An Historical Investigation
Chapter 12: Dynamic Analysis in Monetary Theory
INTRODUCTION This chapter discusses the dynamic methods of two schools in economics that both enjoyed their greatest popularity in the interwar period, the Stockholm school and the Austrian school. These schools were at the forefront of monetary theory in the 1920s and 1930s and aimed to develop an explicit dynamic theory of economic changes with money in a leading role. The interesting fact is that the Swedes and the Austrians have common theoretical roots, for both schools took the work of Wicksell as their starting point (Ebeling 1997; Laidler 1999). The importance of Wicksell in this regard is that he had shown that the interest rate is a key variable for the allocation of scarce resources over time. This placed the relationship between saving and investment at the nexus of the dynamic theories of the Swedes and the Austrians. However, this common starting point cannot conceal the important differences that exist between the macroeconomics of these schools. As Laidler (1999, 52) puts it: ‘It might seem, at first sight, utterly astonishing that two bodies of economic analysis, developed at the same time and in response to the same theoretical puzzles bequeathed by a single person, could move apart so rapidly.’ The aim of this chapter is to shed some light on the different approaches of the Swedes and the Austrians towards the dynamic analysis of the monetary economy. This comparison shall be used to answer the question that I raised in the last chapter: why did the dynamic approach, focussing...
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