Money, Banks and Finance in Economic Thought

Instability at the Cowles Commission (1939-1944)

Michaël Assous, Université Lumière Lyon2

Oskar Lange's interpretation of Keynes’s General Theory touched off extensive discussions at Cowles in the early 1940s. Lange asserted the existence of a continuity between Keynes and Walras (Lange 1938, Rubin 2016) and argued effectively that a stationary equilibrium with involuntary unemployment could be proven when the labor supply elasticity is infinite (Lange 1938, p. 31, 1944, p. 6). Though, claimed Lange, by resorting to a static analysis, Keynes chose the wrong battlefield. For one thing, The General Theory is confined to a time period in which the capital stock is constant while its model produces a solution which alter it (Lange 1938). Most importantly, a point on which Lange insisted, is that as soon as one assumes excess supply of goods and labor cause money wages and prices to fall, one must be willing to acknowledge the phenomena Keynes described are better regarded as disequilibrium dynamics. Promoting that line of reasoning during his stay at the Cowles Commission in the early 1940s, Lange intensively relied on Samuelson’s stability analysis (1941, 1942) and strove to prove full employment equilibrium may be unstable. In this paper, we want to examine the modeling strategy followed by Lange at the time he was at the Cowles . More generally, based on a comparison of Lange with Cowles scholars who were simultaneously developing new dynamic models, the hope is to identify a specific vision of aggregate instability developed at the Cowles in the mid 1940s.

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Keywords: Lange, instability, Cowles Commission, Samuelson, dynamics

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