WICKSELL, GENERAL EQUILIBRIUM, AND THE WAY TO MACROECONOMICS
Knut Wicksell’s formulation of monetary economics as the study of the relation between aggregate supply and aggregate demand played an important role in the development of macroeconomics. Wicksell’s contributions are better understood if we consider the Walrasian roots of his approach. Wicksell pointed to two shortcomings of Léon Walras’s theory: incomplete treatment of the demand for money, and lack of a concept of capital stressing the time element. Wicksell was influenced by Walras’s notions of the tâtonnement by which markets solve the equations and of the zero-profit entrepreneur. Nevertheless, Wicksell’s interpretation of the dynamics of the credit market, with a price (interest rate) distinct from its equilibrium (“natural”) level and the implicit recognition that the latter could assume negative values, did not fit into the Walrasian tâtonnement mold. As the first to produce textbooks on both theories of value and money, Wicksell was confronted with the problem of how to establish connections between them.