The new passage comes from Wicksell’s article “The Influence of the Rate of Interest on Prices” (1907), where the “natural rate” is called the “normal” rate:
“According to the general opinion among economists, the interest on money is regulated in the long run by the profit on capital, which in its turn is determined by the productivity and relative abundance of real capital, or, in the terms of modern political economy, by its marginal productivity. This remaining the same, as, indeed, by our supposition it is meant to do, would it be at all possible for the banks to keep the rate of interest either higher or lower than its normal level, prescribed by the simultaneous state of the average profit on capital?” (Wicksell 1907: 214).This appears to be an earlier formulation of the definition given in Wicksell’s later work Vorlesungen über Nationalökonomie. Band 2: Geld und Kredit (1922). In the English translation of this called Lectures on Political Economy. Volume 2: Money (trans. E. Classen; 1935) we have this definition:
“The rate of interest at which the demand for loan capital and the supply of savings exactly agree, and which more or less corresponds to the expected yield on the newly created capital, will then be the normal or natural real rate. It is essentially variable.” (Wicksell 1935: 192–193).In this definition the “natural” or “normal” rate of interest is determined by the marginal productivity of capital.
Laidler (1999: 53) points out that the Stockholm School contemporaries of Wicksell had already, by the late 1920s, understood the problems with identifying the natural rate of interest defined in these terms:
“[sc. the Stockholm School] … understood that the idea of an aggregate stock of capital with a well-defined marginal product that existed independently of the value of the market rate of interest was, except under very special circumstances, theoretically indefensible. Hence they rejected just that aspect of Wicksell’s analysis that lay at the very foundation of Austrian cycle theory.” (Laidler 1999: 53).Laidler (1999: 29–31) also has an interesting discussion of the ambiguity in how Wicksell defined the natural rate in different passages in his writings.
To speak of a single, or unique, “natural” rate would seem to entail that an economy is in an equilibrium state where the marginal productivity of capital is the same on all capital. Indeed, in Wicksell’s Interest and Money it is a simple stationary-equilibrium model that is the starting point of Wicksell’s monetary theory (Donzelli 1993: 57), an unrealistic assumption for real world economies.
Moreover, though I am no expert on the capital controversies, it would seem to me that on this point members of the Stockholm School also anticipated aspects of the Cambridge Capital Controversies well before the early founders of Post Keynesianism in the 1960s, at least with respect to the natural rate and problems with defining the quantity of capital K in the neoclassical production function.
Colin Rogers’ analysis (Rogers 1989: 22, 30–32) confirms this: he argues that the Cambridge capital critique applies to Wicksell’s theory of capital, and shows that Wicksell’s natural rate of interest is untenable outside a purely abstract one-commodity world (Rogers 1989: 22).
Furthermore, capital as measured in the neoclassical production function Q = f(K,L) is ambiguous, given the circularity involved in defining the quantity of capital K, when to determine K one needs to know the rate of interest, but to determine the rate of interest one needs to know the value of capital K (Rogers 1989: 31).
“Colin Rogers’ Money, Interest and Capital, Chapter 2,” June 12, 2014.
“Hayek’s Trade Cycle Theory, Equilibrium, Knowledge and Expectations,” January 4, 2012
Donzelli, F. 1993. “The Influence of the Socialist Calculation Debate on Hayek’s view of General Equilibrium Theory,” Revue européenne des sciences sociales 31.96.3: 47–83.
Hansson, Bjorn A. 1990. “The Swedish Tradition: Wicksell and Cassel,” in Klaus Hennings and Warren J. Samuels (eds.), Neoclassical Economic Theory, 1870 to 1930. Kluwer Academic, Boston and London. 251–279.
Kompas, T. 1992. Studies in the History of Long-Run Equilibrium Theory. Manchester University Press, Manchester.
Laidler, David E. W. 1999. Fabricating the Keynesian Revolution: Studies of the Inter-War Literature on Money, the Cycle, and Unemployment. Cambridge University Press, Cambridge.
Rogers, C. 1989. Money, Interest and Capital: A Study in the Foundations of Monetary Theory. Cambridge University Press, Cambridge.
Wicksell, K. 1907. “The Influence of the Rate of Interest on Prices,” The Economic Journal 17.66: 213–220
Wicksell, K. 1922. Vorlesungen über Nationalökonomie. Band 2: Geld und Kredit. Fischer, Jena.
Wicksell, K. 1935. Lectures on Political Economy. Volume 2: Money (trans. E. Classen). Routledge & Kegan Paul, London.