Knut Wicksell's critique of market fundamentalism (wonkish)

24 July, 2012 at 16:06 | Posted in Economics | Leave a comment

With the advent of neoclassical economics at the end of the 19th century a large amount of energy was invested in trying to formalize the stringent conditions of obtaining equilibrium and showing in what way the prices and quantities of free competition constituted some kind of social optimum.

That the equilibrium reached in free competition is an optimum for each individual – give prevailing prices and income distribution – was not, however, seen by some economists as making a very strong case for a free market economy per se. It was not possible to prove that free trade and competition gave a maximum of social utility. The gains made in exchange are not a manifestation of a maximum social utility.

Knut Wicksell – the greatest Swedish economist of all time – was one of those who criticized the idea of regarding the gain in utility arising from free competition as an absolute maximum. This market fundamentalist idea of harmony in a free market system did not live up to Wicksell’s demand for objectivity in science and  “the harmony economists, who endeavoured to extend the doctrine so that it might become a defence of the existing distribution of wealth” were judged severely by Wicksell (Lectures 1934 (1901) p. 39).

When propounders of the new marginalist theory – especially Walras and Pareto – overstepped the strict boundaries of science and used it in ascribing to the market economic properties it did not possess, Wicksell felt he had to react. To Wicksell (Lectures 1934 (1901) p. 73) it was

almost tragic that Walras … imagined that he had found the rigorous proof … merely because he clothed in mathematical formula the very argumets which he considered insufficient when they were expressed in ordinary language.

But what about the Pareto criterion then? Wicksell had actually more or less anticipated this in his review ( in Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, 1913: 132-51) of Pareto’s Manuel, but did not think it contributed anything. It was just the same old doctrine in a new disguise. To Wicksell the market fundamentalist doctrine of the Lausanne School obviously didn’t constitute an advance in economics.

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