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

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


, 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).

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).