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.
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.