Paul A Samuelson Essay, Research Paper BIG ECONOMIC ISSUES Samuelson has offered the world many economic theories. One area he is widely known for is his views on the spending multiplier. Samuelson has presented a way through his aggregate demand model to demonstrate how the spending multiplier affects individual types of spending.
Paul A Samuelson Essay, Research Paper
BIG ECONOMIC ISSUES
Samuelson has offered the world many economic theories. One area he is widely known for is his views on the spending multiplier. Samuelson has presented a way through his aggregate demand model to demonstrate how the spending multiplier affects individual types of spending. There are several components of aggregate demand. The basis for understanding this model is as follows:
Ø An increase in prices causes a drop in household assets, thus causing consumers to spend less.
Ø Increases in domestic prices reduce exports, which causes an increase in spending on imports.
Ø The interest rate effect is when prices increase, as does the demand for money, thus increasing the interest rate. This forces a downward pressure on investment and purchases of durable goods.
Therefore, investment, exports and consumption are all inversely related to pricing. In Samuelson?s model, government spending was the only constant. This means the government will always buy the same amount of goods no matter what the price.
The aggregate demand schedule is therefore, the sum of consumption, investment, government purchases and exports. The chart below depicts the aggregate demand schedule.
LevelConsumptionInvestment Gov. PurchasesExports Real Expenditures
(1986 $ billions)
160400 75 100 25600
140450100 100 50700
120500125 100 75800
100550150 100 1009000
80600175 100 1251000
Samuelson used this model to demonstrate how changes in these components would impact real expenditures. For example, the chart below shows the results if the government increased its purchases by $200 billion.
LevelConsumptionInvestmentGov. PurchasesExportsReal Expenditures
(1986 $ billions)
A $200 billion rise in government purchases leads to a $300 billion increase in consumption. It will also reduce exports by $100 billion. When the total changes in the components have taken place, the real expenditures will increase by $400 billion at each price level.
Samuelson also used this model to demonstrate the effect changes in tax amounts could have. Taxes are not one of the components of the aggregate demand formula, but they do impact consumption and imports. If taxes increase, households have less money for domestic purchases. Following is a chart that depicts a $200 billion increase in taxes:
LevelConsumptionInvestmentGov. PurchasesExportsReal Expenditures
(1986 $ billions)
A $200 billion increase in taxes would therefore result in a decrease in consumption and an increase in exports. The real expenditures would then be $200 billion less in each price level.
This model was once the standard for forecasting these types of adjustments. It has been criticized, however, for not including any of the indirect ways in which government spending and taxes can affect the economy. The model still has relevance when examining how the government can provide stabilization to the overall economy.
FREE MARKET CAPITALISM
In his book Foundations of the Free Market System, Paul Anthony Samuelson emphasized the importance of mathematics concepts in the study of economics. Samuelson was also swept up in the Keynesian revolution. The Nobel prizewinner in economics in 1970, Samuelson considered it a “priceless advantage to have received a thorough grounding in classical economics” (Samuelson, PG).
Samuelson, like Keynes, was a total conservative. He agreed that Keynes had two basic motivations, one of which was to destroy the labor unions and the other one was to maintain the free market. Samuelson seemingly went along with Keynes, whose whole idea was to have an impotent government that would do nothing but, through tax and spending policies, maintain the equilibrium of the free market. Keynes was known as the real father of the neoconservatism movement (Anonymous bio.html).
Samuelson was opposed to the world of unregulated free market capitalism. He felt that if we were to look at the behavior of financial markets, we would find that instead of tending toward equilibrium, prices continue to fluctuate relative to the expectations of buyers and sellers. There are prolonged periods when prices are moving away from any theoretical equilibrium. Even if they eventually show a tendency to return, the equilibrium is not the same as it would have been without the intervening period. Yet the concept of equilibrium endures. It is easy to see why: without it, economics could not say how prices are determined (Soros 45).
Samuelson stressed that in the absence of equilibrium, the contention that free markets lead to the optimum allocation of resources loses its justification. The supposedly scientific theory that has been used to validate it turns out to be an axiomatic structure whose conclusions are contained in its assumptions and are not necessarily supported by the empirical evidence. The resemblance to Marxism, which also claimed scientific status for its tenets, was, Samuelson felt, too close for comfort (Soros 45).
An open society is equated to a Market Economy. Private individuals own land and businesses, and operate them for profit, and the market determines what goods are sold at what prices. Wages are set between employees and management, with workers sometimes represented by unions. The Government stimulates output through incentives and usually provides tax benefits to businesses.
A closed, sometimes referred to as totalitarian, society is also known as a Command Economy. The state owns the sources of production, which are managed by bureaucrats. Central planners set production quotas, and the Government sets wages; employee unions are non-existent. The Government is run by the Communist party, which rules with a dictatorial hand. Totalitarianism is defined as domination by a single, like-minded governing elite of all organized political, economic, social and cultural activities in a country by means of a single-party monopoly of power.
Does Paul A. Samuelson support an open or closed society? In his economics textbook, Economics: An Introductory Analysis, Samuelson spends many chapters on the socialist economics of the Soviet Union. He believed Soviet central planning could work and that the Soviet Union had growth rates exceeding the United States. However, Samuelson was not a socialist. He frequently declared his optimism about the future of capitalism and rejected doomsday predictions about another Great Depression. He believes free trade should be considered and is critical of Karl Marx?s economics. In his recent editions of his textbook he says Soviet central planning was a ?failed? model. Samuelson made these comments in an interview with U.S. News & World Report in December 1960: ?I never look upon the government as something in Washington that does something to us or for us. I think of public policy as a way in which we organize our affairs.? Therefore, we believe Samuelson supports an open society.
SUPPORT OF VIEWS
Paul Samuelson?s contributions can be divided into four main areas. These are dynamic theory and stability analysis; consumption theory; general equilibrium theory; and capital theory.
Samuelson?s dynamic theory and stability analysis departed from the traditional thinking that the analysis should not be solely in static analysis which are limited to equilibrium positions. His theory advanced the idea that analysis should also take into consideration how the economic system performs outside equilibrium and how the economy develops following a chain of development phases. This particular theory bridged a gap between static and dynamic analysis. Under this theory, Samuelson defined the conditions of a stable economic system and the methods by which the economy will return itself to equilibrium following a disturbance. An example would be when an increase in demand will bring about a rise in the prices.
Samuelson?s consumption theory defined consumer preferences on the basis of observable behavior. Previous theory looked at the effects of consumption based on incomes and prices. Samuelson believed that households would reveal their preferences by observing their purchasing behavior. This theory provided an important tool of observable behavior for economist to analyze consumption theory.
The equilibrium theory developed by Samuelson studied the interaction between all prices and quantities in an economic system. Under this theory Samuelson demonstrated that free trade is superior to protection by tariffs. Even though it is a known fact that foreign trade causes redistribution within countries, it is more beneficial for individuals benefiting from free trade to completely compensate those who lose in international trade. This method is more beneficial to all involved than the use of tariffs which raise the price of the product and reduce the rewards for international trade.
Traditional thinking regarding capital theory was that there must be an application of an aggregate stock of capital to determine the capital goods of a society. Samuelson, working with Robert Solow, developed a logical capital theory. This theory is based on the assumption that all capital goods in a society can be equated to a sum of money. (http://www.nobel.se/laureates/economy.1970.press.htlm)
The influence of Paul Samuelson can be pinpointed to one man. In his economics textbook, Economics: An Introductory Analysis, he teaches his economic philosophy based on the theories of economist John Maynard Keynes. Samuelson?s textbook is said to be the most influential presentation of the Neoclassical/Keynesian synthesis. Keynes lived from June 5, 1883 to April 21, 1946. He was a British economist, journalist, and financier, best known for his revolutionary economic theories (Keynesian economics) on the causes of unemployment and level of national income. Samuelson makes his mathematical formulations in the context of neo-Keynesian economic theory.
Another influence of Samuelson is his own life. He lived through significant events such as the depression and World War II. During these years, economic conditions varied from one extreme to another. Because Samuelson lived during these times his work centers on these types of issues.
Whom did Paul Samuelson influence? Millions of college undergraduates study economics using Samuelson’s textbook Economics: An Introductory Analysis. Since its first edition in 1948, Economics has sold more than 4 million copies and has been translated into 41 languages. It is the most successful economics textbook ever written. A lot of policy is still being made and a lot of journalism written by people who learned economics from Paul Samuelson. He has set the style for several generations of economists during the last decades.
An individual Samuelson influenced was Joseph E. Stiglitz, who he was a mentor to. Stiglitz is said to be the most prominent economic theorist of this generation. He is a professor at Stanford University, and is the chief economist and senior vice president at the World Bank. He was also an economic Advisor to President Bill Clinton. He uses mathematics and computer models to simulate economic behavior. Stiglitz studied under and highly respected Paul Samuelson for his work in economics and mathematics.
Samuelson also influenced presidents of the United States. He served as an advisor to Presidents John F. Kennedy and Lyndon B. Johnson. Samuelson has had a lasting effect on the economy and political leaders of this century.
It is believed that in the area of microeconomics Samuelson?s development of diagrams of supply and demand, or cost curves set the disciplines standard. However, in the area of macroeconomics, there are some criticisms of Samuelson?s theories.
One of these critics is Professor Mark Skousen of Rollins College in Winter Park, Florida. Professor Skousen believes that Samuelson created a false sense that there is a unified way of thinking on how economies work. Skousen states that in Samuelson?s book, ?Economics? he was introducing John Maynard Keynes? beliefs about economics that advocate the need for active government and skepticism about market outcomes. Skousen believes that people are denied the opportunity to be exposed to the trends of privatization and supply-side economics that have significantly boosted economic activity in other nations.
Skousen?s strongest criticisms of Samuelson are about Samuelson?s belief that the Soviet?s economy was proof that a Socialist command economy can function and thrive. Shortly after that statement, the Berlin Wall was torn down and the Soviets economy collapsed. Skousen?s other strong criticism is in regard to Samuelson?s ?paradox of thrift? that states that excessive savings could cause recession or worse. (Skousen, p.11)
Samuelson’s influence was felt all over the world. Indeed, his textbooks have sold more than a million copies and have been translated into French, German, Italian, Hungarian, Polish, Korean, Portuguese, Spanish and Arabic. “The book’s emphasis on different themes has changed with the changing of the nation’s economic problems,” wrote Business Week in 1959″ (Anonymous bio.html).
The first edition was dominated by the end-of-the-war worry that widespread unemployment would return while later editions put growing stress on fiscal and monetary controls over inflation. In the later editions Samuelson has worked toward what he calls a ‘neoclassical synthesis’ of ancient and modern economic findings. In short, his synthesis is that nations today can successfully control either depression or inflation by fiscal and monetary policies. It is the feeling of some economists that Samuelson’s book is really his greatest contribution. It has gone a long way toward giving the world a common economic language” (Anonymous, bio.html).
Some of Samuelson’s students and fellow theorists who joined him in his theories were Joan Robinson of Cambridge University who was a colleague and student of Keynes, as well as J. R. Hicks of Oxford who was not only substantially influenced but also made significant contributions to the Keynesian theory.
Samuelson had a global impact in that he communicated with many politicians including President Kennedy. In one report to Kennedy, Professor Samuelson made certain minimal policy recommendations “that need to be pushed hard even if the current recession turns out to be one that can be reversed by next summer at the latest.” He urged that there be strong support of pledged expenditure programs, including such things as increasing defense expenditures and foreign aid on a basis of merit and need. He also recommended pushing educational programs, high priority for urban renewal and health and welfare programs, highest priority on improving unemployment compensation, acceleration of useful public works and highway construction programs, help for depressed areas programs, and natural resource development projects (Anonymous bio.html).
Because of Samuelson’s Keynesian viewpoint on the aspect of taxation, and his unique beliefs on the theory of equilibrium in economic theory, it is obvious that his outlooks as far as taxation were concerned were at distinct odds with those of the classicists. Samuelson would favor an equilibrium tax, feeling that ‘all things being equal’ that equal taxation for the masses would be the most fair way to tax the people. The Keynesian theories were well thought out but unfortunately, have not withstood the true test of time. While the theory exists well on paper, it just does not work out to be as balanced in the actuality;
therefore, the tax policies are not realistic and are not a valid theory to support.
Lovewell. Play it again: Paul Samuelson and the Spending Multiplier [online].
Anonymous at http://nobel.sdsc.edu/laureates/economy-1970-1-bio.html
Samuelson, Paul A., Foundations of Economic Analysis, Enlarged Edition, Harvard University Press, Cambridge, Massachusetts, August 1983.
Samuelson, Paul A. and William D. Nordhaus, Economics, 16th Edition, University Press, Cambridge, Massachusetts, December 1997.
Soros, George. ?The capitalist threat.? The Atlantic Monthly, (1997): February, pp. 45(11)
Skousen, Mark. ?Samuelson retreats (slightly) from socialism.? Human Events, 4/194, Vol.50 Issue 12, p11, 3/4p, lbw
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