Monetary theory and fiscal policy:the insights of Alvin Hansen

One of the greatest interpreters of J.M.Keynes was the American economist Alvin Hansen whose A Guide to Keynes became a staple for beginning macro students during the 1950s and sixties. Hansen made several important errors of interpretation and the IS LM apparatus is named after him and John Hicks. As I have argued on a number of occasions  the linear Keynesian cross and the IS LM apparatus ignores the curvilinear core of Keynes’s analysis and the central role of uncertainty in the investment process but it is still useful on other aspects of Keynes’s approach. Less well known than A Guide To Keynes  is Hansen’s 1949 publication Monetary theory and fiscal policy which presents a very insightful analysis of how monetary theory, the quantity theory and Keynes’s breakthrough are inter- connected. I propose over several blog posts to explore aspects of this seminal work to see what we can uncover that still is of use in puzzling our way through the paradoxes of the current crisis and recovery.

Hansen’s work begins with a very perceptive remark by the editor, the Keynesian Seymour Harris that Hansen “shows the importance of money in the theory of output as a whole.” (p.ix) Hansen was Professor of Political Economy at Harvard and had written extensively on business cycles, secular stagnation and the depression before he became an advocate  of Keynes’s analysis. He played a major role in spreading Keynes’s insights throughout the U.S. and Canada.

Hansen begins by exploring the relationship of the quantity of money that the public wishes to hold as  a proportion of the money income. This was originally in Alfred Marshall’s economics known by the symbol k as in M=kY.

A number of earlier economists including  Petty,Hume, and Locke estimated k and explored why money had increased far more than prices implying that the demand for holding money had increased as market capitalism had evolved.

Marshall developed the analysis as M=kY+k’A in which M was money that is currency plus demand and time deposits and A the aggregate value of assets , k as the fraction of income they wish to hold as money and k’ the fraction of assets which people prefer to hold as money. Hansen points out that Marshall’s use of A for assets and k’ the proportion of assets that people wish to hold as cash is still quite useful , particularly in an economy in which finance capital is dominant.(pp2-3) Hansen  introduces a table which covers the years 1800 to 1947 which shows the U.S. national income, total deposits and currrency i.e. M2 and k the ratio of money to income for selected years during this period. It shows k clearly and steadily rising over these 147 years from 0.05 in 1800 to 0.51 in 1900 to 0.81 in 1947. What is very interesting is that in 2012 this ratio k is about 0.78 . Hansen also traces the price trend over these years and discovers that there are two periods of rising prices 1840-1870 and 1900-1947 and two of falling prices 1800-1840 and 1870-1900. Yet during each of these periods the money supply kept on expanding.

” These data(according to Hansen) suggest that there is no invariant relation of money income to the money supply. The quantity of money may indeed affect the level of income but the connection is a tenuous one.” (p.6) Hansen also presents data on real income per capita which shows that it grew steadily in 1926 dollars from 132 in 1800 to 940 in 1947.(p.7) Over the past few years in the U.S. the real per capita income of the bulk of the population has not increased at all.In fact overall real per capita disposable income has fallen. This fact and the high unemployment which accompanies it is at the heart of the current crisis.


About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
This entry was posted in austerity, business cycles, classical economics, Federal Reserve, fiscal policy, full employment, J.M.Keynes, Milton Friedman and NAIRU, monetary policy, quantity theory of money, U.S., Uncategorized. Bookmark the permalink.

2 Responses to Monetary theory and fiscal policy:the insights of Alvin Hansen

  1. Susannah Benady says:

    Can you comment on Lagarde’s statement that Britain (and others?) should cut interest rates to zero and introduce more quantitative easing?

    • Thank you for your comment and question ! the misguided austerity policy that Britain and the rest of Europe has pursued over the past two years has resulted in the deepening of the recession in Britain and in large chunks of Europe. The suggestion that Britain should resort to more quantitative easing in order to lower interest rates to zero is good as far as it goes. But one must go further and undertake major employment focused investment projects which involve stimulating both employment and aggregate demand and at the same time abandoning the budget cutting bias of policy for the time being thereby allowing for positive growth and the eventual reduction of the debt to GDP ratio in future years when real recovery has taken strong hold. Easing the inflation target would also be a good idea to promote growth.

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