Источник: International Journal of Social Economics, 1995, Vol. 22 Issue 3, p24, 7p
JOHN MAYNARD KEYNES AND ALVIN HANSEN
Contrasting methodologies and policies for social economics
The two economists most responsible for the Keynesian revolution were John Maynard Keynes and Alvin Hansen. Keynes originated and developed his general theory of employment; Hansen extended the theory and transformed it into his own neo-Keynesian theory, which he popularized in the USA. Although both of these distinguished economists were in complete agreement concerning the validity and usefulness of the Keynesian system, they utilized different methodologies and drew different conclusions with respect to economic policy. The purpose of this article is to contrast the respective methodologies and policy implications of Keynes and Hansen, and to investigate the suitability and usefulness of these methods and policies for social economics.
Methodology is applied epistemology; therefore, an understanding of methodology presupposes some knowledge of epistemology and logic. Epistemology is that branch of philosophy which deals with the origin and nature of knowledge. There are two basic epistemologies: rationalism and empiricism. Rationalism is based on the presumption that the exclusive source of true knowledge is the reasoning power of the human intellect. Rationalism is compatible with deductive logic, which involves reasoning from the whole to the parts or from general principles to particular applications. Empiricism is based on the presumption that the exclusive source of true knowledge is the perception of experience through the five senses: seeing, hearing, smelling, tasting and touching. Empiricism is compatible with inductive logic, which involves reasoning from the parts to the whole or from particular observations to general conclusions (Gellner, 1964; Pribram, 1983, pp. 31-135; von Mises, 1981).
John Maynard Keynes
John Maynard Keynes' theory of employment is based on a rationalistic epistemology and deductive logic. It consists of a series of analytic propositions, which are true by definition, and synthetic propositions, which are working hypotheses. Keynes used these propositions to develop logical arguments which led him from his assumptions to his conclusions. He assumed that money serves not only as a medium of exchange, but also as a store of value. He concluded that the economy can be in equilibrium at less than full employment. He criticized and rejected the classical theory, which implied that substantial unemployment is a temporary and self-correcting abnormality. He developed a new theory which holds that substantial unemployment is completely normal and can be permanent because the market economy is incapable of correcting unemployment problems (Keynes, 1936, pp. 3-34). Keynes defined the aggregate supply price as the proceeds which would be necessary to motivate entrepreneurs to offer a given level of employment. The aggregate supply function is the functional relationship between the level of employment and the aggregate supply price. He defined the aggregate demand price as the proceeds which employers expect to receive from a given level of employment. The aggregate demand function is the functional relationship between the level of employment and aggregate demand price. According to Keynes, the equilibrium level of employment is determined by the aggregate supply function and the aggregate demand function. The equilibrium level cannot be greater than full employment, but the economy can be in equilibrium at less than full employment (Keynes, 1936, pp. 23-32, 89-91).
Aggregate demand consists of the demand for consumption goods and the demand for investment goods. The independent determinant of consumption demand is the propensity to consume, which is the functional relationship between consumption expenditures and income, when both expenditures and income are expressed in wage units. Keynes explicitly assumes that the propensity to consume is positive, but less than one. The marginal propensity to consume is the proportion of an infinitely small increase in income which would be spent on consumption. Keynes implicitly assumes that the marginal propensity to consume varies inversely with income. The propensity to save is the functional relationship between savings and income, and the marginal propensity to save is the proportion of an infinitely small increase in income that would be saved. Keynes assumed that the propensity to save is positive and greater than one, and that the marginal propensity to save varies directly with income. These assumptions imply that whenever income increases, consumer spending will increase, but the increase in consumer spending will always be less than the increase in income. Therefore, if all of the increased production consists of consumption goods, the demand for these goods will always be less than the increase in income. Therefore, if all of the increased production consists of consumption goods, the demand for these goods will always be inadequate to take them off the market at profitable prices. Given the propensity to consume, the level of employment will be determined by the amount of investment (Keynes, 1936, pp. 27-32, 89-131).
The independent determinants of the level of employment, therefore, are the propensity to consume and the inducement to invest, which is the relationship between the marginal efficiency of capital and the interest rate. The marginal efficiency of capital is the discount rate which would equate the present value of the expected returns from a capital asset to the supply price of the asset. Interest rates are determined by the quantity of money and the strength of the liquidity preference, which is the preference for holding assets in the form of money or its equivalent, instead of some less liquid form. The strength of the liquidity preference is based on the three motives for liquidity: the transactions motive, the precautionary motive, and the speculative motive (Keynes, 1936, pp. 27-32, 135-209).
Keynes' rationalistic and deductive theory of employment implies a set of governmental policies which should be utilized to solve problems of unemployment. The most important of these implications holds that any time the economy is in equilibrium at less than full employment, the monetary authority should increase the quantity of money enough to cause a significant reduction in the interest rate. If the interest rate is forced down to a sufficiently low point on the schedule of the marginal efficiency of capital, then the inducement to invest will be strengthened and the equilibrium level will be raised to full employment (Keynes, 1936, pp. 372-7).
Moreover, if this expansive monetary policy were utilized to sustain full employment for an extremely long period of time, such an abundance of investment goods would be created that the marginal efficiency of capital would decline very drastically.
This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgement. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour-costs of production plus an allowance for risk and the costs of skill and supervision.
Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital (Keynes, 1936, pp. 375-6).
The elimination of large property incomes and the euthanasia of the rentier would cause a strong tendency towards a more nearly equal distribution of income. This tendency towards equality would increase the marginal propensity to consume and reduce the deflationary gap between the supply price and the demand price of the full employment output - the gap which must be filled with investment in order to achieve full employment. The Keynesian policy of monetary expansion and declining interest rates, therefore, would raise the level of employment towards full employment both in the short run and in the long run.
Alvin H. Hansen
Alvin H. Hansen's theory of employment is based on an empirical epistemology and inductive logic. It consists of a series of empirical generalizations which have been induced from historical experience and applied pragmatically to explain the causes and to specify the solutions for problems of chronic unemployment. Hansen's theory of employment is a perfect complement, for Keynes' conclusions and implications became Hansen's preconceptions and assumptions. Keynes implied that the underlying cause of unemployment is either an inducement to invest which is too weak for the propensity to save, or a propensity to save which is too strong for the inducement to invest (Hansen, 1938, pp. 13-34). Keynes did not enquire into the historical causes of the disparity between the inducement to invest and the propensity to save which had caused the Great Depression of the 1930s. This omission was remedied by Hansen who surveyed more than a century of American economic history to discover the causes of the collapse of the inducement to invest that had brought on the Great Depression. He found these causes in the changing nature of technological innovations, in declining rates of population growth, and in the closing of geographical frontiers (Hansen, 1941, pp. 13-65, 341-65).
Hansen argued that the nineteenth and early twentieth centuries were a period of extremely rapid economic growth, which created unprecedented opportunities for large-scale investment. One cause of these greatly enhanced investment opportunities was technological progress, which caused three long waves of accelerated economic growth and expanded investment opportunities. The first long wave was from 1787 to 1815. During this period, the Industrial Revolution created opportunities for large-scale investment in the mechanization of handicraft industries. The second, from 1843 to 1873, was driven by investment in railroads and in related industries. The third long wave, from 1897 to 1929, involved investment in electrical, automotive, and related industries (Hansen, 1938, pp. 303-18; 1941, pp. 27-47; 1951, pp. 72-6). Another cause of the greatly expanded investment opportunities of the nineteenth and early twentieth centuries was rapid and sustained population growth. The population of the USA increased from about 5,000,000 in 1800 to more than 100,000,000 in 1920 (Hansen, 1939; 1947, pp. 299-305). Still another cause of these unprecedented investment opportunities was geographical expansion into the virgin lands beyond the western frontier. During the nineteenth century, Americans spread their culture across the continent, and they made extremely large investments in the development of the vast resources of the growing nation (Hansen, 1941, pp. 349-65).
During a period of rapid economic growth, such as the nineteenth century, a strong propensity to save performs the valuable social function of protecting the economy from disastrous inflation. It was during this period that the savings habits of the American people were formed. Savings were encouraged by all sorts of social pressures, and the propensity to save was rigidly institutionalized at very high levels. The propensity to save probably rose to even higher levels during the early twentieth century as a result of increasing tendencies towards business saving and institutionalized personal saving, such as insurance (Hansen, 1941, pp. 13-65).
By 1929, according to Hansen, the inducement to invest had collapsed because of the failure of the growth factors which had motivated rapid economic growth during the nineteenth and early twentieth centuries. The electrical, automotive, and related industries were reaching maturity with no rapidly growing new industries to replace them. Moreover, Hansen believed that the nature and quality of technological innovations had changed. He contended that, as the economy matured, the labour saving but capital using innovations of earlier years would be replaced by innovations which are both labour and capital saving (Hansen, 1938, pp. 303-18). The other growth factors were even less favourable. The rate of population growth declined drastically during the decade of the 1920s, and the absolute increment to population decreased for the first time in our history during the 1930s (Hansen, 1939). By the First World War, all of the economic frontiers within the USA had been closed, but Americans could export capital to develop foreign economic frontiers until about 1929, when political instability closed all of the remaining frontiers to American investment. By 1929, therefore, the rapid and sustained growth that had characterized the American economy since 1800 had slowed almost to a halt (Hansen, 1941, pp. 27-47).
With the collapse of the inducement to invest in 1929, full employment could have been sustained only by a drastic reduction in the propensity to save; but the propensity to save had been rigidly institutionalized at very high levels. The inevitable result was the Great Depression.
Actually, the Great Depression was not a phase of the business cycle from which recovery would occur more or less automatically in the natural course of the cycle. Rather, the unemployment was a state of affairs which would last indefinitely, or until some drastic intervention by the government corrected the fundamental imbalance between the propensity to save and the inducement to invest. The condition of the economy during the 1930s was one of secular stagnation (Hansen, 1941, pp. 13-47, 341-65).
Hansen's applied theory of employment implied that a government can stabilize the economy at high levels of employment through the implementation of a compensatory fiscal policy. In order to develop the policy implications of his theory, Hansen utilized a three-sector model of the economy consisting of consumption, investment, and the governmental sector. Hansen contended that income generating governmental expenditures constitute injections into the circular flow of the national income, and that taxes are a withdrawal from the income stream. Governmental expenditures, therefore, would stimulate the economy and tend to raise the level of employment; taxes would depress the economy and tend to lower the level of employment. It follows that the level of employment can be controlled through a fiscal policy of managing and manipulating governmental expenditures and taxes in such a manner as to compensate for the fluctuations in the private sectors of the economy. To solve a problem of unemployment, governmental expenditures should be increased, taxes should be decreased, and the governmental debt should be managed so as to monetize the deficit. Conversely, to solve a problem of inflation, governmental expenditures should be reduced, taxes should be increased, and the surplus should be demonetized. Taxes should be progressive, and governmental expenditures should be regressive. The resulting tendency towards a more nearly equal distribution of income would decrease the propensity to save and reduce the savings gap which must be filled with investments in order to maintain full employment. Hansen's compensatory fiscal policy, therefore, would tend to stabilize the economy at high levels of employment both in the short run and in the long run (Hansen, 1941, pp. 109-222; 1951, pp. 544-56).
The contrast between Keynes and Hansen
The contrast between Keynes and Hansen is complete with respect to both methodology and policy implications. Keynes used an abstract, rationalistic, and deductive methodology to justify a monetary policy of increasing the quantity of money whenever the economy is in equilibrium at less than full employment. Hansen used a historical, empirical, and inductive methodology to justify a compensatory fiscal policy of managing and manipulating governmental expenditures, taxes, and deficits or surpluses in such a manner as to maintain high levels of employment. These distinguished economists differed so completely because they were participating in different phases of the Keynesian revolution, they were addressing different groups of readers, and they were attempting to achieve different objectives.
Keynes participated in the initial phase of the Keynesian revolution by formulating his original and innovative theory of employment and by introducing it to professional economists. Keynes, therefore, proclaims in his preface that the General Theory is addressed chiefly to his fellow economists. His objective is to convert the members of the economics profession from their belief in the classical tradition to an acceptance of his new theory of employment. In order to achieve this objective, Keynes had to express his new theory in the language of classical economics, and to use the rationalistic and deductive methodology of Ricardo, Mill, and Marshall. Moreover, the basic conservatism of the academic economists forced Keynes to use a two-sector model of the economy and to present his policy implications as a modification of traditional monetary policy. These concessions to the classical tradition enabled Keynes to argue that his theory was "moderately conservative" and to persuade professional economists that they should accept and advocate this innovative theory of employment.
Hansen was participating in a later phase of the Keynesian revolution when the theory of employment was being transformed from an abstract and pure theory into a pragmatic and applied theory. His works, therefore, were addressed to a broader readership which included professional economists, governmental administrators, and the general public of educated and interested citizens. Hansen's objective was to specify a set of governmental policies that would solve problems of chronic unemployment and stabilize the economy at high levels of employment. In order to achieve this objective, Hansen had to utilize the methodology of historical empiricism to induce an applied theory of employment which was specifically related to the unemployment problems of the USA during the Great Depression. Hansen anticipated that the governmental sector of the economy would become very much more important in subsequent years; therefore, he used a three-sector model of the economy and advocated a compensatory fiscal policy as the most effective remedy for chronic unemployment. Hansen's pragmatic and applied theory of employment completely dominated American macroeconomics and policy science for at least a generation.
Keynes' pure theory of employment and Hansen's applied theory of employment are not only mutually compatible, but also thoroughly consistent with social economics. Recent research into the methodology of the economic science suggests that deductive rationalism and inductive empiricism are complementary, rather than contradictory, and that a symbiotic relationship should exist between these epistemologies (Hill, 1983). A complete methodology for social economics, therefore, should include both rationalism and empiricism and both deductive and inductive logic. Social economists should utilize both deductive rationalism and inductive empiricism in ways which are creatively complementary and symbiotic. Moreover, it has become obvious that a complete stabilization policy must include both monetary and fiscal policies. Social economists, therefore, should utilize both monetary and fiscal policy in their strategy for stabilizing the economy at high levels of employment.
John Maynard Keynes and Alvin H. Hansen were economists of real distinction and true greatness. Together they revolutionized the economic science in such a manner as to bring economics back into relevance with the real world. All economists should utilize their deep insights into the macroeconomic process and apply their relevant policy implications to the contemporary political and social economy.
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