Keynes vs the Stockholm School approach to economics

10 Mar, 2020 at 13:29 | Posted in Economics | 5 Comments

The Stockholm method seems to me exactly the right way to explain business-cycle downturns … gunnar-myrdalBut the “problem” with the Stockholm method was that it was open-ended. It could offer only “a wide variety” of “model sequences,” without specifying a determinate solution. It was just this gap in the Stockholm approach that Keynes was able to fill. He provided a determinate equilibrium, “the limit to which the Stockholm model sequences would move, rather than the time path they follow to get there.” A messy, but insightful, approach to explaining the phenomenon of downward spirals in economic activity coupled with rising unemployment was cast aside in favor of the neater, simpler approach of Keynes …

Unfortunately, that is still the case today. Open-ended models of the sort that the Stockholm School tried to develop still cannot compete with the RBC and DSGE models that have displaced IS-LM and now dominate modern macroeconomics. The basic idea that modern economies form networks, and that networks have properties that are not reducible to just the nodes forming them has yet to penetrate the trained intuition of modern macroeconomists. Otherwise, how would it have been possible to imagine that a macroeconomic model could consist of a single representative agent? And just because modern macroeconomists have expanded their models to include more than a single representative agent doesn’t mean that the intellectual gap evidenced by the introduction of representative-agent models into macroeconomic discourse has been closed.

Uneasy Money


  1. William Barber’s comment upon Gunnar Myrdal’s work on monetary theory goes like this: “If his contribution had been available to readers of English before 1936, it is interesting to speculate whether the ‘revolution’ in macroeconomic theory of the depression decade would be referred to as ‘Myrdalian’ as much as ‘Keynesian’”
    John Kenneth Gailbraith- ” If it was any justice in the world, the so called Keynsian revolution in economics, would be refered as the swedish revolution.They where first”

  2. The Stockholm School analysis was multisectoral surely (see Stockholm Economic Studies volumes by Erik Lindahl, Karin Kock and Einar Dahlgen on National Income of Sweden 1861-1930 and Wages in Sweden 1860-1930) – and that disaggregated approach was I think very influential on the work of Sir Richard Stone at Cambridge in developing The Cambridge Growth Project and the multi-sectoral modelling of the UK economy in the late 1970’s and 1980’s by Cambridge Econometrics. I have in my possession Sir Richard’s Stone’s copy of Erik Lundberg’s ‘Studies In The Theory of Expansion’ (printed in Stockholm 1937), and my copy of Karin Kock’s ‘A Study of Interest Rates’ (printed in Great Britain 1929) was bequeathed by Joan Robinson’s supervisor Marjorie Hollond 1895-1977 (who was a participant in Keynes’s ‘circus’ ) to Girton College Library before it came to me, as a reminder of the keen interest there was amongst us Cambridge economists in the work of Swedish colleagues.

    • Of course, the national account system developed by Stockholm-School economists in the 1930s was sectorial. But with a few exceptions, their disequilibrium theories of the business cycle and of macroeconomic stability were formulated at the aggregate level. For example, they did not distinguish a leading industrial sector in the recovery. And before Bent Hansen’s dissertation (1951), there was no distinction even between the labour market and the product market in the Stockholm-School analysis of disequilibrium processes. And it was not until the mid-1950s that Hansen under influence of the Rehn-Meidner model developed a disequilibrium theory based on the assumption of labour-market heterogeneity.

  3. I agree that the disequilibrium dynamic approach of Myrdal, Lindahl and Hammarskjöld was superior to the equilibrium static approach of the General Theory. And I think that the avoidance by leading Stockholm-School economists of notions such as the natural rate of interest and unemployment was the right one. But the Stockholm-School analysis was mostly too aggregate thus lacking a structural-institutional perspective on growth and the business cycle (which Myrdal became aware of impelling him to turn to US institutional economics).

    • Lennart, in my view the “later” Gunnar Myrdal, is when i read him now,more valuable and interesting than the “younger” Myrdal,in many ways, although all his and the others in the “school´s” great contributions on money theory,ex-ante so on.You written a lot great things about this “Golden age” of great swedish economists,and so has Lars. Your contributes is really valuable,not at least for younger generations to read, that many times not heard of them even as graduate and ph:d students!One do not always need to travel abroad to Chicago or Ivory League to find pearls when you can find them just around the corner. 🙂 All the best

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