Harvard Economists and the Depression
To understand the context in which Samuelson encountered Hansen, it is important to understand the widespread skepticism toward using government spending to cure depression. The prevailing view, consistent with what Samuelson had been taught at Chicago, was laid out in a book written by seven Harvard professors, The Economics of the Recovery Program.12 Published in the second year of Franklin Roosevelt’s New Deal, and the year before Samuelson arrived at Harvard, it analyzed the measures so far taken to promote recovery.
It claimed to do this in a nonpartisan spirit, contending that because the authors held different political views, such agreement as there was reflected their scientific training.13 They asserted that their views were a long way from nineteenth-century liberalism, with its focus on laissez- faire, but the essays were generally pessimistic about whether the measures Roosevelt had introduced would be effective. The reason was not that the measures were too limited, for more radical measures would be subject to the same criticisms.Schumpeter started the book by reviewing past depressions, concluding that not only would recovery eventually come about by itself but that it was best it came about by itself. Measures to mitigate the worst effects of the Depression (presumably unemployment benefits) were needed, but it was important that such measures not injure the economic organism and that necessary readjustments be allowed to take place. While he struck an optimistic note in arguing that recession would eventually end, he was fatalistic in arguing that government could do nothing to speed up the process.
Measures to promote recovery by raising demand were covered by Edward Chamberlin, Seymour Harris, and Douglass Brown. Countering the popular view that purchasing power was too low and needed to be increased—“under-consumptionism,” an idea in wide circulation in popular writing since the nineteenth century—Chamberlin argued that the notion of raising purchasing power was misconceived, whether the measures to achieve it took the form of raising consumption or raising wages.
Consumption could be raised only at the expense of investment, so measures to raise consumption would benefit one sector of the economy at the expense of another. Raising wages would benefit employed workers, but only at the expense of the unemployed and of other classes. It might also be counterproductive in that high wages might induce companies to mechanize production and reduce employment. Many New Deal measures were aimed at raising prices, thereby raising incomes in the sectors affected.Harris offered a wide-ranging discussion of such policies, and saw that it might be possible to stimulate recovery by devaluing the dollar, thereby raising prices and making the world's stock of gold (now worth more dollars) go further. He argued that moderate, controlled inflation was a possibility, and that it was wrong to argue, drawing on memories of wartime experience and what had happened in parts of Europe in the 1920s, that the country faced a choice between deflation and uncontrolled inflation. However, though less pessimistic than Chamberlin, Harris could hardly be described as optimistic about the prospects for promoting recovery.
Similarly, though Brown argued that public works could contribute to recovery, the thrust of his essay was to stress the difficulties involved. It was, for example, important that such spending be undertaken “when the maladjustments which preceded the depression have been sufficiently wiped out so that an increase in production and employment, once started, may continue,” and that it was sufficiently large and well targeted—all difficult to achieve because of “lack of precise knowledge” and “administrative difficulties and impediments.” None of the contributors was optimistic about finding a remedy for the Depression.
Other members of the department would have endorsed the generally pessimistic tone of Economics of the Recovery Program. For example, Haberler, while he recognized that public works spending could contribute to recovery, took the view that such schemes raised “numerous and complicated problems of a fiscal, administrative and political nature.”14 He also noted that “[i]t is by no means easy (though it is not impossible) to find methods of raising the necessary funds, apart from an alarming expansion of central-bank money, without giving rise at the same time or later to a decrease in the flow of money at some other point of the economic system.” Similarly, in discussing wage cuts, Haberler presented it as depending on many factors, qualifying his conclusion that wage cuts would help end a contraction with the remark, “if we carry the argument to its logical conclusion.”15 He noted that wage cuts might work if accompanied by public works spending (the inflationary effects of such spending would counter the deflationary effects of cutting wages), but he hedged this otherwise optimistic conclusion with many qualifications.
Haberler's Prosperity and Depression appeared very soon after the General Theory, meaning that Haberler had had only a short time to digest Keynes's ideas.
In the first edition, discussions of Keynesian concepts were isolated and often confined to footnotes. He took the view that Keynes's theory was not yet fully understood because Keynes used new concepts without making it clear how they related to well-established ones. He sat on the fence in that he was unsure how far Keynes's differences from conventionally held views were substantive and how far they were merely terminological.Much clearer positions on the Keynes book were taken by other Harvard economists toward the end of 1936. In November 1936, the Quarterly Journal of Economics, edited by the Harvard faculty, carried four critical reviews, including one moderately critical one by the recently retired Frank Taussig, and a much more critical one by Wassily Leontief. Constructing an argument in terms of the theory of general competitive equilibrium, Leontief argued that Keynes's novelty was in denying the “homogeneity postulate”: the idea that if all prices rise in the same proportion, demand will not change.16 He concluded simply that, because Keynes had provided neither a theoretical argument for his position nor convincing empirical evidence, his case was unproven.
The following month, Schumpeter, though paying tribute to Keynes's brilliance, denounced the book as claiming to provide a general theory when it did nothing of the kind.17 It was not even scientific, for it was offering policy advice that was valid only in very specific circumstances. Artificial definitions and highly specialized assumptions were used to produce seemingly paradoxical tautologies that were “invested with a treacherous generality.”18 By abstracting from the dynamics of capitalism, Keynes had lost contact with the modern industrial world.
The following February, Leontief mounted a more sustained methodological critique not just of Keynes but also of the entire Cambridge (UK) school: it was based on “implicit theorizing” that smuggled in unacceptable assumptions through the use of peculiar definitions.19 The General Theory was a treacherous guidebook.
One professor, Sumner Slichter, offered an eclectic and empirical view of the business cycle that led Samuelson to describe him as a closeted Keynesian, though he did not develop any formal theory. Burbank strongly disapproved of the way instructors of Ec. A, the introductory economics course for undergraduates, would insinuate Keynesian heresies into their teaching. One undergraduate who was later to become an eminent Keynesian economist, working closely with Samuelson, was introduced to the General Theory not by any professor but by his tutor, who urged him to read “this new book from England” on the grounds that “They say it may be important.”20Keynes was not popular among the senior members of Harvard's Economics department, but the nature of the opposition varied considerably. Schumpeter and Leontief thought it bad economic theory, resting on illegitimate arguments. A different line of criticism was taken by the majority of the department; they approached the book from the perspective of traditional American business cycle theory, in which many of them had been involved. They did not argue in terms of what came, in the 1940s, to be called a “model,” but engaged in much looser verbal reasoning, constructing accounts in which the existence of many unquantifiable factors made it impossible to draw clear-cut conclusions. Although they did acknowledge that policy could affect total spending, and hence affect output, the absence of any way to judge the relative strength of different forces meant that, even when they reached “Keynesian” conclusions, as some of them did, they were often hedged almost beyond recognition. For example, Slichter's Keynesianism was never explicit.
The lack of formal, mathematical analysis explains why Samuelson had not been an enthusiast for business cycle theory before Hansen's arrival. Excited by the prospects for using mathematics in economic theory, he focused on those fields where his mathematical skills could be used to cut through the confusions found in the literature. His intellectual agenda was not at this point motivated by trying to solve the problem of unemployment—perhaps because he believed there was little government could do, or perhaps because he was caught up in his enthusiasm for mathematical economics. Business cycle theory as presented by his Harvard teachers did not present the theoretical challenge that was needed to get his attention.