Karl Gustav Cassel was a founding member, along with Knut Wicksell and David Davidson, of the Swedish school of economics. Cassel came to economics from mathematics. In opposition to the labor theory of value, Cassel proposed a distorted and oversimplified conception of price based on the principle of scarcity of utilities, interpreting money circulation, wages, and economic crises in the light of this conception.
Education
After earning an advanced degree in mathematics from the University of Uppsala, he taught in Stockholm during the late 1890s but went to Germany before the turn of the century to study economics. His publications in economics date from 1899 and span a period of nearly four decades. He taught economics at the University of Stockholm from 1903 until 1936. Gunnar Myrdal and Bertil Ohlin were his most prominent students.
Career
Despite the formal training in Germany, Cassel's perspective on economic reality, and especially on the role of interest, was rooted in British neoclassicism and in the nascent Swedish school, which was given shape by Wicksell's early writings. Cassel's facility with mathematics and his use of it to describe the interconnectedness of markets created a strong kinship between his theories and those of Leon Walras. In addition to his major works on interest-rate determination and general-equilibrium theory, Cassel popularized the purchasing power parity theory of exchange rates and contributed to the ongoing debates on monetary stability and currency reform. (Keynes incorporated the idea of purchasing power parity in his Tract on Monetary Reform (1923). And in 1922 Cassel and Keynes, along with two other economists, were signers of the majority report of a commission on currency reform submitted to the German government.) Cassel also wrote extensively for the popular press and was a staunch supporter of free markets and free trade. A summary of his ideas is offered in his own Fundamental Thoughts in Economics (1925).
The Nature and Necessity of Interest (1903) advanced and soon came to exemplify Swedish thought on the fundamental economic realities that underlie the relationship between saving and investment. If the interest rate is conceived as a price, it is the price of a factor of production called "waiting." Casselian waiting has the dimensions of value and time, as might be measured in dollar-years. Two hundred dollars relinquished to a borrower for a period of three years constitutes, if compounding is ignored, six hundred dollar-years of waiting. A positive rate of interest entices income earners to wait to consume what they could in fact consume now; it entices investors to economize on resource utilization that involves waiting. Alfred Marshall had used the term "waiting" to similar effect—preferring it to the older term "abstinence" (which has moral connotations); William Stanley Jevons had introduced the units of pound-years as the basis of his own dimensional analysis. Critical of Böhm-Bawerk's time-preference theory for its special treatment of intertemporal exchange, Cassel drew on Marshall and Jevons to emphasize that the theory of interest was on equal footing with price theory in general.
Cassel's most ambitious work, Theoretische Sozialökonomie (1918), translated into English in 1923 as The Theory of Social Economy, sets out the conditions for a general equilibrium in the sense of Walras. Cassel's formulation was simpler than Walras's in that money prices rather than the underlying values or utilities served as the basic building blocks of the system. (Critics, including Wicksell, held that this analytical simplicity came at the expense of economic understanding and that the strong link to Walras's system of equations was never sufficiently acknowledged.) Cassel dealt first with the static state, in which secular change is ruled out by assumption, and then with the progressive state, which is characterized by uniform growth. Considerations of dynamics, including cyclical variation, were offered as a supplement to the more fundamental economics of the static and progressive states. Cassel was an eclectic on the issue of the trade cycle: money, credit, trade flows, and speculation in securities markets were all accorded causal roles. In the final analysis, however, movements in the interest rate and corresponding changes in the profitability of fixed capital are central, according to Cassel, to our understanding of trade cycles in modern times.
In several respects, Cassel's theory of general equilibrium—more so than Walras's—represents the relevant foil against which Keynes's own ideas were presented. When Keynes dealt on an exegetical level with alternative theories of interest, he categorized the theories of Marshall, Cassel, and Walras as "classical" in the sense that they took interest to be a real, rather than monetary, phenomenon and took the interest rate as the market's device for bringing saving and investment into equality. Cassel's formulation was the more obvious foil if only because it was a clear and direct outgrowth of Marshall's. Also, the theory of interest, so central to Keynes's thinking, was given due prominence in Cassel's. The system of general-equilibrium equations, as set out in Cassel's 1918 work, was built up around the theory of interest he had developed a decade and a half earlier. By comparison, Walras's Elements of Pure Economics, as first published in 1874, contained no theory of interest at all. The utility theory of saving and a treatment of capital-goods pricing were not introduced until the fourth edition, which appeared in 1900. Finally, Walras was neither well-received nor even widely read in England at the time that Keynes's ideas were developing; there was no English translation of Elements until 1954.
One of Keynes's objections to the classical theory of interest makes direct use of Cassel's treatment of the relationship between saving and the interest rate. The saving function may be backward bending—and will be if people save with an eye toward accumulating a set amount by some future date. (This point is also made by Marshall.) Keynes argues that a downward-sloping demand for loanable funds and a backward-bending supply may have no intersection, a possibility that, in his judgment, should have warned the classical economists away from Cassel's (and Marshall's) supply-and-demand approach.
Probably the most sweeping contrast between Cassel's and Keynes's frameworks derives from differing perceptions of the scope for a general theory of the particular phenomena that give macroeconomics its subject matter. According to Cassel, there can be no such thing as a general theory of unemployment. The system of equations of a truly general theory determine simultaneously all prices and quantities in both product and factor markets and provide a full solution in which, e. g., unemployment and distribution of income have no independent, or separate, existence—and hence in which demand management policies have no justification. This was Cassel's summary judgment in his 1937 review of Keynes's General Theory. For Keynes, however, the inherent unknowability of the future and the inherent subjectivity of expectations about the future were enough to render Cassel's system of equations irrelevant and give scope for the "dark forces of time and ignorance" to affect the performance of real-world market economies.