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Hansen, Alvin

Hansen, Alvin

WORKS BY HANSEN

SUPPLEMENTARY BIBLIOGRAPHY

Alvin Hansen’s place in the history of economic thought and the importance of his role as an economic adviser are undisputed. By propagating and developing the ideas formulated by Keynes, Hansen did more to effect the Keynesian revolution than any other American economist. His books are widely read in the United States and abroad; his Guide to Keynes (1953), for example, was translated into Spanish, Japanese, Italian, French, Hindi, and Korean. Most of his other books have also been widely translated.

Born in 1887 in South Dakota of Scandinavian parentage, Hansen achieved academic eminence despite the handicap of having received his education at small, impoverished Yankton College. For some years he worked as a schoolteacher, principal, and school superintendent. Then he went for graduate training to the University of Wisconsin, where he also began teaching. From Wisconsin he moved to Brown and then to the University of Minnesota before going to Harvard in 1937 as the Lucius N. Littauer professor of political economy. He spent almost twenty years as an economist in Cambridge. After retirement he yielded to demands to serve as a visiting professor at various institutions, including the University of Bombay, Yale, Smith, Vassar, Michigan State, Haverford, and Wesleyan.

Hansen excelled as a teacher. A Harvard seminar in fiscal policy, which he shared with John H. Williams, became one of the most famous in the country. Week after week, for almost twenty years, outstanding scholars and public servants attended this seminar. The gifts of Hansen and Williams were dissimilar but complementary. Williams was a cautious theorist and rather critical of many of Keynes’s ideas, but open-minded and far from dogmatic either in criticism or advocacy and acute in analyzing issues. Hansen, too, could be critical, but his dominant attitude was one of enthusiasm for the New Economics. The interplay between Williams’ skepticism and Hansen’s acceptance provided just the right atmosphere for the exploration and examination of the new ideas. Hansen’s zest was contagious: he not only inspired his students; there were few visitors who came away from these seminars uninfluenced. The seminars served as a platform for debates among the participants, whether regular members, other Harvard colleagues, or guests. Faculty members who were too sensitive to indulge in public debates with their peers soon learned to stay away. It is a tribute both to Williams and Hansen that their debates never led to personal differences.

Although Hansen’s influence is most effectively conveyed by cataloguing his students, it is not possible here to list the hundreds of students he inspired and the numerous doctoral dissertations he supervised. His former students are members of virtually every distinguished department of economics, for example, the departments at the Massachusetts Institute of Technology, Yale, Harvard, the University of California, Stanford, the University of Chicago, Princeton, and Cambridge, England.

There was a reciprocal exchange of ideas between Hansen and his students. His influence is clearly evident in An Economic Program for American Democracy (1938), a prescient document signed by R. V. Gilbert and six other young Harvard and Tufts economists. Hansen, in turn, was influenced by the young economists who wrote the book. At age 50, he had a receptivity to new ideas that was quite remarkable.

It is likely that no American economist of the twentieth century has had more influence on economists in the government than Hansen. As early as 1933-1934 he served as director of research and secretary of the important Committee of Inquiry on National Policy in International Economic Relations. In the years when Cordell Hull’s reciprocal trade agreements were first being established, Hansen served as an aide to the State Department; this was a time when economists were rare indeed in the department. A few years later, he was the economic adviser to the prairie provinces before the Canadian Royal Commission on Dominion-Provincial Relations. At the same time, 1937-1938, he became a member of the Advisory Council on So cial Security. Again, in 1941-1943, he had the privilege of being the chairman of the United States-Canadian Joint Economic Committee. One of his most important assignments was that of special economic adviser to the Federal Reserve Board, a post which he held from 1940 to 1945.

Before 1933 Hansen had been somewhat of a deflationist and a critic of those who questioned Say’s law, which assumes that what is produced will be taken off the market. Keynes was the boldest critic of Say’s law: he asserted that investment may not equal the gap between what the economy is capable of producing and what people wish to consume. Hence his great emphasis on investment and the means of stimulating it. In fact, Keynes built a theory of income formation on the basis of a relatively stable consumption function and multiplier.

Hansen was always capable of changing his mind, and in a review of Keynes’s General Theory (1936) he was generally favorable to Keynes’s views. But neither Hansen nor, very likely, any other economist in the United States at that time anticipated the tremendous impact the General Theory was to have. (In part, its many obscurities concealed the cogency of its argument.) Hansen appreciated Keynes’s intellectual adventurousness: “We are living in a time when economics stands in danger of a sterile orthodoxy. The book under review warns us once again, in a provocative manner, of the danger of reasoning based on assumptions which no longer fit the facts of economic life . . .” (1936, p. 686). But Hansen was clearly at odds with Keynes on some issues. Keynes had urged a reduction of the rate of interest as a means of stimulating investment, since the amount of investment depends upon the relation of the rate of interest and the marginal efficiency of capital, although his stress on manipulation of the interest rate was not nearly so great in the General Theory as it had been in his earlier Treatise on Money. Hansen was not as enthusiastic as Keynes about interest rate policy, cautioning that efforts at general monetary control had already revealed the weakness of this method.

Both in the Treatise on Money and in the General Theory, Keynes had shown an awareness of the need for adequate investment and of the dependence of the amount of investment on the opportunity for investment. Hansen was the principal architect of a theory of stagnation, built on this theme of Keynes and concerned with the circumstances of insufficiency of demand. Hansen agreed with Keynes that the business cycle reflects the variations in the marginal efficiency of capital and that the impact of secular trends is more disrupting than that of the cycle. He wrote in 1938 that “not every period can be characterized as a kind of new industrial revolution. .. . Add to this the wholly new fact of a rapidly approaching cessation of pop ulation growth. Let the perennial optimist reflect on the enormous masses of capital that found investment outlets during the nineteenth century for no other reason than that the population of England quadrupled, that of Europe trebled, while that of the United States increased fifteen-fold. For these and other reasons we shall do well to ponder deeply the problem of …secular stagnation” (1938a, pp. 477-478).

Time and again, and especially in the 1930s, Hansen returned to the theme of the insufficiency of demand and the method of treating it. One of his great contributions was to establish and popularize the idea that compensatory fiscal policy is the most powerful means of maintaining the right level of aggregate demand. One cause of the unsatisfactory conditions of the 1930s, he believed, was the accumulation of reserves in the Old Age Insurance Fund. This meant that purchasing power was being hoarded. The recovery of the 1930s was, according to Hansen’s theory, a consumption recovery generated by a $4,000 million expansion in con sumer installment credit and by $14,000 million of federal expenditures for recovery and relief; and it vanished when these two stimuli were played out. Hansen was among the earliest to develop a pumppriming policy to deal with recessions.

In the 1930s Hansen’s stagnation theory attracted much attention, but in the prosperous 1940s and 1950s its validity was doubted and even ridiculed. Detractors of the theory did not take into account, however, the extent to which World War created a pent-up and temporarily sustained demand, which Hansen had predicted but which he did not expect to be permanent. By the late 1950s Hansen appeared to be vindicated: demand was insufficient to curb the rise of unemployment that resulted from productivity gains and the inflow of new entrants into the labor market. (This influx rises with improved conditions and requires an even larger increase in output—and consequently an increased demand—to prevent rising unemploy ment.) And it was the expansion of government, which Hansen had advocated and which his critics had considered absurd, that served to prevent the stagnation that Hansen had warned against. Ironically, the same critics who had denied that the slowing of population growth could depress busi ness were predicting booms for the 1960s as the result of the acceleration of population growth.

In the 1930s Hansen anticipated some of the problems that were to confront the United States in the 1960s (see 1938b, pp. 303-318). Unlike Keynes, he was not inclined to assume that if general demand is adequate, most of our problems will be solved. He found that between 1870 and 1930 the rise in the white-collar group was six times as large as that of other classes and that the gains of the managerial and professional classes had also been large. He related this relative growth to the large amount of unemployment among unskilled workers and concluded that these workers needed more education. He was well aware that although adequacy of demand is crucial, there are some pockets of unemployment that must be treated directly, for example, the mining areas and the textile towns.

Keynes’s theory was broadly conceived and left much for others to do. He was not concerned about the consequences of a rising national debt, and Hansen was able to show that the elimination of the national debt would raise more problems than it would solve. Interested in the consumption function, Keynes was aware of the relation of consumption to tax structure; but it was Hansen, in his State and Local Finance in the National Economy (Han sen & Perloff 1944), who revealed the perversity of modern state and local tax systems and spelled out the required tax and spending policies for periods of boom and depression. In this book Hansen revealed that a basic inadequacy of fiscal policy in the 1930s was the lack of control over state and local government contributions to total spending. In periods of boom these governments, with their slight dependence on income taxes, were unable to achieve the automatic rise of tax receipts that would help contain the boom, while in a period of depression they aggravated the economic situation and discouraged consumption when they compensated for the declining yield of direct taxes by an increasing recourse to consumption taxes.

Today there is wide acceptance of views that were generally rejected before Keynes’s General Theory was published—witness the 1964 federal tax cut. Among the innovations in economic thinking that owe much to Hansen’s influence are the following: an appreciation of the importance of keeping interest rates low enough vis-á-vis the marginal efficiency of capital to assure adequate investment; an awareness that the level of investment depends not only on interest rates and the marginal efficiency of capital but also on the relation of consumption and income, and that without adequate consumption investment outlets will soon dry up; the concept of an equilibrium in modern economies at a point far below full employment, with full employment only a ’limiting point of the whole range of possible positions of equilibrium“; a policy of national debt management that does not only strive to keep interest costs at a minimum but also considers the effects on the economy of issuing securities when rates are low and money is being created to stimulate the private economy. Hansen deserves as much credit for these advances as any American economist. He helped clothe the Keynesian skeleton, and his simple, clear presentation, in the classroom and out, won many adherents to the New Economics.

Hansen did not, however, limit his work to the elaboration of Keynesian economics. He had, for example, much to say about international monetary policy, and he contributed to the creation of the International Monetary Fund. Yet even in this area he was influenced by Keynes (1944), asserting that international disequilibrium prevails even if gold or foreign exchange reserves are not being reduced, so long as the domestic restraints which are used to conserve reserves bring about unemployment. Adequacy of demand is crucial. Hence the need to keep international reserves large enough so that temporary imbalance can be treated, thus leaving enough time to deal with structural change.

As an economic analyst, also, Hansen made significant contributions. Here are but a few examples: (1) The familiar diagram with the marginal cost curve cutting up through the unit cost curve at its bottom seems to have been first presented by Hansen in the 1920s. (2) About 1930, when the Anglo-Saxon literature stressed monetary factors in cycles, Hansen (with D. H. Robertson) was one of the few to stress real fluctuations in exogenous investment opportunities, in the fashion of Marx, Tugan-Baranovskii, Spiethoff, Cassel, Schumpeter, and other Continental writers. (3) Hansen pio neered accelerator-multiplier models, and he and Keynes stressed the importance for investment of steady income growth. (4) He and some of his students were among the independent discoverers of the balanced-budget multiplier theorem. Associated with Hansen in this discovery were such economists as William A. Salant, Paul A. Samuelson, Harold Somers, and Henry C. Wallich, and the theorem was also discovered in Denmark by J. Galting and in the United Kingdom by Keynes and N. Kaldor. (5) Independently of J. K. Galbraith, Hansen emphasized the important social utility at the margin of the public sector as against the private sector.

The diversity and the importance of Hansen’s contributions to the theory and application of economics place him among the great economists of recent times.

Seymour E. Harris

[For the historical context of Hansen’s work, see the biography ofKeynes, John Maynard. For discussion of the subsequent development of his ideas, seeFiscal policy.]

WORKS BY HANSEN

1921 Cycles of Prosperity and Depression in the United States, Great Britain and Germany: A Study of Monthly Data 1902–1908. University of Wisconsin Studies in the Social Sciences and History, No. 5. Madison: Univ. of Wisconsin Press.

1927 Business-cycle Theory: Its Development and Present Status. Boston: Ginn.

1932 Economic Stabilization in an Unbalanced World. New York: Harcourt.

1936 Mr. Keynes on Underemployment Equilibrium. Journal of Political Economy 44:667–686.

1938a The Consequences of Reducing Expenditures. Academy of Political Science, Proceedings 17:466–478.

1938b Full Recovery or Stagnation? New York: Norton. → See especially pages 303-318 on “Investment Outlets and Secular Stagnation.”

1941 Fiscal Policy and Business Cycles. New York: Norton.

1944 A Brief Note on “Fundamental Disequilibrium.” Review of Economics and Statistics 26:182–184.

1944 hansen, alvin H.; and perloff, harvey S. State and Local Finance in the National Economy.NewYork: Norton.

1945 America’s Role in the World Economy. NewYork: Norton.

1947 Economic Policy and Full Employment. NewYork and London: McGraw-Hill.

1947 hansen, alvin H.; and samuelson, paul A. Economic Analysis of Guaranteed Wages. U.S. Bureau of Labor Statistics, Bulletin No. 907. Washington: Government Printing Office.

1949 Monetary Theory and Fiscal Policy. NewYork: McGraw-Hill.

(1951) 1964 Business Cycles and National Income. Enl.ed. New York: Norton.

1953 A Guide to Keynes. NewYork: McGraw-Hill.

1957 The American Economy. NewYork: McGraw-Hill.

1960 Economic Issues of the 1960s. New York: McGraw-Hill.

1965 The Dollar and the International Monetary System. NewYork: McGraw-Hill.

SUPPLEMENTARY BIBLIOGRAPHY

An Economic Program for American Democracy, by Seven Harvard and Tufts Economists. 1938 NewYork: Vanguard.

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Alvin Hansen

Alvin Hansen

The influential economist Alvin Hansen (1887-1975) brought the 1930's Keynesian revolution in economics to the United States. He was a prolific writer who also played significant roles in the creation of the Social Security System and the Council of Economic Advisors.

Alvin Hansen was born at Viborg, South Dakota, on Aug. 23, 1887, to Danish parents. He graduated from Yankton College in South Dakota in 1910 and worked several years as a high school teacher, then principal, then county school superintendent, before returning to school for graduate studies, which he completed at the University of Wisconsin in 1918. He taught at Brown University until his appointment at the University of Minnesota in 1923. His major works in this period on business cycles and economic stabilization were in the neoclassical economics tradition.

In 1937 he accepted a prestigious appointment as Lucius N. Littauer Professor of Political Economy at Harvard University. Hansen's seminar on fiscal policy created a generation of graduate students, such as Paul Samuelson and James Tobin, who supported Keynesian economics. His 1938 book Full Recovery or Stagnation? was based on but a few paragraphs of Keynes's The General Theory of Employment, but it was an extended argument that employment stagnation would continue for decades to come. Ultimately, stagnation theories became more associated with Hansen, rather than Keynes. His 1941 book on fiscal policy and business cycles was the first major work in the United States to entirely support Keynes's analysis of the causes of the Great Depression, and he used that analysis to support Keynes's mainstay of deficit spending.

Hansen was much more than just a disciple of Keynes. He found serious mistakes in Keynes's presentation; he implemented Keynes, for example, by developing tax and spending models which clarified tax and spending policies as weapons in Keynes's arsenal, and he criticized Keynes for putting too much faith in interest rates and monetary policy. Still, one of his most influential teaching devices was his book, A Guide to Keynes, which took students through Keynes's General Theory chapter by chapter and, at times, paragraph by paragraph.

Hansen's teaching, in essence, was that government should not put the main burden of inflation control on unemployment by its inaction. He thought inflation control should be exercised by timely changes in tax rates, by appropriate changes in the money supply, and by effective wage-price controls. He was said to be "a sparkling teacher." He wrote fifteen books, including an account of the Bretton Woods Conference that helped to establish the World Bank. His books were widely translated and read world-wide.

During the Roosevelt and Truman years, Hansen was of considerable influence in shaping fiscal policies as a member of numerous government commissions and as consultant to the Federal Reserve Board, the Treasury Department and the National Resources Planning Board. In 1935, he helped create the Social Security System and in 1946, he helped in the drafting of the Full Employment Act which among other things created the Council of Economic Advisors. Hansen also served as Vice President of the American Statistical Association and President of the American Economics Association.

After retiring from Harvard University in 1957, Hansen taught at the University of Bombay and at numerous American universities almost to his death in 1975.

Further Reading

Robert Lekachman, The Age of Keynes (1966), has a long and interesting analysis of the influence of Hansen on the development of Keynesian thought in America; Joseph Dorfman, The Economic Mind in American Civilization, vol. 5 (1959), focuses on Hansen's early career; Ben B. Seligman, Main Currents in Modern Economics: Economic Thought since 1870 (1962), discusses Hansen's entire career; For more recent works about Hansen, see the article by some of his former students in Quarterly Journal of Economics, Feburary, 1976; and W. Breit and R.L. Ransom, The Academic Scribblers: American Economists in Collision (1982). □

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