Money, Wages, and Prices

Hansen often explained a problem in terms of how orthodox theory would have presented it. Whilst he frequently turned to the Quantity Theory of Money in its Fisherine form, this was largely an expository device. His own early preference was Aftalion’s tautological definition of the price level as the ratio of money to real income. For the pre-Keynesian Hansen the market would work eventually but the process was slow and hampered by institutional factors. This viewpoint would evolve over the next decade, in a large part due to his analysis of the 1937–8 recession. In his evidence to the 1938 Senate Special Committee on Unemployment and Relief Hansen continued to mix his stagnationist view with the question of an appropriate change in the cost-price structure, most often in terms of reducing costs and removing structural rigidities. By the 1950s Business Cycles and National Income (1951) Hansen made clear that the change in thinking over the flexibility of wages was a major difference between the interwar and postwar thinking on cycles. The fallacy in the old argument for greater wage flexibility was the effect of wage rates on aggregate demand. Hansen rejected the idea that price adjustments alone could solve the problem of inadequate aggregate demand.