Alvin Hansen

America in the early twentieth century was an uneasy alliance of agriculture, industry, and finance, laid bare in the speculative boom of 1929, subsequent crash, and Great Depression of the 1930s. The pioneering west versus the financial control of the east. The New Deal reflected those different concerns, balanced with the needs of the population and democracy as a whole, as it sought to find the right mix of planning and control in an essentially capitalist system while avoiding the fascism of monopoly or the totalitarianism of a planned socialist economy.

Hansen’s initial education was in a one-room schoolhouse at Viborg. He was one of the first two students from the area to attend high school, and then the first in his community to attend college as an undergraduate at Yankton, majoring in English. He received a freshman award as the most outstanding student and developed an interest in public speaking, coming second at a state level and then third at the inter-state level, with an oration on “The Tragedy of Lost Childhood” examining the problem of child labour. Following graduation in 1910, Hansen taught at Lake Preston High School, quickly becoming principal and then superintendent of schools (1912–3). Teaching enabled him to finance his graduate studies at the University of Wisconsin, where John R. Commons and Richard T. Ely channelled his interest into economics, especially labour economics and cyclical fluctuations. From Wisconsin, he took an instructor’s post at Brown before moving to Minnesota in 1919 to join the new School of Business. Having established his reputation there, when Harvard established a Graduate School of Public Administration 1936, his role as a policy economist made him an obvious choice as the first Littauer Professor of Political Economy.

The core elements of Hansen’s thought can be found from his earliest writings. Undoubtedly, he re-evaluated and re-configured many of these building blocks throughout his career, but the key themes of equality of opportunity and social responsibility remained. The central questions were about thrift, or savings, and investment, and role of technological progress and population in a dynamic economy. His initial views on the monetary nature of the trade cycle did change quickly in the 1920s but then remained largely fixed. Hansen’s interest in social security, proper housing, health, and education is also apparent. These are placed alongside issues of population growth, industrialisation, and thrift, i.e. an economy with a high savings rate.

In 1931, Hansen had seen the post-war maldistribution of gold as a major factor behind the depression. Counterfactually, without the drain of gold into France and the USA, the decline in world prices would have been gradual rather than precipitous. At the Chicago Harris Foundation meetings in both 1931 and 1932, Hansen remained sceptical about the efficacy of public works. Later, he characterised the mid-1930s recovery as being consumption-led. Whilst investment had increased, this had followed the rise in consumption. A full recovery had failed to materialise not because of capital shortage but due to a failure to develop adequate investment outlets. In retrospect, considering the depth of the recession, the New Deal had been a success, albeit that it could have been better if Congress had been bolder.

From some of his earliest writings, Hansen had envisaged a state role in channelling savings to support society and improve living standards, including social security, public health, and promoting home ownership. Initially, Hansen’s main call was for a national housing and home loan scheme, modelled on the Federal Farm Loan Act. Despite an early scepticism about the practicalities of stabilisation, his work at Minnesota helped fulfil this vision, first with unemployment insurance and later a broader macroeconomic policy to maintain full employment. Hansen’s first government roles were prompted by his Minnesota work and involvement in other university-led commissions and inquiries. This drew Hansen to the attention of the State Department, where he was Chief Economic Analyst at the Tariff Bargaining Section, an advisor to Secretary Cordell Hull (1934–5). In 1934, because of his earlier work with Murray, and a connection with Witte, Secretary of State Cordell Hull “loaned” Hansen to the Social Security committee. The growing group around Lauchlin Currie in government welcomed Hansen as an important recruit especially for the 1939 Temporary National Economic Committee Hearings. Hansen acted as a consultant to the National Resources Planning Board alongside part-time work for the Federal Reserve Board, where tasks, including aspects of defence programme funding and the nature of the post-war US economy and policy, overlapped.

Secular stagnation is an unfortunate term, which would have been much better expressed in terms of a growing gap between actual, potential, or desired growth in a mature economy. Hansen was seeking long-term explanations and possible remedies to the problems of maintaining full employment in an advanced industrial economy in a period after an exceptional expansion. The nineteenth century had seen America transformed by territorial expansion, waves of immigration, and remarkable technological progress in industrialisation, urbanisation, and transportation (including the electricity, rail, and automotive sectors). What were to be the new drivers for the economy as these older sources diminished? America’s great productive power could be seen as both a blessing and a curse.

Hansen was the consummate teacher, his intellectual curiosity was easily communicated to students and colleagues alike. He was unafraid to display the limits of his understanding and thus to push the boundaries out together. He was said to be a breath of fresh air. Around the time of his arrival in Harvard, Hansen embraced the Keynesian ideas of which he had been so sceptical in his 1936 review. His and John Williams’ Fiscal Policy Seminar created a sense of intellectual excitement combined with social usefulness in terms of policy design. Galbraith described it as the “official” centre of Keynesian discussion at Harvard.

Hansen saw the world from an inherently dynamic viewpoint. What propelled a dynamic economy was investment. The business cycle was ultimately an investment cycle, and what drove that dynamism was his triumvirate of technological progress, territorial and natural resource expansion, and population growth. If one took savings as given, then the issues resolved to a failure to find or fill the profitable outlets for the nation’s savings. Whilst monetary and institutional factors could complicate that process they were not fundamental. Hansen’s savings and investment analysis grew out of his understanding of a continental influenced theory of crisis, through the works of Spiethoff, Tugan-Baranowsky, Wicksell, Schumpeter and Robertson. Reflecting his interest in dynamics he found period analysis far more conducive than Keynes’s statical approach. A key concern was the financial plumbing that made this happen. That raised questions of changes in hoarding as well as the role of institutional savings, financial markets, and corporate saving (retained profits and depreciation allowances) in relation to external finance. This weakened the relationship between the rate of interest, savings and investment. In turn this added to the realisation that whilst monetary policy had a role to play it could not be the prime mover. Fiscal policy could not only fill that role but also achieve far more in terms of redistribution and the provision of public services than the market could do on its own.

Hansen had been interested in consumption as much as investment. Whilst investment ruled the roost for the business cycle, a consumption index had been a goal for a meaningful measure of real income since the mid-1920s. Hansen’s review of Keynes’s General Theory was at best lukewarm. He quarrelled with Keynes’s definitions of income, saving and investment suggesting that Robertson’s schema would have made the exposition clearer especially in regard to hoarding and credit creation. He felt that Keynes was too polemical and not generous enough to Classical theory, but acknowledged the practical import of argument. Hansen’s apparent conversion from sceptic to critical supporter seemed to come around the period of his AEA presidential address in 1938–1939. In the 1940s, Hansen adopted Keynesian tools, the marginal efficiency of capital and the multiplier, in his business cycle analysis. He still favoured the contribution of technological progress, population, and resource growth to an upwards shift in the marginal efficiency of capital schedule rather than the effect of interest rates moving along it. His textbooks popularised both the Keynesian Cross and ISLM graphical representations of Keynesian Economics, whilst his A Guide to Keynes became an undergraduate staple.

If the interwar period had shown that laissez-faire and the market economy required a helping hand, then the experience of the Second World War not only radically increased the size of the state but showed that it was possible for the state and private enterprise to work in partnership. Rather than the “boondoggling” of some of the New Deal, there was a firm theoretical foundation to a suitable stabilisation. A dynamic mixed economy could be successfully managed through an adaptive and agile set of federal economic policies, led by fiscal policy with supportive monetary, state and local government policies, all set in a new international framework of cooperation and development. That required not only better information but also new priorities and a new role for political economy. The strands of Hansen’s thought on the mature economy, the cycle, growth and a better society could be combined through public policy.

Hansen’s contributions to international economic and financial problems have been relatively neglected. Yet these contributions have a long history in the development of Hansen’s thought. He was well aware of America’s changing role in the world economy, and of the impact of global changes on domestic issues and policy goals. Any study of a dynamic economy had to take account of its cultural, technological and geopolitical environment. Increasingly stabilisation had to take on an international perspective, especially in the reshaping of the global monetary system after the Second World War. He talked of developing mutual goodwill and good faith through cooperation in the new institutions which would help promote self-discipline amongst the member countries.

Hansen had a lifelong commitment to education, a belief in the primacy of human capital, and equality of opportunity. At its core this was a vision of potential being fulfilled, whether personal, communal, or economic. This was evident in a distinct normative, ethical, dimension to his thought. A tax dollar could be worth more than just its monetary value because of what it bought in terms of societal benefit: education, employment, health and culture instead of ephemeral gadgets or flashy chrome automotive tailfins. Likewise, stabilisation was not some simple target of price stability, nor just smoothing the business cycle, but rather creating a stable environment in which individuals, enterprise, and society as a whole could flourish. Employment and price stabilisation were only two dimensions of a complex nexus.