by Axel Leijonhufvud in perspective Axel Leijonhufvud’s sad passing on May 5th has rightly stimulated a round of tributes to a thinker of uncommon breadth. But there is perhaps reason to doubt how widely appreciated the diversity of his thinking really was. Leijonhufvud changed the colors of his economic reasoning in response to many strands of 20th-century discussion, repainting each one. He had an ample palette and his color mixes were always interesting – an artist of macroeconomics indeed. Never lacking confidence and blessed with understated charisma, he was a member of one of Sweden’s oldest aristocratic families … Axel’s substantial contributions to economic thinking came in sequence. Each differed substantially from its predecessor. The first was
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Axel Leijonhufvud in perspective
Axel Leijonhufvud’s sad passing on May 5th has rightly stimulated a round of tributes to a thinker of uncommon breadth. But there is perhaps reason to doubt how widely appreciated the diversity of his thinking really was. Leijonhufvud changed the colors of his economic reasoning in response to many strands of 20th-century discussion, repainting each one. He had an ample palette and his color mixes were always interesting – an artist of macroeconomics indeed. Never lacking confidence and blessed with understated charisma, he was a member of one of Sweden’s oldest aristocratic families …
Axel’s substantial contributions to economic thinking came in sequence. Each differed substantially from its predecessor. The first was his book On Keynesian Economics and the Economics of Keynes. Heavily influenced by Robert Clower’s “dual decision hypothesis” which can be summarized by his aphorism “Money buys goods and goods buy money but in a monetary economy goods do not buy goods.” Money is a form of financial institutions’ debt. It can be used to purchase goods but is not a good in itself. Axel’s book elaborated elegantly on this idea because it can lead to severe coordination problems between the financial and real sides of the economy.
A second major theme was developed in a very long and fascinating 1979 UCLA working paper on “The Wicksell Connection.” It exhaustively reviews 20th-century macro theories, all based on the class and payment structure underlying Knut Wicksell’s “cumulative process.” Households lend to business to finance investment …
Axel stuck with Wicksell and subsequent mainstream analysis. At the end of the paper, his 1979 avatar imposed Fisher arbitrage between the profit and real interest rates with full employment, thereby accepting Say’s Law and rejecting the General Theory’s determination of the interest rate in markets for stocks of securities. This Wicksellian loanable funds set-up is nowadays trumpeted by the American mainstream. It has nothing to do with Clower.
Meanwhile, Axel had another idea he called the “corridor hypothesis,” elaborated over decades. The idea is that the macroeconomy can be self-stabilizing if key variables stay within a range around a steady state. If they stray outside the corridor, disaster can follow. He wrote policy briefs for the Centre for Economic Policy Research which point to potentially destabilizing forces such as high leverage …
Axel was certainly correct about corridors when there is positive feedback, but perhaps he could have been a bit less literary in thinking through their implications. His work called attention to Clower, Wicksell, Minsky, and climate, enriching economic debate. It is too early to tell, but he is likely to be more than a footnote to the history of economic thought.