm behaviour, whereas the latter provides evidence on what actually occurred. Even though these concepts as such are to be found no earlier than 1933, they resonate implicitly also in Myrdal’s 1927 thesis. In chapter ten of the thesis, he had discussed the dynamic elements which enter between the firm’s ‘investment calculations’ (or ‘expectations’), and its ‘long-period results’. He summarized the four main causes of dynamic price elements, which have to enter the theory of price determination. The dynamic elements complemented the static ones (technology, factor endowments, etc.). Firstly, he argued, means of production are ‘relatively sticky’ in relation to price changes, implying a time element which has to be taken into account (and giving occasion to uncertainty). Secondly, entrepreneurs have different capabilities in investing with ‘low objective risk’, giving superior firms a scarcity (of human capital) advantage and premium. Thirdly, personal risk may be reduced if the entrepreneur can finance his own investments (thus avoiding principal- agent problems such as moral hazard). Lastly, risk bearing is affected by the fact that it is evaluated in a non-neutral (non-symmetrical) way. Entrepreneurs with the lowest risk assessments will be more bullish and ready to invest on an expanded scale. These elements therefore enter the price determination and influence future profits or losses. Myrdal’s reasoning was abstract and not very concise, but his dynamic approach apparently stimulated much new theoretical research. The Stockholm School economists held to the general belief that the dynamic approach was more appropriate when analyzing business cycle fluctuations. This is most clearly seen in the doctoral

28 G. Myrdal, Monetary ..., op. cit. 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 81

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thesis by Lundberg. 29 In a ten-sequence model, Lundberg showed the dynamics of growth where increases in efficiency (obtained through labour-saving technologies), under relatively constant wages, create a surplus income accruing to capital owners and thus increased savings. A continued expansion under higher saving rates requires high rates of investment, rates which cannot be maintained over longer periods of time. When investment begins to decline, underutilization and excessive production capacity will eventually provide a check to further economic growth. By introducing a dynamic approach, Lundberg was thus able to develop a model pointing towards the inherent instability of economic expansion. 30 Regardless of these contributions, no unified theory or model was ever realized. One finds different approaches to resolve the issue of time and equilibrium in major works by Lindahl, Hammarskjöld, Lundberg and Ohlin. 31 With time, and perhaps because of a rather scathing critique by Palander, the research programme – in so far as Sweden is concerned – was more or less discontinued. 32

29 E. Lundberg, Studies in the Theory of Economic Expansion , London: P.S. King, 1937. 30 See C.G. Uhr, ‘Erik Lundberg and Dynamic Economics: A Review Article’, Journal of the History of Economic Thought , 12, 1990, pp. 222-235. 31 E. Lindahl, Penningpolitikens medel [Means of Monetary Policy], Malmö: Fahlbeckska stiftelsen, 1930 ; idem, Studies in the Theory of Money and Capital , New York: Allen & Unwin, 1939; D. Hammarskjöld, Konjunkturspridningen. En teoretisk och historisk undersökning [Business Cycles. A Theoritical and Historical Study], Stockholm: Norstedt, 1933; E. Lundberg, ‘Om begreppet ekonomisk jämvik t’ [On the Concept of Economic Equilibrium], Ek onomisk Tidskrift , 32, 1930, pp. 133-160; idem, Studies ..., op. cit.; and B. Ohlin, ‘Till fr ågan om penning - teoriens uppläggning’ [On the Formulation of Monetary Policy], Ekonomisk Tidskrift , 35, 1933, pp. 45-81. See B. Hansson, The Stockholm School and the Development of Dynamic Method , London: Croom Helm, 1982; J. Pete rsson, Erik Lindahl och Stockholmskolans dynamiska metod [Erik Lindahl and the Dynamic Method of the Stockholm School], Lund: Universitetsförlaget Dialogos, 1987 ; and C.-H. Siven, ‘Monetary Equilibrium’, History of Political Economy , 38, 2006, pp. 665-709. 32 T. Palander, ‘Om “Stockholmsskolans” begrepp och metoder’ [On the Concepts and Methods of the ‘Stockholm School’], Ekon omisk Tidskrift , 43, 1941, pp. 88-143. 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 82

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4.3. The Government Committee on Unemployment Further discussion and debate has been aroused by the works published under the auspices of the Government Committee on Unemployment. In contrast to the purely theoretical works on dynamics, one finds here a highly policy-oriented approach. The Committee had been initiated in 1927 to provide measures and proposals on the unemployment problem, and their final report was presented in 1935. The economists engaged in this work – among others, Ohlin, Myrdal, Hammarskjöld, Johansson and Svennilson – thus came for several years to be involved in one of the, politically, most relevant issues in the interwar period. The argument has also been made that a large and concerted research effort of this kind was instrumental in stimulating economic research in a small country such as Sweden. Considering the project’s scope, we will here only focus on some of the most relevant contributions. It was Myrdal who had authored the main supplement on fiscal policy, 33 which was also summarized in a well-known amendment to the Social Democratic government’s budget plan of 1933. 34 Here he defended public works in economic terms and laid out his proposals on how to balance the budget over the business cycle, thus explicitly allowing the possibility of temporary deficits. How this budgetary technique could be implemented was perhaps Myrdal’s most enduring contribution to fiscal policy. ‘Under-balancing the budget during a depression’, he would later argue, ‘is not primarily a deliberate policy but a practical necessity’. 35 Had such a budgetary approach been utilized in the early stages of the Depression, a more efficient countercyclical policy would have been possible. In practice, taxes had to be raised on the income side, thus offsetting government stimuli on the expenditure side. Instead, he argued, a formula should be designed where room was made for deficit spending during recessions, by securing the building-up of surpluses in the upswing. Myrdal’s take on the budget approach was subsequently adopted by the Social Democrats.

33 G. Myrdal, Finanspolitikens ..., op. cit. 34 G. Myrdal, ‘Der Gleichgewichtsbegriff... ’, op. cit. 35 G. Myrdal, ‘Fiscal Policy in the Business Cycle’, American Economic Review , 29, 1939a, pp. 183-193. 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 83

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A second policy-relevant contribution was Myrdal’s discussion on the importance of so-called international space. At stake was the extent to which a small and export-oriented nation such as Sweden could independently pursue an active fiscal and monetary policy. He took into consideration aspects such as various exchange rate regimes, capital movements and currency reserves. The argument was that with a larger space for autonomous fiscal and monetary measures, the stated goals of economic policy would be easier to pursue. Means considered were devaluation, import duties and regulations, borrowing from abroad and export subsidies. No student of the Swedish post-war experience can have failed to notice how these means also came to be implemented (in one way or another). Ohlin also discussed how public works could stimulate employment, and how these in turn would generate income through a multiplier process. 36 As we now know, 37 Ohlin had even attempted to calculate these possible effects in 1933 (this part of his supplement was not published at the behest of Hammarskjöld). In 1932 he had argued that to minimize unemployment, rather than to promote a stable price level, should be the target of monetary policy. 38 It was by now a generally accepted idea that wage reductions would not have any counter-cyclical effect on growth during recession. In Johansson’s Committee contri - bution one thus finds a clearly formulated implication for wage policy:

Changes in wages have no constitutive effect on the business cycle. They might in different ways modify the business cycle, but these modifications may, in accordance with the changing circumstances,

36 B. Ohlin, ‘Penningpolitik, offentliga arbeten, subventioner och tullar som medel mot arbetslöshet ’ [Monetary Policy, Public Works, Subsidies and Custom Duties as Means Against Unemployment], Stockholm: P.A. Norstedt & Söner, 1934. 37 E. Wadensjö, ‘Före Stockholmsskolan – Arbetslöshetsutredningen, Ernst Wigforss och Gösta Bagge’ [Before the Stockholm School – The Committee on Unemployment, Ernst Wigforss and Gösta Bagge], Ekonomisk Deba tt , 15/4, 1987, pp. 298-304; and idem, ‘The Committee on Unemployment and the Stockholm School’, in L. Jonung (ed.), The Stockholm School of Economics Revisited , Cambridge: Cambridge University Press, 1991, pp. 103-128. 38 E. Wadensjö, ‘The Committee...’, op. cit. 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 84

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take different directions, and the changes in wages must thus in general be considered as relatively unimportant in comparison with the cycle-shaping factors. 39

The Committee report, which was finalized in 1935, elaborated on measures against cyclical unemployment, which included a coordination of monetary, fiscal, trade and wage policies. Yet, considering its acclaim in the history of economic thought, rightful assertions can be made that it was in fact rather orthodox for the time. It is plausible that global events had simply rendered the report redundant. In a review of Myrdal’s contribution, Lindahl noted that with regard to ‘these partic - ularly dark prospects of the future, one is not inclined to outright accept such a passive policy as that proposed by the Committee majority’. 40 He further noted how it was ‘remarkable that the Committee which had originally been set up in light of permanent [my italics] unemployment had not presented this investigation’. Various policy alternatives should have been formally evaluated, regardless of their political connotations. What was lacking was an analysis of how ‘total demand for labour can increase through a change in the orientation or scope of the public sector’. Nevertheless, the report became important, as it lent support to the policies pursued at the time by the Social Democrats – and the theoretical arguments laid out therein came to be a source of pride for the Stockholm School.

5. Ernst Wigforss

Students of the Swedish interwar period have not failed to note the towering presence of Ernst Wigforss in policymaking and public debate. 41 Fewer attempts have been made, however, to assess his contri -

39 A. Johansson, Löneutvecklingen och a rbetslösheten [Wages, Development and Unemployment], Stockholm: N orstedt, 1934. 40 E. Lindahl, ‘Arbetslöshet och finanspolitik’ [Unemployment and Fiscal Policy], Ekonomisk Tidskrift , 37, 1935, pp. 1-36. 41 L. Magnusson, ‘Den svenska modellens uppg ång och fall’ [The Rise and Fall 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 85

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bution to economic thought, not least his theoretical understanding of depression and crisis. Landgren emphasized the role of Wigforss in order to downplay the importance of the Stockholm School, 42 but was also heavily critiqued for his anachronistic readings of the original texts. 43 Other scholars 44 have, on the contrary, argued that the major theoretical impulse came from Lindahl, Myrdal and Ohlin, which is also the commonly accepted version. Interestingly, both approaches – from their different perspectives – have failed to shine full light on perhaps the most significant Swedish policymaker of the 1930s. The omission of Wigforss from the traditional canon is unfortunate. He was a vivid reader of economic thought and participated in some of the most important forums of the time (such as the Political Economy Club and the Government Committee on Unemployment). Not least did he write on economics, but he also, perhaps most significantly, usually underpinned his policies with theoretical rather than ideological arguments. A large body of literature exists in the form of books, tracts and pamphlets, from which Wigforss’ theoretical views may be distilled. These sources provide an apt entry into the mind of one of the most important Swedish policymakers during the Great Depression. Awaiting a fuller study of his works, the following section will only highlight some of his major contributions.

of the Swedish Model], in B. Furuhagen (ed.), Äventyret Sverige [The Sweden Adventre], Stockholm: UR, 1993, pp. 295-313; B. Gustafsson, ‘Unemployment and Fiscal Policy in Sweden during the 1930s’, in W.R. Garside (ed.), Capitalism in Crisis , London: St Martin’s Press, 1993, pp. 83-105; A. Montgomery, Svensk och internationell ekonomi, 1913-1939 [Swedish and International Economy, 1913- 1939], Stockholm: KFs Bokförlag, 1954; B. Rothstein, Den korporativa staten. Intresseorganisationer och statsförvaltning i svensk politik [The Corporativist State. Interest Groups and Public Management in Swedish Policy], Stockholm: Norstedt, 1992. 42 K.-G. Landgren, Den ‘ nya ekonomien’ ..., op. cit. 43 T. Fernholm, ‘Idéutveckling, ekonomisk politik och ekonomisk teori. Kommentar till Karl-Gustav Landgren: Den “nya” ekonomien i Sverige’ [Idea Development, Economic Policy and Economic Theory. A Comment to Karl-Gustav Landgren: The ‘New’ Economics in Sweden], Ekonomisk Tidskrift , 62, 1960, pp. 161-184. 44 C.G. Uhr, ‘Economists and Policymaking, 1930-1936: Sweden’s Experience’, History of Political Economy , 9, 1977, pp. 89-121. 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 86

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Already in a 1928 pamphlet, Wigforss had attempted to explain the mechanisms of recession, where money is hoarded and not invested. Under such conditions, when private enterprise was unwilling to hire and produce, he argued, only the government could step in and claim underutilized resources. Obviously, the case for public works as a remedy for unemployment was not a new idea in the 1930s, but of interest to historians of economic thought is how such policies were understood, approached and defended (or discarded). Wigforss’ argument is therefore worth quoting at length:

It is therefore an old wisdom that society, in a period of depression, attempts to cure what is lacking in the willingness or ability of the citizens to purchase. The government and communes should be restrictive under good conditions, but should launch desirable projects [ arbeten ] in a depression without hesitation. When individual enterprise is hesitant to put available savings to use, the public needs to step forward and direct its use. The principle is so much easier to proclaim than to apply in practice. But as it seems as if we here have a means to smooth the fluctuations of business activity, the difficulties should not discourage. 45

A few points can be made. As regards factual economic policy, it needs to be remembered that the questions of fiscal policy and unemployment were among the major political issues of the time in parliament. Wigforss was the major spokesperson for the Social Democrats, by 1928 again in opposition. This was the setting for his writings. The idea that government should intervene during recessions was described as ‘an old wisdom’. At stake was thus not whether or not something should be done – the government should under all circumstances intervene. However, his argument has some novel theoretical underpinnings which need to be noted. According to Wigforss, there was a risk that a

45 E. Wigforss, ‘Spararen, slösa ren och den arbetslöse’ [The Saver, the Spendthrift and the Unemployed], in idem, Fr ån klasskamp till samverkan [From Class Struggle to Cooperation], Stockholm: Tidens Förlag, 1941 [1928], pp. 289-294. 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 87

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deflationary process in a period with unclaimed productive capacity would feed on itself. This was an important insight. Under such conditions the government would have to step forward, providing investment in remunerative projects, not only to reduce unemployment, but also to stimulate demand and smooth the business cycle. Wigforss had reason to return to the question of depression three years later, in his only full-length economics treatise, Den ekonomiska krisen , published in the autumn of 1931. 46 As the title indicates, he here set out to explain the mechanisms of economic depression. In contrast, it should be noted that no such full-length treatise was ever written by the Stockholm School economists. This book has also attracted attention in previous research. Landgren praised it for its theoretical foresight, but did not elaborate much further. 47 Both Öhman and Steiger have emphasized its discussion on Say’s law and the possible mechanics of public works through a multiplier process. 48 The treatise contained, however, much more of a theoretical novelty value. The following will provide an outline of some key arguments made herein. During the first stage of a crisis, Wigforss assumed declining prices and wages (if there was no government intervention). He ascribed the deepening of the crisis to a decline in both aggregate and effective demand, where the recession eventually feeds on itself. He subsequently expanded on the pro-cyclical effects of recessions, where declining profits reduced the incentives to produce. Left unchecked, this process would be self-defeating, as deflation rendered debt repayments relatively more burdensome. A fall in the price of factors of production was no cure, only a sign of the crisis:

The price fall during the crisis removes or reduces the profits of enterprise, whose willingness to produce is therefore dissipated or diminished. However, a reduction in production and entrepreneurship

46 E. Wigforss, Den ekonomiska krise n [The Economic Crisis], Stockholm: Tidens Förlag, 1931. 47 K.-G. Landgren, Den ‘ nya ekonomien’ ..., op. cit. 48 B. Öhman, Svensk ..., op. cit.; O. Steiger, Studien ..., op. cit. 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 88

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not only implies a reduced demand for all that firms usually need. It also implies unemployment, reduced income for the workers, and thus a reduced demand for many consumer goods; and therefore a further decline in prices and willingness to keep production going. 49

Wigforss continued with a denial of the validity of Say’s law, at least as far as the short run was concerned. The fact that it might hold true in the long run was no consolation. ‘The issue is precisely this’, he commented, ‘how far it suffices. As usual with abstract reasoning, it suffices better “in the long run” than for the short period which is here of interest’. Assuming the validity of Say’s law, little room was left for over- production or lacking purchasing power as explanations of the crisis. These aspects were, on the contrary, important, not only as explanations of the crisis as such, but also for their political implications. A deficit of purchasing power (underconsumption) pointed, according to Wigforss, to the issue of uneven income distribution. Whatever the preferred explanation of the crisis, Wigforss concluded that the only impulse sufficient to halt and reverse the recession was government stimuli. He rejected the idea that income and expenditure had to conform at all times, on all levels. On the contrary, certain discretion on behalf of the government was preferred. ‘Government expenditure is part of the total expenditure of the citizens, and all our expenditure does not have to vary in the same way as our income. It is, on the contrary, clear that it should not’. In a period when people are unwilling to depart with liquidity, only the government could fill the void. Such stimuli through public works would in turn generate new income, which led to his perhaps most significant point – an original outlay would be multiplied throughout the economy:

The jobs generated through these public works are naturally not restricted as to the number of work-hours or work-days in the public enterprises. Materials and tools must to a large extent be provided by private enterprise, and newly employed workers may increase their

49 E. Wigforss, Den ekonomiska ..., op. cit 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 89

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consumption by receiving an increased income. The stream of purchasing power grows, and the repercussions are felt throughout the whole business community. 50

The quotation should make clear that Wigforss had no difficulty in grasping the functioning of the multiplier process, at least sufficiently so as to provide a verbal analysis. Since his treatise does not provide any references, it remains unclear what his potential influences could have been, but neither Kahn nor Warming could have been available to him at the time. 51 This conundrum will have to await further archival research, which might potentially provide some more evidence. For now, it suffices to say that Den ekonomiska krisen was not only an elaborate treatise on the mechanisms of depression, but also provided a rationale for expansive fiscal policies to stimulate employment and growth. When he returned to government in 1932, Wigforss could easily provide a theoretical explanation for his preferred policy measures. Much later in life, he admitted that this had indeed been important. Theoretical arguments, he noted, ‘were needed because a liberal theory had developed as the foundation for the official “Swedish policy”. It had to be challenged also on the theoretical field’. 52 This had not earlier been the case, and in the 1930s tables turned: ‘It was now the opponents who had to resort to abstruse theories. To further save, when already produced goods could not be sold, demanded sophisticated motivations. That mass unemployment was a price to be paid for advances in the long run was an appeal to heroism beyond sensible measures.’ In this way, new economic theory and policy found a perfect fit. With an alternative explanation of the crisis, and also the business cycle, Wigforss was able to defend his policies in the public debate and in

50 Ibid . 51 R.F. Kahn, ‘The Relation of Home Investment to Unemployment’, Economic Journal , 41, 1931, pp. 173-198; J. Warming, ‘International Difficulties Arising Out of the Financing of Public Works during Depressions’, Economic Journal , 42, 1932, pp. 211-224. 52 E. Wigforss, ‘Ideologiska linjer i praktisk politik’ [Ideological Currents in Practical Policy], Tiden , 59/9, 1967, pp. 468-483. 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 90

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parliament. This was instrumental when positing the Social Democrats as a credible alternative between the communists and the centre-right.

6. Concluding remarks

This essay has attempted to outline the development of ‘new economics’ in Sweden during the Great Depression in a double meaning of the term: on the one hand, the evolution of economic thought, where an established orthodoxy was subsequently abandoned; and, on the other hand, how this development informed, and was informed by, important changes in policy orientation. This development in turn had an important context, which in some respects was unique to the interwar period. The economic data (persistent deflation and unemployment) seemingly gave credence to the pursued changes in both theory and policy. It purports to testify to the affinity between context and economic thought. The relationship between the Stockholm School economists and Ernst Wigforss remains to be fully understood. It is clear that Swedish economists ventured into research areas during the 1920s and 1930s that were in some respects new. The attempts to integrate a dynamic approach with business cycle theory had distinct domestic roots, and it came to inform also their policy-oriented research. However, it also meant that no distinct model was ever presented, at least not a model sufficiently intuitive to compare with Keynes’ unemployment equilibrium. Rather, they were able to shine light on more narrow aspects of the business cycle, complementing the Keynesian static equilibrium approach. Any doubts whether Wigforss was an able economist should be erased. We have here only scratched the surface, but his writings prove that he in some respects was on par with, or in advance of, his profes - sional colleagues. He comprehended and was able to describe how a liquidity trap with deflationary pressure could reinforce a downward economic spiral. He further understood how this would play out through a multiplier process in the downturn as in the upswing, conditional 067-092 Kragh.new_Layout 1 19/10/2012 9:35 π.μ. Page 91

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upon appropriate government intervention. His writings on these topics antedate the most important publications by the Stockholm School economists. To conclude, the concern here has not been so much as to what extent Wigforss’ theoretical contributions were truly original or not. His writings highlight how the interaction between economic thought, economic policy and political philosophy, at a certain point in time, can inform one another with far-reaching outcomes.

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