Karl Gustav Cassel

Gustav Cassel has the unfortunate distinction of belonging to that distinct group of influential economists who are intensely disliked by everyone. The Stockholm School, where he taught for many years, did its utmost to dissociate itself from him due to Cassel’s bitter rivalry with their beloved master, Knut Wicksell. Although Walrasians applauded his general equilibrium work, they cringed at his attacks on utility theory. The Marshallians disliked him for exactly the opposite reason. The Austrians resented him for having helped bury Böhm-Bawerk’s theory of capital and interest. And, finally, the Keynesians have no love for one of the most vociferous opponents of Keynesian Revolution. All this was not helped by Cassel’s abrasive personality and his refusal to acknowledge others’s work. As Hans Brems notes:

“A writer less generous than Cassel would be hard to find. Karl Marx at least paid tribute to Francois Quesnay and David Ricardo. Karl Gustav Cassel paid tribute to nobody. Leon Walras had written the first system of simultaneous equations of general equilibrium theory. Vilfredo Pareto had purged it of any measure of sensations. Cassel followed both but mentioned neither. We must not treat Cassel the way he treated others. We must respect him as a pioneer.” (H. Brems, 1981: p.158)

Nonetheless, despite all the antipathy, Gustav Cassel has remained a silent giant in 20th century economics. Gustav Cassel maintained the Lausanne torch alight with his magnificent Theory of Social Economy (1918). However, there were a few bizarre twists: marginal productivity was dumped in favor fixed coefficient technology; utility theory, following up on his 1899 contribution, is dropped by the wayside. In his opinion:

“This purely formal (utility) theory, which in no way extends our knowledge of actual processes, is in any case superfluous for the theory of prices…(T)his deduction of the nature of demand from a single principle, in which so much childish pleasure has been taken, was only made possible by artificial constructions and a considerable distortion of reality.” (Gustav Cassel, Theory of Social Economy 1918: p.81).

Nonetheless, the Cassel’s general equilibrium system on the basis of demand functions was the reading material of the Vienna Colloquium in the 1930s and the fundamental contributions of John von Neumann and Abraham Wald, which did so much to create modern Neo-Walrasian economics would not have occurred had Cassel not written his text. It was through his work that the concept of a “steady-state growth” equilibrium was introduced.

Among his other contributions is the rudiments of a purchasing power parity theory of exchange rates (1921) and an ‘overconsumption’ theory of the trade cycle (1918). His Nature and Necessity of Interest (1903), in turn, was an attempt at resurrecting Leon Walras’s theory of capital. He also worked on the German reparations problem. His review of John Maynard Keynes’s General Theory in 1937 was one of the most critical.

Major works of Gustav Cassel

– Grundrisse einer elementaren Preislehre, 1899, ZfN
– Sozialpolitik, 1902
– The Nature and Necessity of Interest, 1903
– Theory of Social Economy, 1918
– The World’s Monetary Policies, 1921
– Money and Foreign Exchange after 1914, 1922
– Fundamental Thoughts in Economics, 1925
– The Rate of Interest, The Bank Rate, and the Stabilization of Prices, 1927, QJE
– On Quantitative Thinking in Economics, 1935
– Keynes’s General Theory, 1937, International Labor Review
– The Downfall of the Gold Standard. 1936