Analytical Foundations of Erik Lindahl's Monetary Analysis, 1924-1930

Erik Lindahl might nowadays be best known for the Lindahl solution in public finance analysis, originally stated in his 1919 dissertation Die Gerechtigkeit der Besteuerung. It has not always been this way. Forty years ago, in his obituary for Lindahl, Bertil Ohlin (1960, 4) wrote, “His dissertation has since long been considered a bit obsolete” but stressed the importance of Lindahl's monetary studies.¹

Lindahl was a leading figure in the group that later was called the Stockholm school (Ohlin 1937a, 1937b; Hansson 1982). One of the reasons for Lindahl's importance was that he carried on the tradition of Knut Wicksell, and his work formed a major link between Wicksell and younger Swedish economists.²

Wicksell heavily influenced Lindahl's early scientific work. Lindahl's dissertation was based on Wicksell's analysis in Finanztheoretische Untersuchungen. Moreover, Wicksell was the opponent appointed by the faculty when Lindahl defended his dissertation. Lindahl's monetary work also drew extensively on Wicksell, as Wicksell had read and commented upon the manuscript of Penningpolitikens mål och medel [Ends and means of monetary policy], Lindahl's first major work on monetary theory. Wicksell supported Lindahl when the latter applied for a professorship in Copenhagen (given to Bertil Ohlin), and in Stockholm, Lindahl and Wicksell had contact through the Political Economy Club (Henriksson 1991). Even the title of Lindahl's aforementioned work on monetary theory and policy resembles that of Wicksell's inaugural lecture from 1904, whose title appeared as “Ends and Means in Economics” in a 1958 translation.

Lindahl's formulation of the ends of monetary policy was closer to David Davidson's approach than to Wicksell's. But Lindahl built his positive analysis on the Wicksellian foundation, as can be seen in his microeconomic analyses and in the stress he placed on variations in interest rates as monetary measures.

Lindahl consequently built his theoretical work on the foundation laid by Wicksell. His basic ideas were not only fruitful in themselves but set the stage for further development not only by other Swedish economists (Uhr 1960; Chiodi 1991; Steiger 1987b) but by non-Swedes as well. Gunnar Myrdal, for example, took Lindahl's discussion of the normal rate of interest as the starting point for his own analysis of monetary equilibrium, and Lindahl's application of the temporary equilibrium method to monetary analysis influenced Hicks and, via Hicks, theoretical developments during the 1970s and 1980s.

A number of economists have commented on Lindahl's work on the theory of money. Karl-Gustaf Landgren (1960) started from a Keynesian perspective in his evaluation of Lindahl's monetary analysis, but his approach was rather one-sided, prompting immediate reactions by Tor Fernholm (1960) and Gertrud Lindahl (1960) and, a few years later, Otto Steiger (1971).³

Jan Petersson (1987, 1991) focuses on Lindahl's theory, but the concern is Lindahl's development of the general dynamic theory from the middle and end of the 1930s and its significance for the Stockholm school. William Yohe (1962) deals with Lindahl's works after 1939. In contrast, Klas Fregert's (1993) analyzes Lindahl's norms for monetary policy, but Fregert's objective was not to discuss Lindahl's monetary analysis. David Laidler (1991) discusses Lindahl's role in the development of the Stockholm school, Johan Myhrman (1991) briefly surveys the monetary economics of that school, and Björn Hansson (1982) extensively discusses Lindahl's development of the method of temporary equilibrium as a background to his monetary theory.

Discussions of Lindahl's work have thus partly focused on aspects other than Lindahl's development of monetary theory during the 1920s. The task of the present essay is to discuss the analytical instruments used by Lindahl in his development of monetary theory during the 1920s and to trace the origin of ideas concerning these instruments.⁴

I first recount Lindahl's work during the 1920s. The main part...