Keynesianism
Hansen's review of John Maynard Keynes's The General Theory of Employment, Interest and Money was skeptical, but by December 1938, in his presidential address to the American Economic Association, he embraced Keynesian theories of the need for government intervention in periods of economic recession. Soon after his arrival at Harvard in 1937, Hansen's famous graduate seminar on fiscal policy began inspiring graduate students such as Paul Samuelson and James Tobin—both of whom would go on to win the Nobel Prize—to further develop and popularize Keynesian economics. Hansen's 1941 book, Fiscal Policy and Business Cycles, was the first major work in the United States to entirely support Keynes's analysis of the causes of the Great Depression. Hansen used that analysis to argue for Keynesian deficit spending.
Hansen’s best known contribution to economics was his and John Hicks' development of the IS-LM model, also known as the Hicks-Hansen synthesis. The framework graphically represents investment-savings (IS) and the liquidity-money supply (LM), and can be used to illustrate how fiscal and monetary policies can be employed to alter national income.
Hansen's 1938 book Full Recovery or Stagnation was based on Keynesian ideas and was an extended argument that there would be long-term employment stagnation without government demand-side intervention. Ultimately, economic stagnation theories became more associated with Hansen than with Keynes.
Paul Samuelson was Hansen's most famous student. Samuelson credited Hansen's Full Recovery or Stagflation? (1938) as the main inspiration for his famous accelerator-multiplier business cycle model of 1948. Leeson (1997) shows that while Hansen and Sumner Slichter continued to be regarded as leading exponents of Keynesian economics, their gradual abandonment of a commitment to price stability contributed to the development of a Keynesianism which conflicted with positions of Keynes himself.
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