More on Alvin A. Hansen’s Prediction of a Post-1945 Boom

In a previous post I drew attention to Alvin A. Hansen’s prediction of a US boom after the Second World War in his chapter in Postwar Economic Problems (McGraw-Hill, New York and London).

Let us look further at his chapter.

On pp. 17–18, Hansen assumes a hypothetical model of postwar US GDP in which both private consumption and investment spending would rise considerably from 1943.

Hansen makes it clear that he regarded this as the most probable outcome for the US economy after the war:

“Altogether the various factors enumerated above indicate the great possibilities for the expansion both of consumption and of private investment during the transitional period. Indeed, the potentialities for expansion of consumption and private investment in the immediate postwar period are sufficient to indicate the possibility of a genuine and fairly prolonged postwar boom. The Federal government should, however, be prepared to play a balancing role, checking any temporary tendency toward an excessive boom, and, on the other hand, be prepared to go forward with large Federal expenditures on public improvement projects to compensate for any strong tendency toward deflation and depression.” (Hansen 1943: 18).

So, while Hansen did hedge his bets, in the sense that he thought that any tendency towards “deflation and depression” would require fiscal stimulus, nonetheless he felt there were “great possibilities [my emphasis] for the expansion both of consumption and of private investment during the transitional period. Indeed, the potentialities for expansion of consumption and private investment in the immediate postwar period are sufficient to indicate the possibility of a genuine and fairly prolonged postwar boom.”

Elsewhere, Hansen also made it clear that he was an optimist, and did not share the views of the pessimists about the post-war economy:

“The fact is that many people dread to think of what is coming. Businessmen, wage earners, white-collar employees, professional people, farmers—all alike expect and fear a postwar collapse: demobilization of armies, shutdowns in defense industries, unemployment, deflation, bankruptcy, hard times. Some are hoping for a postwar boom. We got that after the First World War. Not improbably we may get it again. If the war lasts several years, we may have at the end of the war sufficient accumulated shortages in residential housing, in durable consumers' good such as automobiles, and in the plant and equipment required to supply peacetime consumption demands, to give us a vigorous private investment boom. Indeed, we need to be on the alert to prevent a possible postwar inflation. If in fact we do experience a strong postwar boom, there is, however, the gravest danger that it will lull us to sleep. Sooner or later such a boom will end in a depression unless we are prepared. If appropriate action is taken, there is no necessity for a postwar collapse.

Everywhere one hears it said that, when this war is over, all countries including our own will be impoverished. This view is, however, not sustained by past experience. No country need be impoverished if its productive resources (both capital and human) are intact. The productive resources of this country will be on a considerably higher plane when this war is over than ever before. A larger proportion of our population will be trained to perform skilled and semiskilled jobs. We shall have enormous productive capacities in all the machine industries. And in special consumers’ durable industries where plant and equipment may have become deficient by reason of the war, we shall be able very quickly, with our large basic machine-producing industries, to expand to meet the peacetime requirements. We shall have, when the war is over, the technical equipment, the trained and efficient labor, and the natural resources required to produce a substantially higher real income for civilian needs than any ever achieved before in our history.” (Hansen 1943: 12–13).

What emerges from this is that opinion on what would happen after the war was divided. There was indeed some pessimism about the possibility of a severe slump after 1945 amongst certain “[b]usinessmen, wage earners, white-collar employees, professional people, [and] farmers.” It was not some opinion held merely by Keynesian economists (and even amongst Keynesians there were important optimists). In the end, Hansen did not share the pessimistic view, and explicitly stated that he thought the idea was not “sustained by past experience.”

Moreover, there was nothing inherently unreasonable about the idea that America might face severe unemployment problems and depression after the war. Business expectations are subjective. They can change rapidly in response to shocks. What happened to the private US economy after 1945 was dependent on expectations. Either a boom or slump was possible. The fact that some Keynesian economists did think a slump was coming does nothing to invalidate their underlying macroeconomic theory, for Keynesian economics (or at least that of Keynes himself and those heterodox varieties not compromised by neoclassical economics) stresses the uncertainty of the future. It is not possible to predict with certainty or with objective probability scores the state of certain future economic variables in market economies. All one can do is make forecasts qualified by assumptions about how expectations will play out. One’s assumptions may turn out to be right or wrong.

As it happens, Keynes, Hansen and Richard M. Bissell were right in their forecasts about the post-1945 US economy.


BIBLIOGRAPHY
Hansen, Alvin A. 1943. “The Postwar Economy,” in Seymour E. Harris (ed.), Postwar Economic Problems, McGraw-Hill, New York and London. 9–26.