From business cycle theory to the theory of employment: Alvin Hansen and Paul Samuelson

This paper discusses the transition from a perspective in which the determination of income, output and unemployment was seen as a part of the theory of the business cycle to one in which they are determined independently of the cycle, a transition that meant that the theory of output came to be more sharply separated from the theory of growth. In place of theories of the business cycle theories that were rooted in structural changes associated with growth, business cycle theory came to be more of an adjunct to short-run theories. Whereas Pigou and Keynes were already arguing in terms of the short run by the early 1930s, some American economists continued to think in terms of the business cycle until the very end of the 1930s. This paper shows that for Alvin Hansen and Paul Samuelson, both highly influential figures in postwar economics, the shift came about only because of the need to adduce structural
factors to explain the recession of 1937-8 and wartime experience. The focus on income determination as the central macroeconomic problem in Samuelson’s textbook reflected the change in thinking that had happened during the 1940s.