Published by EH.N ET (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.
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
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
, 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
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 sect ors. 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
the se 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
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
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
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 19 50s 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.
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
-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 a theoretical 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.
Robert Leeson, 1997. “The Political Economy of the Inflation-Unemployment
Trade-Off.” History of Political Economy, Vol. 29, No. 1 (Spring):
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).
. 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).