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Home , Bertil Ohlin, Gustav Cassel

PROFILES OF WORLD 20 BERTIL GOTTHARD OHLIN

BERTIL GOTTHARD OHLIN

doc. Ing. Anetta Čaplánová, PhD.

Bertil Gothard Ohlin was born on 23rd rent economic development. In 1931 he April 1899 in Klippan, the village in the prepared a report on the World Depres- East of , in the middle-class sion for the and in family. In 1917 he graduated from the 1934 an analysis of the unemployment , where he studied mat- situation for the Swedish government. hematics, statistics and . Between 1937 – 1947 he studied for Later he studied economics at Stock- some period at recognized world uni- holm School of Economics under Eli versities, at the University in Berkley, at Heckscher and , who con- Columbia and Oxford University. ducted research in the theory of in- Ohlin belongs, due to his economic ternational trade. This inspired ideas developed between the world Ohlin’s in this area. Ohlin wor- wars, which had formed in discussions ked on the theory of in his docto- with his colleagues – other economists in Stock- ral thesis from 1924 entitled Handelns teori (Trade holm, E. Lindahl, G. Myrdal, E. Lundberg, to the theory). Between 1925 – 1930 he held a chair at the School, a group, which is in many res- Copenhagen University. In 1931 he returned back to pects considered to be a parallel and independent Sweden, where he succeeded Heckscher at the developer of the theory of the economy with unused Stockholm School of Economics. Already during this resources, which became the essence of Keynes‘ period he paid attention to the analysis of the cur- General Theory.

At the end of 30-ties Ohlin became a member of the beginning and towards the end of his professio- the Swedish parliament „”, with which the nal career, since his long-lasting political activities long period of his active participation in the political did not allow him to allocate more time to his acade- life of Sweden began.Between 1944 – 1967 he wasmic work. a chairman of the Liberal Party.During the 2nd World In 1977 he was awarded, together with James War he served as the Minister of Trade in the Swe- Meade, the Nobel price for economics for his contri- dish government.He was an MP until 1970. bution to the development of the monetary theory For many years Ohlin contributed to Swedish and the theory of economic expansion and for the newspapers.He wrote articles related to current eco- analysis of theoretical and practical problems of nomic events and economic policy.Similarly to hisinternational trade and movements of .Bertil academic work most of these articles were written at Ohlin died on 3rd August 1979 in Stockholm.

Ohlin’s contribution to economic theory maintain its macroeconomic equilibrium. In differen- ce to Keynes, Ohlin emphasized that if proper mone- Monetary Theory tary and fiscal policies were formulated and fixed In 1929 for the first time Ohlin attracted attention of exchange rate regime applied, the increase of taxes a wider audience of economists and gained recogni- required by the need to accumulate resources to pay tion in his polemics with J. M. Keynes on the mecha- reparations, would bring about the decrease of the nism of capital transfers applied to the concrete purchasing power in Germany and the increased example of reparations, which was Germany assig- demand in England and France. This would find cor- ned to pay after the 1st World War. In this discussion responding response in the trade balance of these Ohlin took the position that even in the situation of a countries. Germany would create export surplus and large international monetary transfer a country can England and France import surpluses.

BIATEC, Volume XII, 7/2004 PROFILES OF WORLD ECONOMISTS BERTIL GOTTHARD OHLIN 21

Similarly to other representatives of Stockholm operations as a tool of monetary policy was limited in School, Ohlin frequently used the ex-ante and ex-post Sweden. Ohlin criticized it and requested to use chan- approach in his analysis. He emphasized the impor- ges in the interest rate and subsequently in the volu- tance of time-lags and with respect to the analysis of me of credits as the main tool of the monetary policy the monetary policy he pointed out that changes in of this period. psychological reactions of individuals could influence Ohlin also dealt with the issue of the optimal level of the economic development to a larger degree than the interest rates, which he considered to be at 3-3.5 per- monetary policy itself. The ex-ante and ex-post app- cent. He arrived at this estimate on the basis of the roach did not allow him to consider the interest rate as analysis of the dynamics on the Swedish market of an equilibrating variable. Regardless from its value, ex long-term credits in 1930. He concluded that the inter- post investment will be always equal to savings. So in est rate at 3 percent represented a critical lower mar- the first place he considered the interest rate as the gin, since there existed psychological barriers, which price of credit and only in this respect able to influen- did not allow it to decrease below this level. However, ce to some extent the size of investment. in 1938 interest rates in Sweden fell even below 3 per- Ohlin’s monetary theory is in a wider sense closely cent. Ohlin attributed it to the fact that the recession in related to his business cycle theory. If the central bank the industry created suitable psychological preconditi- aims to influence the real sector of the economy then ons for their decrease. the interest rate will play a key role. Ohlin also analy- According to Ohlin, the aim of the interest rate regu- zed possibilities for endogenous changes in the lation should be the price stabilization and the desi- money supply and credit, but questioned whether rable economic development. He criticized the ban- these changes are sufficient to influence aggregate king system that during the war it was not able to expenditures. Ohlin’s paper „Till fragan om penningte- maintain the flexibility and did not issue bonds with oriens uppläggning“ (On the Formulation of Monetary short periods of maturity. Ohlin did not emphasize the Theory) from 1933 is considered by several econo- role of money in the economy. If the ex ante - ex post mists as a parallel formulation of the theory, which approach is applied, not the quantity of money in cir- Keynes came with in his General Theory. However, in culation is important for changes in price level, but the difference to Keynes a primary concern of Ohlin’s conditions, which exist on the capital market. He cal- insterest in this article is the analysis of changes in the led for attention of economists to an individual, whose price level and the fluctuations of output are treated psychological reactions to the liquidity and interest only as secondary ones. On the other hand, it is rates, he considered to be more important as money necessary to emphasize that Ohlin did not specify the and its circulation if aiming to influence the economic role of changes in output as an equilibrating variable development. as Keynes did. As stated above, Ohlin analyzed changes in the Ohlin’s theory of interest rates can be considered as price level and also factors, which lead to the price his monetary theory in the narrower sense. This theo- changes. His explanation of changes in the price level ry was presented in his papers in the „Economic Jour- elaborates on the Wicksell’s idea according to which nal“ (1937) and further elaborated in the monograph the inevitable and sufficient condition for the increase Kapitalmarknad och räntepolitik (The Capital Market in prices is the increase of the sum of the consumpti- and Interest Rate Policy) (1941). The main aim of the on and investment demands compared to the change later one was to formulate a capital market theory and in output. Thus, the price increase can be initiated eit- to criticize credit policy in Sweden during the first two her from the side of investment or from the side of years of the war. He also analyzed factors, which consumption. If trying to explain changes in prices determine the level of interest rates. He considered then we have to concentrate on the identification of one of the most important factors in this respect factors, which influence the demand and the supply of expectations of economic agents. Prices on the secu- consumption and investment goods. rities market are formed in the mutual interaction of In his paper from 1934 Ohlin pointed to the interest the demand and supply. He called for the diversifica- rate as a factor, which has impact on the size of the tion of this market in general and in Sweden of those demand and the supply. The decrease of the interest days in particular. In Sweden up to 1935 securities rate leads to the increase of planned investment. The with the maturity period between 30 – 80 years were impact of the increase of investment on output and issued. Only in 1935 securities with the maturity peri- price level depends upon the elasticity of supply deter- od of 12 years were issued, however this step was not mined by the existence of unused resources in the met positively by investors. Because of the situation economy. If the supply is perfectly elastic, i.e. there during this period the possibility to use open market exist spare resources in the economy, the increase of

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investment will lead to the corresponding increase and se for the discussions among several economists on will not increase the price level. In this analysis we can whether Ohlin, before Keynes and independently clearly see parallel with Keynes’ conclusions. However, from Keynes, formulated the theory of the economy as indicated above Ohlin’s aims were different from with unused resources. those of Keynes. Ohlin concentrated primarily on the In his 1934 paper he based his analysis on the explanation of changes in the price level, meanwhile Wicksell’s treatment of the mutual relationship bet- Keynes’ priority was to explain fluctuations of output. ween the natural and market (monetary) interest Ohlin’s views from the area of the pure monetary the- rate. According to Wicksell, if the monetary interest ory can be found in his paper Stockholmskolan kontra rate is below the natural rate, businessmen will inc- kvantitetsteorien (Stockholm School versus quantity rease nominal wages of their employees. However, theories) (1943). In this paper changes in the quantity the physical output will no change since, according of money in circulation are considered as a most com- to Wicksell, prices of goods and services will increa- mon factor, which can increase the price level. Howe- se correspondingly to the increase of nominal ver, in spite of this statement Ohlin took critical position wages, thus real wages stay unchanged. In this situ- to the quantity theory. In this paper he also analyzed ation the economy is hit by unanticipated . In current problems of the monetary sector development his model Ohlin added to the price level another vari- in Sweden during that period and drew theoretical able – macroeconomic output. In his analysis, simi- generalizations based on this analysis. According to larly to Keynes a bit later, he used the propensity to Ohlin, it is the situation on the credit market and not the consume, liquidity preference and the multiplier, as quantity of money, which plays a decisive role in the well as the accelerator, which was not used by Key- economy. If we want to understand the situation we nes in his General Theory. Ohlin pointed to their have to study psychological reactions of individuals. mutual interaction in the following way. According to Ohlin, the specifics of Swedish appro- If the consumption demand increases the increase ach in the monetary theory lied in the fact, that it tur- of macroeconomic output will follow and additional ned the attention of analysts towards the behaviour of income in the economy will be created.The impact on individuals and their motives and did not pay primary the creation of additional output will be determined by attention to money, the velocity of its fluctuation as it is the existing propensity to consume. Ohlin also poin- done by supporters of the quantity theory of money. If ted out that the change of investment will initiate, i.e. the monetary policy is to be an effective tool to influ- accelerate, the change of the macroeconomic output. ence the economy, it is, according to Ohlin, necessa- Similarly as in Wicksell’s model also in Ohlin’s appro- ry to develop other theories of money, which provide a ach these reactions take up the form of the cumulati- certain alternative to the quantity theory. ve process, represent a sequence of disequilibria situations, which change expectations of individuals Ohlin’s contribution to the development with respect to the future development based on their of macroeconomic theory experience. Thus, in difference to Keynes, Ohlin’s approach to the analysis is a dynamic one. Together with other members of the Stockholm To deal with the problem of unemployment during School Ohlin analyzed the situation, which led to the the Great Depression it was, according to Ohlin, Great Depression on the theoretical basis and postu- necessary to use the whole spectrum of economic lated rules for the conduct of proper practical econo- policy measures, some of which could mutually mic policy. Already in 1927 during his stay in Den- counteract. Ohlin suggested that in the situation of mark he called for the utilization of public works as a the economy with unused resources, a concise pro- tool of expansive fiscal policy to deal with the high gram of recovery should be prepared. It would con- rate of unemployment. He further elaborated on sist from the policy of easily accessible money utili- these ideas and they were published in 1937 in Eng- zing open market operations and limited only by the lish as the “Stockholm Theory of Savings and Invest- state foreign reserves and from a wide program of ment”, the paper which was his reaction to the Key- public works partially supplemented by agricultural nes’ General Theory published in 1936. subsidies and tariffs imposed on imports of consu- However, already in Ohlin’s paper from 1934, mer goods. He admitted budget deficits accrued as a which was published in Swedish, many conclusions consequence of the financing of public work and can be found, which are parallel with Keynes’ theory. public investment programs in recession, since their This publication, at the time of its appearance from financing from increased taxes would limit consump- the language perspective not accessible to the inter- tion expenditures and neutralize their goal. Accor- national economic audience, became later an impul- ding to Ohlin an increased budget deficit should be

BIATEC, Volume XII, 7/2004 PROFILES OF WORLD ECONOMISTS BERTIL GOTTHARD OHLIN 23 financed by the increase of the supply of money, The dissolution of economic isolation will assist the since issuing additional bonds would crowd out pri- development of the trade. Exports of goods requiring vate investment and thus limit targeted results of relatively large quantity of an abundant production public work programs. factor increase the demand for it and its price. Imports will decrease the demand for a relatively Ohlin’s contribution to the theory scarce production factor and its price. If transportati- of international trade on costs were zero and specialization did not exist, the trade would lead to the equalization of production Probably best known contribution of Ohlin to eco- factor prices. However, Ohlin realized that in the real nomics is his contribution to the development of the life situation these preconditions do not held. Tran- theory of international trade. The starting point of his sportation costs are not zero and the existence of the work in this area is Cassel’s version of Walras’ gene- returns from scale in the first place creates the rea- ral equilibrium theory of the closed economy with per- son for the development of the specialization. fect mobility if production factors. Inspired by E. Second Ohlin’s modification of Cassel’s theory was Heckscher, Ohlin set out on the way of its modifica- based on considering the international trade as a tion to the conditions of a country indulged in the specific case of the interregional trade. Countries dif- interregional and international trade. In the open-eco- fer not only in their equipment with production factors nomy macroeconomics this contribution became and technology, but in climatic, cultural and legal known as Heckscher-Ohlin theorem. aspects. In different countries different currencies At first Ohlin considered an economy, which con- are used and countries experience different moneta- sists from regions characterized by perfect mobility of ry policies. Different currencies add to the model production factors within a region and imperfect, or another unknown variable, i.e. exchange rate. If con- non-existing, mobility between regions. If separate sidering the attainment of an external economic equ- regions are differently equipped with production fac- ilibrium, the between trading tors, relative prices of goods in different regions will countries should be taken into account. be different. This difference can be based also on the Except for this contribution to the open economy differences in technology, or preferences of consu- macroeconomics, at the end of his carrier Ohlin dis- mers. cussed at that time a very discussed claim about the In the situation of isolation, there will be goods with need to harmonize social legislation as well as tax relatively low and relatively high prices in each regi- systems among countries, which created some form on. Since individual regions are differently equipped of an economic union. Ohlin considered the empha- with production factors, to produce a good with low sis on the need for the harmonization as overstated. price a relatively large quantity of abundant producti- He stressed that the legislative framework of the on factor will be used and thus its price will be low. country represents the revelation of a collective pre- This good probably becomes an export article if the ference of citizens in the area of social policy and alt- economic isolation of the region is released. The hough it can lead to changes in the allocation of pro- price of a good with high price is high, since for its duction and in the structure of trade in the economic production a relatively large quantity of a scarce pro- union and outside of it, he does not prior the formati- duction factor (with high price) is needed. This good on of the economic union over the collective prefe- probably becomes an import article after the isolation rence of citizens, which led to the creation of a given of the region is removed. legislative framework.

Selected works of • 1934. Penningpolitik, offentliga arbeten, subventioner och tullar som medel mot arbetslösheten: bidrag till expansio- • 1924. Handelns teori. Stockholm: Centraltryckeriet. nens teori, Stockholm: Norstedt • 1929. Transfer Difficulties, Real and Imagined, Economic • 1937. Some Notes on the Stockholm Theory of Saving Journal 37, March 1929. Reprint: Readings in the Theory and Investment, 2 parts, Economic Journal 47, March, of International trade, ed. H.S. Ellis and L. Metzler, Phil- p. 53, June, p. 221. delphia and Toronto: Blakiston, 1949. • 1941. Kapitalmarknad och räntepolitik, Stockholm. • 1933. Interregional and International Trade. Cambridge, • 1943. Stockholmskolan kontra kvantitetsteorien. En ana- Massachuset: Press. lys av variationer i penningmängd, likviditet, köpkraft och • 1933. Till fragan om penningteoriens uppläggning. Ekono- prisutveckling, Ekonomisk Tidskrift, p. 27. misk Tidskrift. Preklad: On the formulation of monetary • 1978. and the Stockholm school: theory, History of Political Economy 10 (3), Fall 1978, a comment on Don Patinkin’s paper. Scandinavian Jour- p. 353. nal of Economics 80(2), p. 144.

BIATEC, Volume XII, 7/2004