Alvin Hansen

• 1. Introduction

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  Alvin Harvey Hansen was born on the 23rd of August 1887 in Viborg, South Dakota, the son of a farmer. He died in 1975 having done more to shape American economic policy than perhaps any other economist of his century. Paul McCracken, chairman of the President's Council of Economic Advisers, said exactly that in 1967: "It is certainly a statement of fact that you have influenced the nation's thinking about economic policy more profoundly than any other economist in this century." Yet outside economics classrooms, Hansen's name has largely faded. How did a farmer's son from South Dakota become the man who brought Keynesian economics to America? And what happened to the stagnation thesis that made him famous, and then notorious, and then famous again?

• 2. From Viborg to Harvard

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  Yankton College, a small school near Hansen's South Dakota hometown that would later close in 1984, granted him a degree in English in 1910. That background in the humanities shaped a writer who would later reach audiences far beyond academic journals. He enrolled at the University of Wisconsin-Madison in 1913 to study economics under Richard Ely and John R. Commons, two scholars who believed the discipline existed to address pressing social problems. That outlook never left him. He finished his coursework for the PhD in 1916, then taught at Brown University while completing his dissertation, a study called "Cycles of Prosperity and Depression," which was published in 1921. He moved to the University of Minnesota in 1919 and rose quickly enough to reach the rank of full professor by 1923. His 1927 book Business Cycle Theory and an introductory text he co-wrote with Frederic Garver the following year brought him to the attention of economists nationwide. A Guggenheim grant funded European travel during 1928 and 1929, and the resulting book, Economic Stabilization in an Unbalanced World, published in 1932, placed him in the broader conversation about public affairs. In 1932 he was also elected a Fellow of the American Statistical Association. When Harvard invited him to occupy the new Lucius N. Littauer Chair of Political Economy in 1937, he arrived at the institution where he would have his greatest influence.

• 3. The Convert and His Seminar

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  When Keynes published The General Theory of Employment, Interest and Money, Hansen reviewed it with skepticism. His initial doubts did not last long. By December 1938, delivering his presidential address to the American Economic Association, he had fully embraced Keynesian ideas about government intervention during recessions. The reversal was dramatic, and the timing was decisive. Hansen's graduate seminar on fiscal policy at Harvard became one of the most consequential classrooms in the history of American economics. Students who sat in that room included Paul Samuelson and James Tobin, both of whom would later win the Nobel Prize in Economics. Samuelson credited Hansen's 1938 book Full Recovery or Stagnation? as the main inspiration for his own multiplier-accelerator model of 1939. Hansen's 1941 book Fiscal Policy and Business Cycles was the first major work published in the United States to offer complete support for Keynes's account of what caused the Great Depression. He used that analysis to argue for deficit spending as a deliberate policy tool. Later work, including America's Role in the World Economy in 1945 and Economic Policy and Full Employment in 1947, carried the case to a wider public audience.

• 4. The IS-LM Framework

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  John Hicks, working alongside Hansen, helped develop what became known as the IS-LM model, or the Hicks-Hansen synthesis. The model captures, in a single diagram, the relationship between two curves: the investment-saving curve, labeled IS, and the liquidity preference-money supply curve, labeled LM. The diagram provides economists and students with a way to visualize how changes in fiscal and monetary policy ripple through to affect national income and GDP. It became a standard tool in mainstream economics textbooks and remains one. Hansen also testified before Congress on multiple occasions to argue against using unemployment as the primary weapon against inflation. He insisted that inflation could be managed through changes in interest rates, tax rates, and controls on wages and prices. That position shaped decades of American policy debate. His 1938 book Full Recovery or Stagnation presented the case that without active government intervention to stimulate demand, both growth and employment would stagnate over the long run.

• 5. Secular Stagnation

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  In the late 1930s Hansen put forward a proposition that provoked fierce argument: the American economy had entered a state of permanent, or "secular," stagnation. His claim was that all the ingredients that had driven growth historically, including technological innovation and population growth, had played out. Without large-scale, ongoing deficit spending by the federal government, he argued, rapid growth would never return. George Terborgh was among those who attacked him as a pessimist and a defeatist. Hansen replied that secular stagnation was simply another name for the underemployment equilibrium that Keynes had already described. The sustained economic expansion that began in 1940 appeared to disprove the thesis, and for a long time it was set aside. In later decades, however, theories of economic stagnation came to be associated more closely with Hansen's ideas than with Keynes's, suggesting that the question he raised was never entirely answered, only deferred.

• 6. Policy Architect

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  Hansen's influence on actual government structures was direct and lasting. In 1935 he helped create the Social Security system of the United States. In 1946 he assisted in drafting the Full Employment Act, the legislation that, among other things, established the Council of Economic Advisors. Starting in 1940 and continuing through 1945, he served as special economic adviser to Marriner Eccles at the Federal Reserve Board. During the Roosevelt and Truman presidencies he served on commissions and as a consultant to the Federal Reserve Board, the Treasury, and the National Security Resources Board. Between 1939 and 1945 he also served as co-rapporteur to the economic and financial group of the Council on Foreign Relations's War and Peace Studies project, working alongside Chicago economist Jacob Viner. Hansen's advocacy of Keynesian policies for post-war full employment, pursued together with Luther Gulick during World War II, helped persuade Keynes himself to engage with plans for the postwar international economy. Not everyone approved. Journalist John T. Flynn argued that Hansen's policies bore alarming similarities to the economic program of Benito Mussolini, whom he called a de facto fascist influence. The American Economic Association awarded Hansen its Walker Medal in 1967, the same year McCracken offered his tribute. After retiring from active teaching in 1956, Hansen continued writing; The Dollar and the International Monetary System appeared in 1965.