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Stagnation Theory: Alvin Hansen

Updated on March 4, 2013
The great economist: Alvin Hansen.
The great economist: Alvin Hansen.

Alvin was born in 1887. He worked as professor of Economics at Harvard. He was a well read professor on matters of current economic issues. He had a great influence on the government of the day. That is how he was able to help in creating the Council of Economic Advisors as well as the popular Social Security System.

Alvin is credited for having introduced Keynesian economics to the US. This was in the 1930s. He was more determined than any other person to make popular the ideas of Keynes. He graduated for his economics degree in 1918 from University of Wisconsin. Immediately after his doctorate, he worked at Brown University. In 1923 he was became a professor at the University of Minnesota where he was an expert in matters of business cycle. Later in 1937, he became a professor of Political Economy at Harvard University in the United States.

In the beginning Hansen was very skeptical about Keynes’s works: The General Theory of Employment, Interest Rates and Money. This point of view changed drastically when in 1938 he embraced those ideas. As Keynes did, he also supports government intervention during times of economic recession. Many great economists were inspired by the works of Hansen. On the top of the list is Paul Samuelson as well as James Tobin. These two economists ended up winning Nobel Prices. The two had build on Keynesian economics.

The most powerful contribution to economics was the IS-LM model. Another name for that model is the Hicks-Hansen synthesis. This is a model that is used to illustrate on how monetary and fiscal policies can be used to make changes to the national income.

Stagnation Thesis

Hansen had a belief that secular stagnation had been reached and the American economy would never have a chance to grow fast as before. This was because he believed that all the ingredients of growth had been exhausted. America had reached its optimum in terms of population growth as well as technological innovations. This thesis became extremely controversial and attracted many critics. Hansen was therefore labeled a pessimist as well as a defeatist. He further proposed that the sole solution was huge deficit spending by the federal government on a regular basis.

In his efforts to defend his ideas, he said that secular stagnation thesis was just another name the underemployment equilibrium used by Keynes. After 1940 when America started experiencing growth, the stagnation thesis was discarded.

Hansen played a great role in shaping public policy. He played a central role more especially during the Truman and Roosevelt reign. He explained his economic principles as a member of various governmental commissions and being a consultant to the Federal Reserve Board, National Resource Planning Board as well as working with the United States Treasury.

The IS-LM curve.
The IS-LM curve.

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    • RonElFran profile image

      Ronald E Franklin 4 years ago from Mechanicsburg, PA

      I think the history of the last century and a half shows that any theory built on the assumption that technological innovations will be exhausted is probably doomed to failure. Not even the most prescient economist could have foreseen in the 1930s the economic dynamo that would be unleashed by computer and internet technology. Thanks for an informative hub.

    • conradofontanilla profile image

      conradofontanilla 4 years ago from Philippines

      Let's try to approach the subject this way. The subjects of astro physics are determinate. The laws that govern them or they follow are immutable. When we deal with small objects in physics like wave and particles, the elements are highly predictable or their transformations are predictable like mass is convertible to energy, and nothing is lost. Whereas in economics, emotions are volatile. The impulse to buy is not highly predictable. An emotion may dissipate, whereas an electron will not. Economics can still be an exact science in that it deals with concepts and relationships among concepts. Some are amenable to mathematical expressions.

      One element of economics must be scrutinized, like its being an invention. Capitalism as a system is an invention. Some of its elements are conventions that have no physical basis. A system as we know has its internal logic. If that logic were violated the result would be different from what is expected. A good analogy is the game of chess that is an invention. It has rules and internal logic. When one or several of its rules were violated it ceases to be the one as established long time ago. Chess is a game played by people. And people can change its rules. We know that there are people who know the internal logic of capitalism and they know how to change the rules. Or they have the power to change the rules. In physics, if an astronaut does not follow the correct angle, according to the theory of relativity, in coming back to earth from space travel he will bounce back to space and become marooned there. In economics, the powerful knows what rule to change to his advantage and can put it back once he had attained his objective. He is not jailed if his misdemeanor were detected. Or he will not be marooned like the errant or ignorant astronaut.

      For example, interest rate. In the US since the interest rate is controlled by the Federal Reserve Bank, its chairman can raise or lower interest rate and not even the president of the US can stop him.

    • gkerosi profile image
      Author

      Geoffrey Kerosi 4 years ago from Nairobi

      I agree with you on the issue of malleability. Economics is not an exact science. This is due to a number of factors. Some of the important factors include: Economics tries to predict human emotions which are subject to change. Human behavior cannot be measured accurately by Mathematical equations.

      I also agree that Einstein played a central role in laying the general framework through his Theory of Relativity.

    • conradofontanilla profile image

      conradofontanilla 4 years ago from Philippines

      Agreed on modifications. In fact, Einstein said a theory consists of concepts and relationship(s) among concepts. So modifications can be done on concepts and relationships. Or use new ones. Einstein said creativity comes in in coming up with concepts and relationships. They must be defined precisely and once verified, they must be maintained.

      Agreed that a theory explains and predicts.

      Economics is a little more malleable than physics or chemistry.

    • gkerosi profile image
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      Geoffrey Kerosi 4 years ago from Nairobi

      Changes and Modifications can be made on Economic Theories. This is usually done after getting contrary results to the theory's original predictions. At this point in time, economists try to re-evaluate the experimental design to determine its soundness. If it is as required, they replicate the experiment for accuracy reasons. That way, theories can be improved every time they seem not to hold water. The improvements can be major or in some cases minor changes are made. Successful modifications are known to build on each other. That way the theories gain more predictive power. That is how accuracy is improved over time.

    • gkerosi profile image
      Author

      Geoffrey Kerosi 4 years ago from Nairobi

      The problem with Stagnation Thesis is that Hansen did not factor in the increased consumption after the 2nd World war originating from the forced investments after government rationing.

      World governments started thinking in terms of Keynes Economics after the war. That explains how Keynes' policies gained momentum at that time.

      The verification of economic theories takes a lot of time. They have to be proven right in all situations before they are declared water-tight theories. I think in that respect we can call it "Stagnation Thesis". It has to be refined to qualify as a proven theory. What is you think?

    • conradofontanilla profile image

      conradofontanilla 4 years ago from Philippines

      If the assumptions did not hold then there is no theory. Einstein made Lorentz transformation as one of his assumptions in his special and generalized theory of relativity. This transformation says that the laws of nature in one coordinating system (galaxy for example) are the same as in another coordinating system. He could not verify this. In fact, no one had verified it because there is no spacecraft that can go to another galaxy and make observations. The Lorentz transformation was proven by means of deduction not by induction. That is, it holds.

    • gkerosi profile image
      Author

      Geoffrey Kerosi 4 years ago from Nairobi

      Thank you conradofontanilla, balanced budgeting is a planning situation where the revenues are equal or greater than the government expenditures. On the other hand, Stagnation Theory is used to explain the effect of a war on the economy. Unfortunately, the assumptions held did not hold.

    • conradofontanilla profile image

      conradofontanilla 4 years ago from Philippines

      I remember Keynes concepts like interest, as a reward for parting from one's money. Aggregate demand, as consolidated demands of individuals, and effective demand which is availability of means to buy. In deficit budgeting, the economy expands by the extent of the deficit. That way it stimulates the economy. Given that Keynes theory is capitalistic. No quarrel about that. It is funny but even among capitalists there is disagreement. Bernard Baruch, a wall streeter and member of the American delegation in the Paris conference after WWI ignored the Keynesian theory. Keynes was a member of the British delegation. How does balanced budgeting differ from stagnation theory? Investment, Keynes said, is deferment of expenditure if I remember it right.

    • gkerosi profile image
      Author

      Geoffrey Kerosi 4 years ago from Nairobi

      Hello Conradofontanilla,

      Thank you for reading this hub and leaving a comment. The Keynesian economics had strengths and weaknesses. But at the time when they were introduced there were more strengths than the weaknesses.

      Some of the major strengths includes:

      Government spending played a great role in stimulating the economy. Keynes argued that the government had to be involved in stimulating the economy.

      The government uses the power of taxation to distribute a country's wealth.

      Major Weakness:

      Keynesian economics are mostly regarded as a depression economics to offer temporary solutions. Other critics argue that it is a capitalistic theory.

      Despite these weaknesses, the theory played a key role in rejuvenating world economies.

      On the other hand, stagnation theory failed when the economy which was supposed to fail, flourished due to the investments people made by buying government bonds during the Second World War. This is what was converted into increased consumption...

    • conradofontanilla profile image

      conradofontanilla 4 years ago from Philippines

      I am interested in the concepts and relationships between these concepts of his theory. I had a copy of Keynes book you mentioned when I could not yet fully appreciate Keynes economics. I understand, so I think, his deficit budgeting recommendation that is now being applied by governments.

    • profile image

      willmose 4 years ago

      well...well....

    • gkerosi profile image
      Author

      Geoffrey Kerosi 4 years ago from Nairobi

      Hello HSchneider,

      Thank you for reading this hub and leaving a comment. We will learn a lot from the failures of these great men. It is our sincere hope that our contemporary economists will do better!

    • profile image

      Howard Schneider 4 years ago from Parsippany, New Jersey

      Great Hub, Gkerosi. I think Hansen was an excellent economist but he failed to take into account the huge changes in technology that were and continue to be introduced.

    • gkerosi profile image
      Author

      Geoffrey Kerosi 4 years ago from Nairobi

      Jewel01, thank you for your comment. I will read that book by Chomsky.

    • Jewel01 profile image

      Julie Buchanan 4 years ago from Michigan

      Great hub. I think you might be interested in a book by Noam Chomsky, Manufacturing Consent. It is interesting how they propped up the economy after WWII. Thank you for the unbiased information.

    • gkerosi profile image
      Author

      Geoffrey Kerosi 4 years ago from Nairobi

      1887. That was a technical error. Thank you for pointing it out.

    • pstraubie48 profile image

      Patricia Scott 4 years ago from sunny Florida

      He was born when??