H-NET BOOK REVIEW
Published by EH.Net (February, 2000)
Theodore Rosenof. _Economics in the Long Run: New Deal Theorists and
Their Legacies, 1933-1993_. Chapel Hill: University of North Carolina
Press, 1997. ix + 223 pp. $34.95 (cloth), ISBN 0-8078-2315-5.
Reviewed for EH.Net by Michael Perelman <[EMAIL PROTECTED]>,
Department of Economics, California State University at Chico
This book tells a complex story about the development of the economic
theories of Keynes and Schumpeter, along with those of Alvin Hansen and
Gardiner Means, in the context of the Great Depression. While Schumpeter
preferred to let the depression run its course, the other three advocated
a more activist approach. Although Keynes's specific policy prescriptions
at the time were vague (Perelman 1989), his basic approach was to let
business be free to do as it would choose, while creating a macroeconomic
climate in which investment would be brisk.
Hansen concurred, although the context of his policy was quite different.
For Hansen, the long run process of secular stagnation had diminished
investment opportunities so much that massive government spending was
required in order to stimulate business. At times, Keynes seemed to agree
with Hansen, but for the most part, he was vague about the particulars.
Moreover, throughout the _General Theory_, Keynes emphasized the role of
subjective expectations rather than objective economic conditions.
Just as Hansen dropped Keynes's concern with the subjective element in the
investment equation, Hansen's followers in the United States ignored his
concern with the long run forces that shape the economic environment,
giving rise to the sterile economics of the neoclassical synthesis, which
Rosenof classifies as short run Keynesianism. By the time that World War
II arrived, this stripped-down version of Keynesianism had carried the day
within the economics profession. Activist macroeconomic policy meant
little more than infusions of government spending to keep the business
cycle in check, with no concern for the long-run economic environment.
Although Gardiner Means's role is less familiar today, in the early years
of the Roosevelt administration, he was probably the most influential
economist among policymakers. His influence suddenly waned with the
disillusionment regarding the National Recovery Administration and the
outbreak of the depression within the depression in 1937-38. The torch
then passed to the aggregative economic policies advocated by Alvin
Hansen.
According to Means, industry consists of two unequal sectors. On one side,
highly competitive industries, such as agriculture, live in a world of
flexible prices. On the other side, industries inhabited by a few large
corporations enjoy sufficient power to set prices at levels of their own
choosing. Because these high prices restricted demand, employment rather
than prices fall in this sector whenever a negative shock hits the
economy. In contrast, prices collapse in the competitive sector,
restricting buying power from within that sector, compounding the
deflationary shock.
For Means, the Depression required something like what we now call
industrial policy. The New Deal implemented industrial policies, but not
in a fashion that won Means' approval. Instead, the New Deal consisted of
a variety of agencies, each operating in its own bailiwick. In contrast,
Means's industrial policy would take the entire economy into account,
rather than a few specific industries.
Although Means thought he found support in Keynes for his writings, he was
sadly disappointed by Keynes's response. Ironically, each thought that the
others' economic theory was merely a special case of his own more general
theory. In time, Means came to see Keynes as an adversary. He even
proposed that expansionary monetary, rather than fiscal policy would
remove the pressures that created the imbalances between the competitive
and the noncompetitive sectors of the economy.
The appearance of inflation in the late fifties led to the reemergence of
Gardiner Means in economic analysis and public policy advocacy. Means no
longer called for a monetary expansion. Instead he advocated a return to
the policies associated with the National Resources Planning Board, where
he once wielded enormous influence. Means's modest rehabilitation could
have never returned him to the center of power. By that time, McCarthyism
was in full bloom. Economists who questioned the efficiency of private
enterprise were coming under severe attack (Leeson 1997, p. 125). The
safest course was to follow the lead of the neoclassical synthesis and put
questions of corporate power aside. In the midst of Cold War hysteria,
Means's approach was not likely to find a warm reception in influential
circles.
Even Hansen's fiscal policies were too dangerous for the times. By 1945
the Federal Reserve Board dropped Hansen as an adviser. According to press
accounts, complaints by bankers were a major factor. Soon thereafter, the
Eisenhower Administration purged Washington of Democratic Keynesians
(Tobin 1976, p. 35).
The slow growth of the 1950s also lent some credence to Hansen's theory of
secular stagnation. As the postwar boom wore on, Hanson and Means were
largely forgotten again, and Keynes's star dimmed significantly, while for
some admirers of the prosperity of the time, Schumpeter has became an
almost cult-like figure. With the stagflation of the 1970s, Means again
achieved a modicum of attention, since short-run Keynesianism seemed at a
loss at the time.
Each of the four authors under study recognized a part of the totality.
None seemed willing to incorporate the insights of the others, except for
Alvin Hansen, who was the least original of the group. Hansen
enthusiastically incorporated one side of Keynes, but not the other side
that emphasized subjectivity. Similarly, he disregarded Means, at least
until the 1960s, when they were no longer rivals for power. Rosenof
attributes this failure of communication to a resistance to on the part of
his subjects to make a sufficient break with orthodox economic theory (p.
174).
Rosenof notes that John Kenneth Galbraith managed to incorporate both the
Means and the Keynes-Hansen approach to economic theory (pp. 126-27),
stressing the need for macroeconomic policies to expand demand while
paying close attention to the nature of corporate power. Galbraith also
has affinities with Schumpeter. Both have successfully drawn upon a
sociological style of writing. However, most economists today put a
premium on tight theoretic modeling regardless of the realism of such
efforts. In this environment, the broad sweep of Galbraith's writing
appears as a defect rather than as a strength. Because Schumpeter's ideas
resonate with the current political climate, economists tend to forgive
him for his sociological style.
Rosenof cites Paul Samuelson to buttress his case. Samuelson noted that
American Keynesians such as himself did believe that "imperfections of
competition" were "an important part of the Keynesian under-employment
equilibrium story." Upon reflection he realizes that
"Keynes-cum-Chamberlin-and-Means would have been better than Keynes alone"
(Samuelson 1983, p. 217; cited on p. 134).
The author's own preferred synthesis would combine institutionalism and
post-Keynesianism. Many economists might find that mix too atheoretical
for their preferences, but Rosenof makes a strong case that the more
rigorous economics commonly practiced today is too restrictive to account
for the complex world in which we live.
References
Robert Leeson, 1997. "The Political Economy of the Inflation-Unemployment
Trade-Off." _History of Political Economy_, Vol. 29, No. 1 (Spring):
117-56.
Michael Perelman, 1989. _Keynes, Investment Theory and the Economic
Slowdown: The Role of Replacement Investment and q-Ratios_ (NY and London:
St. Martin's and Macmillan).
Paul A. Samuelson, 1983. "Comment." in David Worswick and James
Trevithick, editors, _Keynes and the Modern World: Proceedings of the
Keynes Centenary Conference, Kings College, Cambridge_ (Cambridge,
England).
James Tobin, 1976. "Hansen and Public Policy." _Quarterly Journal of
Economics_, Vol. 90, No. 1 (February): 32-37.
Michael Perelman's most recent books are _The Invention of Capitalism: The
Secret History of Primitive Accumulation_ (Duke, May 2000), _Transcending
the Economy: On the Potential of Passionate Labor and the Wastes of the
Market_ (St. Martin's Press, May 2000), _The Natural Instability of
Markets: Expectations, Increasing Returns and the Collapse of Markets (St.
Martin's Press, 1999), and _Class Warfare in the Information Age_ (St.
Martin's Press, 1998).
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Louis Proyect
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