The 1920s and 1930s saw the rise of macroeconomics, business cycle theories and economic planning. Can these new ideas about the aggregate economy and new methods of doing economics be understood as revolutionary, in the Kuhnian sense?

The 1920s and 1930s saw unprecedented fluctuations and depressions in the worldwide economy. Between 1929 and 1933, unemployment rose by over 20% in the U.S. and this level became standard across much of the western Europe. Prior to the 1930s, classical economics was the dominant and most widely adopted of current theories on the macroeconomy. The foundations were laid upon Say’s law, which dictates that production is the source of demand, and also on the assumption that prices were flexible and that there is equilibrium at full employment. A theory based on equilibrium at full employment meant the classical economists did not focus on employment itself, but rather on the issues of growth and allocation of resources at the full-employment level. Two implications come out of this: Firstly, as supply creates its own demand any possibility of serious depression is eliminated. Secondly, markets are self-adjusting and will return to full employment following fluctuations. In the field of economics the Great Depression therefore raised some serious questions. Coats (1960) argues, there was ‘growing concern about the inadequacy of existing theory’. It was becoming evident that unemployment in the 1930s was not returning back to normal through market forces as classical theory predicted, and classical economists were having difficulty explaining how it could be possible that goods were going unsold and workers were unemployed. It also revealed another anomaly in classical theory, that of deficient demand. Tuncer (2008) explores this: In classical theory, all goods and labour are sold, because prices and wages would drop until they did so. However, there were other factors that were not taken into account. In reality wages and prices are sticky and not flexible. Since wages are a part of income, a decrease in wages reduces demand for goods, which in turn reduces employment. Therefore a decrease in wages means that employers won’t be willing to hire more people, as would be predicted if ceteris paribus held in reality.

The failures of pre-1930s theory to explain the ideas of deficient demand and persistent unemployment ‘called for a new theory’. What followed was Keynes’ General Theory of Employment (1936), which offered a new theory of the macroeconomy. Keynes’s work demonstrated that equilibrium was possible without full employment and that full employment was a ‘special case’ not the norm, something that the classics had virtually ignored. Keynes explained how the new concept of 'effective demand’ shows in the flow of expenditure which determines the flow of income. He also explained, through the Keynesian multiplier, that weak effective demand can lead to a diminished income, and therefore increased unemployment, which reduces demand further. It is clear that the series of events described here fit into the Kuhnian description of a ‘scientific revolution’. If we view the classical economists as existing within one ‘paradigm’, then we can see the classical paradigm’s theory failed to take into account observed phenomena of the Great Depression. The anomalies of deficient demand, prolonged unemployment, necessity of government intervention, and sticky wages, were accumulating. They stretched the classical paradigm to its limits, until the point that a Kuhnian crisis emerged. What emerged from the crisis was the Keynesian paradigm. Blaug (1991) noted that the Keynesian Revolution was ‘remarkable’, ‘never before has the economics profession been won over so rapidly and massively to a new economic theory’. This certainly fits with Kuhn’s description of the transition between paradigms: “transition from a paradigm in crisis to a new one from which a new tradition of normal science can emerge is not a cumulative process. It is a "reconstruction of the field from new fundamentals”. He goes onto to state that criticism of the new theory came almost solely from the older members of the profession, whereas the younger generation took to it with enthusiasm. This generation gap in the response of scientists and the resistance to the new paradigm candidate is clearly in line with what Kuhn (1962) described a scientific revolution to look like.

The Keynesian paradigm also contradicted the classical paradigm on it's stance on government intervention. Pre-1930s, government intervention was seen as an obstacle to reaching the full employment equilibrium, as the ‘self-adjusting nature of the market would quickly restore full employment via flexible money wages and prices’. However, as new ideas of the macroeconomy appeared post-1930s being able to manage demand became a vital policy tool to restore employment. The role of uncertainty and animal spirits are key to Keynes argument, therefore, Keynes argued for a “long term programme” of investment by the government to reduce uncertainty by “reducing the potential range of fluctuations” that could be caused by the withdrawing of private investors from the markets. Furthermore, Kuhn argued that ‘the assimilation of either a new sort of phenomenon or a new scientific theory must demand the rejection of an older paradigm’. This applies here, the role of the government in creating stable markets in the face of uncertainty is a novel area that requires the rejection of the classical paradigm in order to be accepted.

The period of ‘normal science’ that followed the publication of Keynes’ General Theory of Employment demonstrates the creation of a new paradigm and confirms that the rise of macroeconomics was a Kuhnian revolution. Samuelson (1939) based is work on the Keynesian multiplier, combining it with the accelerator theory of investment, to model the business cycles at the macroeconomic level. This is just one of the Fiscalist contributions to Keynesianism, and Samuelsons theory clearly underlines the importance of fiscal policy. Furthermore, in Hicks (1937) analysis the oscillatory movements of the real business cycle are explained. Pernecky (1992) argues that Hicks adapted the Keynesian Cross into the IS/LM model, which showed Keynes’s money market, planned investment and savings ‘in a state of simultaneous equilibrium’. These examples are Kuhnian in two senses: Firstly, Kuhn argued that once the ‘transition from former to alternate paradigm is complete, the profession changes its view, method, and goals’, ‘placing them in a new system of relations with one another by giving them a different framework’. Samuelsons use of the Keynesian multiplier and Hicks’s use of the Keynesian Cross show that Keynes had set a clear framework from which others could work within and build upon, in a ‘logically compatible' way. Secondly, it is clear that fiscal policy and monetary policy, and explanations of not-full-employment, were still assumptions and goals made by following economists. They continued Keynes's progressiveness; empirically, technologically, and in terms of policy. The work that these economists completed was within Keynes's paradigm and explanatory framework, and not the classical one, underlining the fact that the rise of macroeconomics and business cycle theory was a Kuhnian revolution.

To conclude, the rise of macroeconomics was a Kuhnian revolution for three main reasons. Firstly, it explained anomalies that had caused the previous, classical, paradigm to enter crisis. Secondly, the shift in theory and practice that happened in the 1920s and 1930s clearly fits the narrative of a revolution - from stretching the previous paradigm to rapid adoption of the new one by the younger generation. Thirdly, what followed the creation of the Keynesian paradigm shift was clearly a period of normal science.

Bibliography

Blaug, J. 1991, Second Thoughts on the Keynesian Revolution, A History of Political Economy, Duke University Press

Coats, A.W. 1969, ‘Is there a “structure of scientific revolutions” in economics?’, Kyklos

Hicks, J.R. 1937, Mr. Keynes and the “Classics”; A Suggested Interpretation, Econometrica, Vol. 5, No. 2

Keynes, J. 1936, The General Theory of Employment, Interest and Money, Palsgrave Macmillan

Kuhn, T. 1962, The structure of scientific Revolutions, University of Chicago Press

Parnecky, 1992, the Keynesian Revolution From a Philosophy of Science Perspective: Revolutionary or Evolutionary?” Methodus, vol. 4

Roll, E. 1992, A History of Economic Thought, Faber & Faber

Samuelson, P. 1939, Interactions between the multiplier analysis and the principle of acceleration, Review of economics and statistics, pp.75-8

Tuncer, I. 2008, A note on the Keynesian Revolution and the Paradigm of Kuhnian Scientific Revolution, PHD Thesis