FREE ESSAY ON PAUL A SAMUELSON

PAUL A SAMUELSON

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:
 An increase in prices causes a drop in household assets, thus causing consumers
to spend less.
 Increases in domestic prices reduce exports, which causes an increase in
spending on imports.
 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.
Price
Level Consumption Investment Gov. Purchases Exports Real Expenditures
(1986 $ billions)
160 400 75 100 25 600
140 450 100 100 50 700
120 500 125 100 75 800
100 550 150 100 100 9000
80 600 175 100 125 1000
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.
Price
Level Consumption Investment Gov. Purchases Exports Real Expenditures
(1986 $ billions)
160 700 75 300 -75 1000
140 750 100 300 -50 1100
120 800 125 300 -25 1200
100 850 150 300 0 1300
0 900 175 300 25 1400
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:
Price
Level Consumption Investment Gov. Purchases Exports Real Expenditures
(1986 $ billions)
160 100 75 100 125 400
140 150 100 100 150 500
120 200 125 100 175 600
100 250 150 100 200 700
80 300 175 100 225 800
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).
TOTALITARIAN SOCIETY
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)
INFLUENCES
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.
SIGNIFICANT CRITICISMS
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) 
COMPARSION/IMPACT
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. 
BIBLIOGRAPHY 
Lovewell. Play it again: Paul Samuelson and the Spending Multiplier [online].
Available: http://www.ryerson.ca/lovewell/PIAG2.html
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)
http://www.nobel.se/laureates/economy-1970-press.html
Skousen, Mark. "Samuelson retreats (slightly) from socialism." Human Events, 4/194,
Vol.50 Issue 12, p11, 3/4p, lbw