The Institutionalist Reaction to Keynesian Economics

Abstract

American institutionalist writers were much involved in the pre-Keynesian discussion over the problems of business cycles, unemployment, and appropriate government policy towards the problems of unemployment and macroeconomic stabilization. This paper will begin by establishing the main lines of institutionalist argument concerning these issues. Most important will be the work of Wesley Mitchell and those involved in the business cycle project at the National Bureau of Economic Research, J. M. Clark, those such as R. G. Tugwell and Mordecai Ezekiel who adopted underconsumptionist ideas, and the series of books produced by Edwin Nourse, Harold Moulton, and others at the Brookings institution. The similarities and differences between these various positions will be examined. In the later New Deal, and more especially after World War II, institutionalist ideas were rapidly replaced by an Americanized version of Keynesian economics represented by Alvin Hansen and others. The second part of this paper will deal with the impact of Keynesian thinking on institutionalists, and their reactions to it. In some cases institutionalists adopted Keynesian ideas in a more or less modified form, but other reacted with significant lines of criticism covering methodological, theoretical, empirical, and policy issues. In this part of the paper the focus will be on the work of J. M. Clark, M. A. Copeland, A. F. Burns, Edwin Nourse and Harold Moulton. Institutionalists, on the whole, regarded the Keynesian model as too simplified, doubted the stability of the Keynesian consumption function, rejected Hansen's mature economy thesis, and were much more fiscally conservative than the Keynesians.