----------------- HES POSTING ----------------- 
 
------------ EH.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, Department of Economics, 
California State University at Chico. <[log in to unmask]> 
 
 
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). 
 
Copyright (c) 2000 by EH.NET and H-Net. All rights reserved. This work may 
be copied for non-profit educational uses if proper credit is given to the 
author and the list. For other permission, please contact the EH.NET 
Administrator ([log in to unmask]; Telephone: 513-529-2850; Fax: 
513-529-3308). Published by EH.NET (February 2000) 
 
 
------------ FOOTER TO HES POSTING ------------ 
For information, send the message "info HES" to [log in to unmask]