Emil Kauder, Recent Developments of American Economic Thinking (1951)

Emil Kauder’s journal article surveys American economic theory from 1936 to 1951, treating the publication of Keynes’s General Theory as the beginning of a major intellectual reorientation. Its eight sections move from the social and philosophical conditions of change to aggregate analysis, price theory, distribution, international trade, and the history of economic thought; concluding summaries appear in German, French, Spanish, and Italian. Kauder’s central claim is that economics has acquired two new directions: the analysis of total income flows and the reconstruction of price theory around imperfect competition and strategic interaction. His judgment concerns the historical significance of these developments, not the demonstrated correctness of every new doctrine.

The situation after 1936 is just the opposite. Empirical institutionalism is on the down-grade and theory is on the up-grade.

This reversal reflects both institutionalism’s limitations and its partial absorption into theoretical economics. Theorists increasingly acknowledge the influence of law, custom, and social circumstances, while empirical research alone has failed to supply adequate instruments for understanding depression and unemployment. Kauder connects intellectual innovation to the Great Depression, the New Deal, oligopolistic industry, and the expanding population of younger economists. Immigration also contributes substantially, although he resists treating foreign-born scholars as simple transmitters of distinctively European methods. Keynes remains the decisive influence, but Swedish saving–investment analysis and independent developments in price theory prevent the story from becoming exclusively Keynesian.

The philosophical discussion places economic security at the center of American economists’ ethical concerns. Kauder traces their desire to improve society to Puritanism and the Enlightenment, contrasting it with Max Weber’s demand for ethical neutrality. The aspiration to plan effectively encourages mathematical precision and imitation of physical science, yet mathematical construction and empirical verification remain different achievements. He argues that econometrics has often developed formal theory more energetically than it has tested propositions. The deeper difficulty concerns what models can capture:

The empiricist investigates the economic reality with all its dynamic pulsations; the theoretical economist constructs a static model.

Kauder distinguishes Samuelson’s definition of dynamics, which relates variables across time, from approaches emphasizing uncertainty, historical novelty, and changing structural conditions. A formally time-dependent model may remain “static” in the latter sense if its assumptions never change. Ex-ante and ex-post analysis nevertheless provide useful ways to distinguish intended actions from completed outcomes without claiming to have solved economic dynamics.

The aggregate approach shifts the starting point from households and firms to the whole economy. Kauder separates Leontieff’s analysis of commodity flows, which retains connections to Walrasian price interdependence, from monetary-income analysis organized around consumption, saving, and investment. Keynes’s claim that equilibrium can coexist with unemployment supplies the latter’s central challenge to inherited doctrine. The multiplier explains successive income creation following new expenditure, subject to leakages through saving, hoarding, or imports. Kauder carefully reconstructs its logic while questioning the realism of stable prices and consumption propensities, the duration of spending rounds, and the possibility of statistical measurement.

The saving–investment controversy illustrates the value of temporal distinctions: planned saving and investment need not coincide, whereas their ex-post equality follows from accounting definitions. Applications to international payments and deficit finance extend the multiplier’s reach but also expose its disputed foundations. Fiscal disagreements ultimately concern rival explanations of unemployment and business cycles, not merely budgetary technique. Hansen’s stagnation thesis confronts Terborgh’s confidence in continuing innovation. The accelerator, developed through several intellectual lineages, explains why modest changes in consumption can produce much larger investment fluctuations; it describes their amplification rather than their original cause.

Price theory forms the second major field of reconstruction. Post-Marshallian economists refine demand curves and equilibrium analysis to address oligopoly, but disagree over firms’ knowledge, profit maximization, and the empirical standing of the kinked demand curve. Von Neumann and Morgenstern offer a more radical alternative: strategic choices depend on competitors’ responses, making isolated maximization an inadequate model. Kauder explains minimax reasoning, mixed strategies, coalitions, and alternative distributions of gains. Their methodological importance lies in preserving theory while abandoning the mechanical analogy:

Both our authors say that new laws on a non-mechanical basis can be constructed.

Game theory thus answers an institutionalist objection without accepting an antitheoretical conclusion. Its multiple possible solutions also make legal and moral standards relevant to actual outcomes. Kauder regards this as a significant concession to historical and institutional explanation, while stressing that an encompassing replacement for Marshallian price theory remains unfinished.

Change is less uniform elsewhere. Distribution retains autonomous problems, particularly the older Clark–Böhm-Bawerk controversy over capital. Interest theories remain plural, wage theory divides over marginal productivity and monetary illusion, and rent receives little new attention. International trade undergoes revision through Heckscher–Ohlin regionalism, opportunity costs, and Graham’s intermediary commodities and countries. Kauder questions national indifference curves and treats Graham’s work as a modification rather than a refutation of classical theory. New tariff arguments weaken free trade’s claim to unconditional theoretical superiority, without establishing protectionism as generally desirable.

The final section favors specialized historical research over broad surveys that obscure conceptual development beneath accumulated material. Kauder concludes that aggregate analysis and strategic price theory have widened what economics can explain, even though their success remains contested. The article’s relevance lies in this contemporary assessment of a discipline undergoing transformation: conceptual novelty is substantial, empirical adequacy uncertain, and intellectual victory still undecided.

Neither the economists nor the historians are prophets.