Anticipations of the General Theory:

The Case of F. B. Hawley

Mauro Boianovsky

The central message of John Maynard Keyness General Theory is,

according to Don Patinkin (1982, 8-1 1) and other scholars (see Milgate
1982, chap. 6), the proposition that a decline in output caused by excess aggregate supply will reduce supply more than demand and bring
the economy to equilibrium at less than full employment. The equilibrating effect of the contraction in aggregate income is the core of
Keyness theory of effective demand, based on the assumption that the
marginal propensity to consume is less than one. However, Keynes-or
Michal Kalecki for that matter-was not the first to conceive of the adjustment mechanism pointed out by Patinkin. In works published from
1879 to 1927-but particularly in his 1907 Enterprise and the Productive
Process-the American economist Frederick Barnard Hawley (b. 1843d. 1929; see Bigelow 1932 for biographical information) made it clear
Correspondence may be addressed to Dr. Mauro Boianovsky, SHIS, QI 16, conj. I , c.12,
Brasilia, D.F.. 71600, Brazil. I am grateful to Mark Blaug. Geoff Harcourt, Terence Hutchison,
iind Don Patinkin for their comments. I also would like to thank Bradley Bateman. Harry
1-andreth, Terry Peach, and other participants at the 2 1 st meeting of the History of Economics
Society (Babson College, June 1994) for helpful discussion. I am thankful to St. Edmunds
College, the Centre for History and Economics, and the Faculty of Economics and Politics
(Cambridge) for financial support for the HES meeting. Financial support from FundagHo
CoordenagHo de Aperfeigoamento de Pessoal de Nivel Superior (CAPES, Brazil) is gratefully
acknowledged.
1. Perhaps I should say Kaleckis theory of effective demand (see Chapple 199 I ).

History of Political Economy 28:3 @ 1996 by Duke University Press.

372 History of Political Economy 28:3 ( I 996)

that excess aggregate supply would gradually be removed by a reduction
of income greater than the decline in spending.
Of course this maladjustment of supply and demand due to the character of the demand is only temporary. The trouble is in the means
by which re-adjustment is finally effected, namely the slackened employment of labour, and the absolute loss of all that could have been
produced by the idle capital and labour force. The remedy is however
effective. As expenditure is never cut down to the full extent in which
income is curtailed, the accumulation of capital is necessarily lessened
by industrial inactivity and in extreme cases the fund of pre-existing
capital may be impaired. (Hawley 1907,225)*

The Consumption Function

The adjustment suggested by Hawley in the quotation above is based
on his conception of the consumption function developed in 1907 (23942). The crude notion that negative savings occur at low income levels is
behind his first and rudimentary description of the readjustment period:
Any period of excessive saving is necessarily followed by a period of
lessened production, which continues until such excess is consumed
in one way or another. (1879b, 277)
Consumers, forced at least by lessened means to be prodigal, that is,
to spend more than their income, eat up and wear out, burn down or
rust away the surplus. Men must live, and, fortunately for society, they
find it impossible to live within their incomes when they have none.
The capitalist makes an inroad into capital, or, if that is gone, upon the
capital of others, and the labourer out of work begs or steals. If it were
not so, the desperate attempts to reduce expenditure would prolong the
process of recuperation indefinitely. In such times expenditure must
exceed income until the equilibrium between capital and consumption
is restored. (1 879a, 105)
The assumption that expenditure changes less than income-a marginal
propensity to consume less than one-at all levels of income is advanced
in the 1907 book.3
2. As will become clear below, the phrase accumulation o f capital is used by Hawley in
the sense o f saving.
3. P. Barnett (1941,3840)has an excellent discussion o f Hawleys views on the consumption
function but does not comment on its similarities with Keyness. R. M. Davis, on the other
hand, compares Hawley with Keynes but concludes that the former treated consumption as

Boianovsky / The Case of F. B. Hawley 373

The characteristic of savers, which is most important in this connection
is this: That it is the habit of all consumers to keep pretty close to
the standard of living they have once adopted. As men prosper their
standard will be raised, but it will be raised gradually, except perhaps
in cases of unexpected inheritance. In years when income is below the
average, some economy is practised, but the reduction of expenditure
is always less than the reduction in income. And when incomes are
unexpectedly large, additional expenditure very rarely eats up all, or
even the greater part, of the increase. (240-41)4
The adjustment between aggregate production and consumption is explained by the postulate of an established standard of living: When
their incentive to production is lessened enterprisers of course produce
less, and as established standards of life make it difficult for consumers
to restrict consumption to the extent in which production has declined,
the equilibrium between production and consumption is finally restored
(97).
Although Hawleys 1907 ideas on the consumption function may look
like an earlier formulation of the habit-persistence hypothesis, he did not
suggest-as J. S. Duesenberry (1949) would later-that the standard of
living is governed by past peak income. We can find, instead, the view
that consumption plans are determined by expected income, measured
by the average income of a series of years (that is, the mathematical
expectation). Hawleys distinction between expected (or gradual) and
unexpected (or sudden) changes in income is better appreciated in the
context of Friedmans 1957 permanent-income theory of consumption.
Hawley assumed that the short-run marginal propensity to consume is
lower than the long-run one since individuals do not fully adjust consumption spending when income change is unexpected. The idea was
first formulated in The Rationale of Panics: Increase of production is
determined by population, which is hardly a correct interpretation (1953, 125). Besides,
both Barnett and R. M. Davis together with Terence Hutchison (1953. 3 5 9 t t h e only authors
to mention Hawleys ideas on the subject-wrote before the emergence of the literature of
the 1950s on the consumption function, with its distinction between long-run and short-run
consumption decisions.
4.The similarity to Keynes is striking; he writes, a mans habitual standard of life usually
has the first claim on his income, and he is apt to save the difference which discovers itself
between his actual income and the expense of his habitual standard; or, if he does adjust his
expenditure to changes in his income, he will over short periods do so imperfectly ([ 19361
1973, 97). The exception concerning unexpected inheritance can be explained by the shift
upward of the permanent income curve, for example, in cases of windfall gains (see Friedman
1963, 5-1 I), which suggests that Hawley had a correct basic intuition of the problem.

374 History of Political Economy 28:3 (1996)

always attended by some increase of consumption; but the proportion
between the two is much less disturbed by a gradual than by a sudden
rise of prices. A sudden increase of income will yield a larger percentage for investment than a gradual one of equal extent. The more gradual
it is, the closer will the increased expenditure approximate to the increased income, and, if it be very gradual, may almost or quite equal it
(Hawley 1879b, 290; repeated in 1882, 91-92; quoted in Barnett 1941,
39; quoted in Hutchison 1953, 359).5 Furthermore, the notion that the
ratio of consumption to income (the average propensity to consume) declines as income increases in the short run is put forward by Hawley:
the more prosperous the times, the more rapidly is capital accumulated,
owing to the fact . . . that marginal savings are always made out of incomes greater than the average yearly expectation (1907, 289-90). He
also mentions the influence of income distribution on savings, suggesting that the average propensity to consume is lower for individuals with
higher income levels. As a rule, the larger an individuals income, the
larger the proportion of it, both relatively and absolutely, that is saved
([1882] 1972, 140).
The classical assumption of income inequality was an important element in Hawleys first articles (see 1879a, l 11-14 and 1879b, 282, in
which he refers to the existence of a class whose main object in life
is not consumption but accumulation). This changed in the 1907 book
in which he explained that the higher proportion of profits saved corresponded with the degree of uncertainty in the expectation of future
income, which is consistent with conclusions of the permanent-income
hypothesis. This new idea is expressed in the following passage: there
is a marked tendency among men to adopt a standard of living very close
to income, when the income is an assured one. . . . In proportion to its
average amount, the more variable and uncertain an income, the more,
as a rule, will be saved from it in the long run, and it follows, therefore,
that profit being much the more variable form of income, must yield the
largest proportion for accumulation (1907,241).
The influence of the interest rate on saving is dismissed as ambiguous
and secondary.6 It is worth noting that the relevance of the consump5. See Hawley 1879b, 286; 1882, 86, for a similar passage. Hawley is using investment in
the sense of individual savings; the passage is part of a discussion of the effects of higher prices
on profits.
6. Interest is by no means the only inducement to save. To assure ourselves against poverty
in our declining years, or against a loss in earning power, or against unforeseen circumstances,

Boianovsky / The Case of F. B. Hawley 375

tion function for the adjustment mechanism outlined above is stressed
by Hawley: The point of the argument is this: that the regulation of
accumulation, and the re-adjustment of capital when superabundant, do
not depend so much upon the will, as upon the ability (24142).

Saving and Investment

Hawleys conception of the consumption function is in marked contrast with the ideas of his contemporaries, who also discussed economic
fluctuations from the perspective of the saving-investment relation. The
question of how savings are invested during times of depression-used
by N. Johannsens chapter 2 title in his 1908 book-was asked by b u t
Wicksell ([ 19071 1953), A. Spiethoff (1904), M. Tugan-Baranovsky
(1901), and others (see Boianovsky 1995, sect. 4). Although Hawley
shared some ideas with that distinguished group of economists, he did not
join them in assuming that aggregate saving is roughly constant during
a depression. This idea apparently originates with W. Bagehots ([ 1873J
193I , 143) remarks about savings by quiet people in a depression. It
is expressed in Tugan-Baranovskys statement that a whole series of
incomes is completely independent of the fluctuations of industry . . .
capital is accumulated continuously, but production expands in spurts
(1901,241).
Johannsen rejected the explanation that excess saving shrinks in a depression ([1908] 1971, 30-31). While accepting the view that a fall in
earnings causes a reduction in saving, he argues that the explanation
only states that the total of the savings will fall off; but it does not show
what becomes of the savings that are still being made (31). He argues
that excess (impaired) savings are absorbed in the purchase of assets
from impoverished non-savers. Tugan-Baranovsky argues imprecisely
that non-invested savings accumulate in the form of bank deposits that
are used up in the following boom. Spiethoff and Wicksell argue that
excess saving accumulates in inventories of unsold goods. This corresponds to the first stage of Hawleys treatment, but in contrast with
Hawley, the unsold goods are absorbed only later, in the boom following the depression. Hawley s second stage-the elimination of excess
inventories and the adjustment of saving to investment through an output
or to provide our children with a start in life, are all motives to save, strengthened rather than
weakened by a decline in the rate of interest (Hawley 1907, 239; see also Keyness discussion
ofthe subjective factors [( 1936) 1973, 1071).

376 History of Political Economy 28:3 (1996)

contraction higher than the simultaneous fall in spending-is not found
in Spiethoff or Wicksell.
J. S. Mills discussion of capital accumulation when the rate of profit
is approaching its minimum is the starting point of Hawleys 1882 book
(compare Davis 1953, 117). He wrote in reaction to Mills statement that
excess saving is swept away. To this I must object that no destruction of
capital or wealth in any form occurs during a panic. The excess of capital
is not swept away in any sense of the term. It is not even devoted to
unproductive consumption, as that itself in such times is lessened. The
readjustment comes, and can only come, from a decrease in productive
consumption, greater than the accompanying decrease in unproductive
([ 18821 1972,54).
The classical terms unproductive consumption and productive consumption were replaced in Hawleys 1907 book by the more familiar
terms consumption and production, respectively. Haw leys mention
of unproductive consumption is also a criticism of the view suggested by
Mill that there is a great consumption of capital during the stagnation
which follows a period of general overtrading (Mill [ 18481 1965, 741).
In this connection, Hawley advances the proposition that aggregate production decreases by more than the initial excess saving, since-using the
term introduced later by Johannsen-it is multiplied by the consequent
decline in consumption:
If unproductive consumption did not decrease, the proper ratio of capital to population would be obtained much sooner than it now is, viz.,
when production had been decreased to an amount exactly equal to the
previous over-accumulation. . . . But the curtailment of unproductive
consumption adds to this loss one of many times its extent, viz., the
loss for ever of all those enjoyments which individuals have forgone
by lessening their unproductive consumption, in their endeavour to
retain their own capital unimpaired. (Hawley 1882, 54-55; see also
Johannsen 1908,49n)
In 1882 Hawley introduced the term dead stock to designate accumulated inventories of unsold goods, but he did not use it in the 1907
7. Mill writes, In England the great emigration of capital, and the almost periodical occurrence of commercial crises through the speculations occasioned by the habitually low rate of
profit, are indications that profit has attained the practical, though not the ultimate minimum,
and that all savings which take place . . . are either sent abroad for investment, or periodically
swept away ([ 18481 1965, 845).

Boianovsky / The Case of F. B. Hawley 377

book. Instead, he developed the concept of the necessary (ex post) identity between the flow of saving and the investment in fixed capital and
inventories.* Barnett incorrectly interprets Hawley as saying that individuals save things in the first instance (1941, 46).9 Hawley is clearly
approaching the basic identity of social accounting, as one can see in
his remarks about the irrelevance of actual saving and investment for the
determination of the interest rate.
By the necessity of the case, as capital goods before the final consumers can buy them can be transferred by one enterpriser only to
another enterpriser, a condition of equality always obtains between
the amount of capital goods that exists, and the amount of capital
the enterprisers, as a body, must have, or borrow. How then is any
change in the rate of interest brought about? This however is a matter
we are not as yet prepared to discuss, and which must be deferred until
the subject of Loanable Funds is treated. (Hawley 1907,226-27)
The definition of annual national savings as the difference between
what a nation annually produces and what it consumes (263) was used
by Hawley to criticize the view that growth depends on the economic
surplus (saving). He came very close to enunciate the so-called paradox of thrift: The fallacy here, as we have already seen, lies in the tacit
assumption that the annual national surplus can be increased by parsimony, by, that is, an unwise and niggardly contraction of consumption.
Carried beyond a certain point, national parsimony defeats itself by restricting production as much as, or more than, it decreases consumption
(263-64).

8. For every dollar saved and not invested infixed capital there is an addition to circulating
capital of an unsold commodity worth a dollar. The demand for investment is therefore a
demand for commodities that shall not be consumed, but that shall be retained for use, or held
for a market at cost of reproduction inclusive of normal profit (1907, 223; quoted in Davis
1953, 121). Unsold commodities that cannot be held at cost of reproduction are not part of the
demand for investment, but are added to the total investment of the period as a forced, or
unwilling demand (see also Hawley 1907,223-24; 1927,423).
9. Purchasing power must have some material representation somewhere, and the only way
a saving can be effected is by the retention of some material thing. But, paradoxical as it may be,
the material thing saved is never in the possession of the saver as an economic capitalist. . . .
What the economic abstainer abstains from is merely the exercise of a part of the abstract power
to purchase which has come into his possession (1907, 255-56).
10. Again, the similarity to Keynes is remarkable: Every such attempt to save more by
reducing consumption will so affect incomes that the attempt necessarily defeats itself ([ 19361
1973,84). As a matter of fact, Hawley had already implied this point in his I882 book: There is
here a case where individual are opposed to social interests. . . . The capital that the community

378 History of Political Economy 28:3 (1996)

The upward movement is not discussed in detail; the view that aggregate saving is determined by the higher level of investment is only
implicit: The permanent additions to the national capital . . . are not
acquired at the expense of consumption, as consumption will be greater
during a period of continued activity and accumulation than it would have
been during the same period if it had been one of stagnation, but are the
combined result of a labour force that would otherwise have been wasted
in idleness, of opportunities that would have been overlooked, and of enterprise that would have been misdirected or unthought of (291-92).
Hawleys treatment of the determinants of the rate of interest (1882,
106-10; 1907, 25 1-54) follows the loanable funds approach. Interestingly enough, Hawley used the concept of an ideally perfect system of
banking, by which we mean that all transfers are by check alone (1882,
110). This is of course an early description of the pure credit economy
made famous later by Wicksell ([1906] 1978). Under the assumption
of a system of banking not ideally perfect, bank reserves will be decreased on account of the greater amount of money in transit during
active times, which causes eventually an increase in the rate of interest (Hawley 1882, 11 1; 1907, 252). However, instead of a Wicksellian
disequilibrium process, Hawley used what we may call a Fisherian assumption: Anything which affects the proportion between money and
other commodities affects likewise the rate of interest, but only until
prices are adjusted to the new conditions. . . . The only influence which
causes the rate of interest to differ from the rate of profit is the expectation
that prices will decline or rise during the life of the loan (1882, 111).
The Fisherian assumption was not repeated in 1907, and is not central to
his argument. As we shall see next, Hawley did not build his macroeconomics on the discrepancy (Wicksellian or Fisherian) between the rate
of profit and the rate of interest, but on his own risk theory of profit.

The Business Cycle

The condition for zero forced, or unwilling demand (Hawley 1927,
423) for inventories is the equilibrium between the supply of savings
and the demand for investment. Hawley expresses equilibrium as equalcan permanently employ, including his own, is actually lessened by his accretions when the
general capital has increased more rapidly than population (55).
1 I . The view that aggregate saving comes from increased expenditure instead of reduced
consumption was roughly expressed by T. R. Malthus (118201 1989, 512-13).

Boianovsky / The Case of F. B. Hawley 379

ity between the accumulation of capital on one side and population
growth plus advances in the state of arts on the other (1907, 225). He
did not make clear why the tendency of saving to exceed investment is
inevitable (1927, 423), but a passage in his 1907 book suggests that,
under the assumptions that the ratio of consumption to income (average
propensity to consume) decreases when income grows and that the ratio
of investment to income is roughly constant, the economy will temporarily stagnate.12
Every additional opportunity for profitable enterprise, by absorbing
the capital that would otherwise fail to find profitable use, postpones
the evil day when enterprisers will be forced in self-defence to limit
their operations, and curtail the employment of labour. As a matter of
fact that time always comes eventually, no matter how much the field
for investment is widened, for the more prosperous the times, the more
rapidly is capital accumulated, owing to the fact, already pointed out,
that the marginal savings are always made out of incomes greater than
the average yearly expectation. (1907,289-90)
In 1882, Hawley considered the tendency of capital to increase faster
than population to be the central thought of this treatise, and is the
contribution I bring to the science of political economy ([ 18821 1972,
6 1). His conclusion that over-accumulation (excess saving) is the cause
of industrial stagnation was put forward as a reaction against the prevalent
capital scarcity (excess investment) explanation of B. Price and Henry
Fawcett (see Hawley 1882, 34). Hawley clearly focused on the business
cycle, rather than the determinants of the equilibrium level of income.
His ideas are basically the same, from the discussion of the three states
(progressive, stationary, and retrogressive) that all nations complete in
periods of about ten years (1 882,6 1) to the statement of the law of the
business cycle (1927,421-24). He suggested, as an alternative to John
Stuart Mills definition of the progressive state in terms of the growth
of wealth (capital) and population, that if the income per capita of its
people is growing larger, I should say it was enjoying economic progress,
12. This is a short-run version of the so-called stagnation thesis. See also Branson 1989,241:
if y = c+i, then I = c / y + i / y is the condition for equilibrium growth of real output y . But this
could not be a secular stagnation, since Hawley assumed that the ratio between consumption
and income is steady in the long run. The view that a decreasing average propensity to consume
leads eventually to secular economic stagnation is clearly implied by Keynes ([1936] 1973,
105).

380 History of Political Economy 28:3 (1996)

irrespective of whether such advance or retrogression was accompanied

by growth or decline of the total wealth and population (1882,59). The
study of the stationary state (constant income per capita) is secondary
in comparison with the investigation of what we may now call a process
of cyclical growth.13
Movements in output are determined by the relation between the normal rate of profit (1 882, 119) and the current rate. The former is defined
in the 1907 book according to the risk theory of profit developed by
Hawley in a series of articles in the Quarterly Journal of Economics
(QJE)in the 1 8 9 0 ~ .In ~Hawleys words:
If the normal rate of profit be established, as it will be, by the seriousness of the risks enterprisers believe to be involved, it is during the
periods when the rate obtainable is above the normal rate that we enjoy
industrial activity, and when profits are depressed below the normal
we suffer from industrial stagnation. When the normal rate is unobtainable, industry slackens, thus lessening the ability of all classes as
consumers to add to their accumulations. On the other hand, when
profits exceed the normal, two readjusting forces are released. The
competition of enterprisers with each other for the means of production becomes keener and the accumulation of capital goods [saving]
is stimulated. Thus it comes about that the marginal enterpriser, taking
one period with another, obtains exactly the normal rate of profit. All
attempts of the other classes to deprive him of it, and all his attempts to
exceed it, put in motion self-reacting forces which very shortly restore
the balance. (1907, 1 4 4 4 5 )
The business cycle is then associated with the process of convergence to
the normal rate of profit. Excess supply-provoked by excess saving13. Strictly speaking, there is no stationary state of society at all. The perpetual flux and
reflux of human events prevent such a state from being more than momentary, a mere turningpoint between the progressive and the retrogressive, or vice versa. When the growth of net
incomes, in which I consider the progressive state to consist, is counteracted by the growth of
aggregate capital and population, which Mill seems to consider as constituting it, society pauses
stationary for a moment, and then enters the retrogressive state, in which its annual produce and
net income decline, and this proceeds until the consequent decrease of capital and population
checks society in its downward course, and it again momentarily pauses, in a second and lower
stationary state, from which an advance is once more effected (1 18821 1972,60). The effects
of income per capita over population growth are not part of the adjustment in the 1907 book,
in which Hawley assumed constant population during the readjustment period.
14. On this, see the detailed discussion of Hawleys theory of profit by F. H. Knight (1921,
4146).

Boianovsky / The Case of F. B. Hawley 381

leads to accumulation of unsold goods and consequently to a reduction
of the rate of profit below the normal rate governed by the subjective
valuation which the marginal enterpriser places upon the irksomeness
of the responsibilities and risks he will be forced to assume if he concludes to undertake a marginal enterprise (145). In another passage,
Hawley asks, what can enterprisers do, by varying the character of the
supply, to protect themselves against this attack of the saving classes
upon their chances of profit? (224). The answer is the readjustment process (225). The view that a reduction of output adjusts supply to demand
because spending declines less than income is not a digression. The idea
is repeated by Hawley many times in order to show how the difference
between the normal and the current rates of profit is removed in the
e c o n ~ m y .It ~is also used to explain why lowering money wages does
not prevent a contraction of output: In dull times enterprisers also endeavour to avoid the cessation of production by lowering money wages.
This expedient, undoubtedly effective to the individual enterpriser. . .
is of more doubtful use to the class in general. If it leads to a corresponding decrease in consumption, nothing at all is gained, as it is only when
labourers are forced to suspend saving . . . that the maladjustment of
capital to its profitable use is in some degree rectified (229).
The main characteristic of periods of industrial stagnation is the
downward movement of output, not its absolute level at less than full
employment (see also the distinction between the retrogressive and the
stationary states). The concept of a period of readjustment, however,
shows that the reduction of output in the depression is finite, in contrast
with the famous banana plantation parable used by Keynes (1971,
159-60) in his Treatise on Money. According to Hawley,
Capital . . . becomes less effective when in excess, and surely entails
a diminution both of consumption and production by any excess of the
latter; for cessation of profit is followed by cessation of employment,
and that by a lessened consumption, which tends, in its turn, further
15. If at any time the total amount of unsold goods is unusually great, it must affect the
average rate of profit unfavourably, and lead to some cessation of production . . . which will
necessarily continue until consumption as a whole has caught up with the lessened production on
the whole, and the misfits have found purchasers at some price (1907,221). And there is . . .
a periodic increase in the pressure of capital upon its limitations, adjusted not, as economists
seem to take for granted, by capitalists obtaining a lower rate of interest, but by cessation of
production sufficient to check accumulation to a point where existing capital can be employed
at the previous rate of profit and interest (337).

382 History of Political Economy 28:3 (1996)

to diminish profits. The process could only terminate in barbarism if
it were not that consumption, under such circumstances, is lessened
in a smaller ratio than production. ( 1879a, 104; emphasis added)
With the benefit of Patinkins illuminating distinction (1982, lo), it is
possible to conclude that Hawley focused on the stability of the equation
d Y / d T = f [ F ( Y )- Y ] ,where fis positive, instead of the solution of
the equation F ( Y ) = Y . The theory of effective demand appears as part
of the study of the business cycle.I6
It is worth noting that after the elimination of excess supply at the end
of the period of readjustment, the economy will be working at less than
full employment with the normal rate of profit. But Hawley was apparently not aware of that, since he referred to the normal rate of profit as
the expectation of profit that will induce the marginal enterpriser. . . to
continue [an undertaking] in full operation, which is not consistent with
his general results (1907,368). Consequently, he tended to pass over the
analysis of unemployment equilibrium: additional savings are bound to
appear in the form of large stocks of consumable goods held by producers, and the forces of reaction come into play and remain potent until
savings are less than the field of investment calls for (1927, 423-24;
emphasis added). That the concept of saving as a function of income is
considered central to explain the periodicity of economic fluctuationsthat is, movements of aggregate output-instead of the equilibrium level
of income is clear enough. The longtime periodicity of the business
cycle is mainly the result of causes affecting savings. Panics and other
interferences with periodicity are mainly due to changes suddenly affecting the disposition to invest (424).
This is, of course, a major difference between Hawley and Keynes
(1936) that can be explained in part by the fact that the Marshallian
notions of equilibrium are not part of the formers theoretical framework.
Although Capital and Population was written as a criticism of J. S. Mill,
Hawley made use of the theoretical apparatus of Mills magnum opus.
This is less visible in the 1907 book (which is mainly a reaction against
both J. B. Clarks and Eugen Bohm-Bawerks versions of neoclassical
capital theory), but the classical framework and the notions of equilibrium
associated to it (see Bharadwaj 1978) are still present. (Kalecki, on the
16. Patinkin also writes that the essential novelty of the General Theory [is], in the context
of business-cycle analysis, the argument that the decline in output exerts a dampening feedback
effect on the dynamic process (1982,80).

Boianovsky / The Case of F. B. Hawley

383

other hand, developed his formulation of the theory of effective demand

with no use of Marshallian concepts; nevertheless, the influence of the
equilibrium framework is present in another guise-Marxs equations of
reproduction.)

Discussion
Hawleys concept of period of readjustment made no impact on the
contemporaneous business cycle literature. Eugen von Bergmann ( 1895),
author of a comprehensive history of theories of business cycle of the
nineteenth century, quoted a passage from Hawley (1882, 17) about the
elimination of dead stock through output reduction but made no reference to page 54, where Hawley made the crucial assumption that spending will decline less than output. Bergmann discussed Capital and Population as part of his chapter on the simple over-production theories
(58-60), which misses the point that, according to Hawley, consumption
exceeds production during the depression. Hawley ( 1927) distinguished
sharply his own formulation from the under-consumption approach of
Foster and Catchings and John Hobson, since none of them note the
influence of variation in the field of investment. . . . Consequently, they
are unable to formulate any general law of the business cycle and make
little or no statement of the period of readjustment (422-23). It was
clear for Hawley that his formulation filled a gap in the literature. Why
it is that at certain periods there appear to be so many more unsaleable
misfits than at others, and how such maladjustment is rectified, are questions that economists have hardly attempted to answer, but which are
inevitably led to inquire into when we have once adopted enterprise as
the standpoint from which to view the field of Economics (1907, 245).
The macroeconomic character of Hawleys approach has its roots in the
application of supply and demand concepts to capital as an aggregate
of goods in 1879-82 and in the notion that the rate of profit depends on
aggregate consumption demand, advanced in 1907. The former idea was
expressed in the following passage: Capital . . . is a means, not an end
. . . a commodity useless except within definite limit. It is but the totality
17. Their statement that lack of money prevents consumers from buying commodities as
they are created, is too strong. They can always eke out by infringing on their capital. This
is just what happens during the period of readjustment, during which consumers purchase not
only all products as created, but all the accumulated stock of old commodities (Hawley 1927,
422).

384 History of Political Economy 28:3 (1996)

of products, and as strictly subject to the laws of supply and demand as

any single product. . . . Capital, or accumulated savings, must bear a
definite ratio to consumption; and the law which governs this ratio is that
capital, being in reality a commodity, is subject to the law of supply and
demand (1879a, 1 14 and 107).
In the 1907 book, on the other hand, Hawley-based on an improved
notion of capital and on the idea of the consumption function-stressed
the process of determination of the rate of profit vis-h-vis the remuneration of other productive factors. The realization of aggregate output is not
assured, since only part of the generated income returns as consumption
demand.
The demand for consumption comes of course from landlords, capitalists and labourers as well as from enterprisers, but it does not come
from them as such, but as individuals. . . . While, therefore, enterprise is dominant over the other productive factors . . . , it, in its
turn, is subservient to the whole community, and dependent upon
the demand exerted by consumers as a body for the realisation of
its expectations. . . . The point essential to my argument is this-that
the remuneration of enterprisers depend, both primarily and ultimately,
upon their relation to the community as a whole, while the remuneration of landlords, capitalists and labourers depends primarily upon
their relation to enterprise. (96-97)
The normal expectation of profit of the enterpriser does not change
over the business cycle, in contrast with the payment demanded by other
factors. This is the basis for Hawleys proposition that during a depression
enterprisers adopt a course of action which obstructs accumulation and
depletes capital, until the normal expectation is obtainable (1907,459).
The emphasis put by Hawley on enterprise as the central concept of
economics and as the foundation of his business cycle theory explains in
part why the latter was overlooked by his contemporaries. The two reviews of Enterprise and the Productive Process, published in the Journal
of Political Economy (1908) and Economic Journal (1910), focused on
Hawleys claim for a new methodology in economics, without any mention of its implications for the study of economic fluctuations (see Davis
1953, 124). Twenty years later Hawley summarized his 1907 book in the
American Economic Review and asked for the reconsideration of the
scheme as a whole (1927,409). Once again, he treated his insight into
economic fluctuations as a by-product of the orientation of economics

Boianovsky / The Case of F. B. Hawley 385

on enterprise (the title of the article). He referred to the consumption
function and the adjustment mechanism but did not discuss them in any
detail stating that all of this is so self-evident, when we adopt the controlling function, enterprise, as our viewpoint, that we need not further
elaborate its presentation for our present purpose (423). But, of course,
it was not self-evident.
It is worth examining whether Hawleys failure in bringing his macroeconomic insight to the attention of his contemporaries resulted from his
inability to fully incorporate it into the exposition of his central message (see Patinkin 1982, 86) or from the fact that it had nothing to do
with the central message expressed by the risk theory of profit. First, it is
noteworthy that the equilibrating mechanism is not mentioned in any of
Hawleys articles on capital and profit in the QJE, which could be considered evidence in support of the latter alternative. The omission, however,
is explained by the fact that in the QJE articles basically he is advancing
an alternative explanation-to Bohm-Bawerks-of the source or existence of a positive rate of profit, while in the 1907 book he investigates
the determination of the rate of profit in the market. The book combines
the insights from 1879-82 with the risk theory of the QJE articles, and it
should be regarded as the only complete exposition of what Hawley had
previously called the Theory of the Productive Process. In various
articles contributed by me to the Quarterly Journal of Economics . . .
some few of the ideas here advanced have appeared, but disconnected
from their connotations and without logical sequence, so that this presentation of my Theory of the Productive Process is practically my first
appeal to the judgment of fellow-students (1907, xii).
Concerning the role of the equilibrating mechanism in Hawleys risk
theory, one should recall his description of how market forces work when
the actual rate of profit is below the normal rate, that is, output contracts
until excess supply is eliminated and the rate of profit converges to the
normal rate. As an explanation of the convergence to the normal rate, the
equilibrating mechanism is fully integrated into his general framework.
The relevance of and implications of the theory of entrepreneurial profit
were pointed out by Hawley in a methodological article in the QJE, en
route to the 1907 book. At the end of that article Hawley asked,
Who . . . has studied the forces governing the accumulation of capital? Surely, there are laws of accumulation; but I am not cognizant of
any systematic and comprehensive attempt to discover and formulate

386 History of Political Economy 28:3 (1996)

them; and I venture the prediction that, when they are formulated,
accumulations will be found to arise from the proceeds of labor that
would otherwise have been unemployed, or in other words, that the
amount of a nations capital depends almost wholly upon the opportunity for profitable investment. Who understands the relations between
interest and profits? Who has satisfactorily explained the variations in
the amount of employment? (1902,264)
Apparently, Hawley believed his new ideas would be understood if only
his proposed definition of economics was accepted, as indicated by
his American Economic Review article (1913). This overemphasis on
methodology and definition helps to explain his inability to communicate
to his contemporaries the notion of the equilibrating mechanism as an
essential part of his Theory of the Productive Process.
Neglect of the equilibrating mechanism by Hawleys contemporaries
may be also interpreted as another instance of an unsuccessful early
discovery that did not fit into the then current state of science, of
the kind discussed by Stigler ( 1980).18First-rate macroeconomists, such
as Wicksell, were not ready to accept the idea that unsold goods are
absorbed in the depression since consumption is presumed to decline at
the same pace as output. Earlier theory has in my opinion turned the
whole matter as it were upside down in so far as it assumes that stocks
are increased in good times and depleted in bad times. . . . Not even the
assumption of widespread unemployment (or short time) in depressions
suffices as an explanation, for. . . unemployment itself implies greatly
reduced consumption (Wicksell 1978,213-14; see Boianovsky 1995).
R. K. Merton suggests a distinction between three degrees of resemblance in the study of the history of ideas: (i) rediscoveries (substantive identity); (ii) anticipations (when the earlier formulations overlap
the later ones but do not focus upon and draw the same set of implications); and (iii) adumbrations (earlier formulations have merely foreshadowed later ones; 1968, 13). The application of Mertons classification scheme leads to the conclusion that Haw ley prediscovered Keyness
consumption function and anticipated the adjustment mechanism be18. Stiglers list includes only instances of early discoveries from the theory of value and
distribution. Perhaps we should add three cases from macroeconomics and monetary theory:
Henry Thorntons, James Wilsons, and Hawleys early discoveries of the Wicksellian cumulative process, the Hayekian capital shortage explanation of the business cycle, and the Keynesian
theory of effective demand, respectively.

Boianovsky / The Case of F. B. Hawley 387

tween aggregate supply and demand (or the corresponding one between
saving and investment) in the downturn. Hawley clearly enunciated the
concept of a marginal propensity to consume less than unity, and he
was aware of its relevance for the equilibrating mechanism. But he did
n o t - o r could not-realize its implications for the study of the equilibrium level of income and, consequently, for aggregate demand policies.
His economic policy recommendations focused on ways to absorb excess saving in order to prevent industrial stagnation, not on measures
to stimulate expenditure once the economy is below full employment.20
There is no indication that Keynes ever read Hawley; therefore,2 the
Keynesian consumption function is a genuine rediscovery in the sense
that it did not evolve from Hawleys earlier formulation. In Mertons
19. Hawley did not approach the consumption function from the microeconomic perspective of utility maximization. Neither did Keynes. Hawley suggested a distinction between the
primary phenomena and the data of economics-the latter consists of individualistic and
social data, in contrast with industrial facts that form the subject of economics. Accordingly,
he distinguished between the sciences of Individualism and Sociology on one side and
economics on the other. Utility is of course the ultimate personal purpose of all human activity . . . but what we have the right to ask of Economics is not the mere statement of this
self-evident fact, but the process by which this general command over utilities can be acquired
(Hawlcy 1907, 77). This view is relevant for his treatment of consumption. The science of
Economics . . . cannot include the laws of consumption, but is confined to utilising the results
of those laws as data. . . . In the last analysis demand is exercised by the individual, and all
Economics has to do with it is to notice how the extent and character of the demand influence
supply, or, in other words, how consumption affects production. Men combine to produce but
do not combine to consume. Now what does an individual living with his income do with it?
(8 1,222-23).
20. This can be easily seen in Hawleys emphasis on export surplus as an absorber of home
savings, without any mention of its multiplier impact on aggregate demand. The starting point
is a state of disequilibrium, with excess saving. The importance of this fact [the readjustment
period] to the practical application of economic theories can hardly be overestimated. It explains
the periodicity of industrial activity, the persistent belief in an excess of exports being favourable
to a nation-the explanation of which is that home capital is supplanting foreign capital either by
investment abroad, or by taking the place of foreign capital at home, thus allowing accumulation
to continue and enabling labour to obtain full employment (1907,337).Capital and Population
has an extensive discussion of the effects of tariffs and taxes on the level of activity, which
Hawley summed up in his address to the Tariff Commission in the same year (see Dorfman
1949, 131-32). On the other hand, public expenditure will affect economic activity in the
short run, due to absorbing savings that would otherwise tend to press upon the limitations
of accumulation (1927, 424). but this is a transient effect, ceasing when the state starts the
payment of its debt (424; see also Dorfman 1949, 132).
21. My assumption that Keynes was not acquainted with Hawleys works is based on the
absence of any reference to Hawley in the author index of Keyness Collected Works. If
Keynes was in any extent influenced by Hawley, that would be a case of cryptomnesia
(unconscious plagiarism), of the kind discussed by Mcrton (1963b. 402-3). The same can be
said of Wicksells pure credit economy, described by Hawley in 1882.

388 History of Political Economy 28:3 (1996)

words, Often a new idea or a new empirical finding has been achieved
and published, only to go unnoticed by others, until it is later uncovered or
independently rediscovered and only then incorporated into the science.
After all, this is what we mean by rediscovery: the signals provided by
a discovery are lost in the noise of the great information system that
constitutes science, and so must be issued anew (1963a, 380).
Though he was active as a member and treasurer of the American
Economic Association in its first years (see Dorfman 1949, 209), the
signals provided by Hawley were lost. He did not hold an academic
position and had no influence on the professions approach to economic
fluctuations. Like Johannsen, he was a New York businessman with acute
insight into the workings of the economic system. The lack of crossfertilization between Johannsens multiplying principle and Hawley s
readjustment period helps to explain why The General Theory was not
within full grasp of the New York of 1907-8.
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