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The Keynesian Revolution Paul A. Samuelson (1915-2009)

The Keynesian Revolution

Paul Anthony Samuelson (1915 - 2009)

Hans-Walter Lorenz (FSU Jena) A Short History of Economic Thought Winter 2017/18 111 / 148


Vital Dates

◮ Born May/15/1915 in Gary, Indiana, as the son of the pharmacist

Frank S. and his wife Ella Lipton, both Jewish immigrants from

Poland

◮ Bachelor of Arts from the University of Chicago in 1935 and

Master of Arts in 1936

◮ Ph.D. in Economics in 1941 from Harvard with a thesis on utility

measurement (David A. Wells price for best dissertation)

◮ Lived in an economists’ family: Robert Summers as brother,

brother-in-law Kenneth Arrow (see below) and nephew Larry

Summers

◮ Died Dec/13/2009 in Belmont, Massachusetts



Academic Career

◮ Assistant Professor at MIT (Massachusetts Institute of

Technology, Cambridge, MA) in 1940

◮ Full Professor of Economics in 1947

◮ 1966: Institute Professor at MIT (considered as most prestiguous

title at MIT)

◮ Advisor to US presidents John F. Kennedy and Lyndon B. Johnson

◮ Consultant to the US Treasury, the Bureau of the Budget and the

CEA

◮ Weekly column in Newsweek – alternating with the Monetarist

Milton Friedman (see below)



Major publications

◮ Foundations of Economic Analysis. Cambridge: Harvard

University Press 1947

◮ Economics: An Introductory Analysis. New York: MacGraw-Hill

1948 (until 2009: 19 eds., translated into 40 languages, over 4

Mill. copies sold)

◮ Very large number of journal articles etc., collected in: Collected

Scientific Papers, 7 volumes. Cambridge, MA, 1966-2011



Elements of Samuelson’s Work

S. contributed to nearly all relevant fields in modern economic theory

(and laid the foundations for many of them). Examples:

◮ Business cycle theory: multiplier-accelerator (equilibrium) model

with lagged consumption and investment acceleration as the

source of cyclical movements of a simple macro-economy

◮ Choice acts: development of the theory of revealed preferences

(how can individual preferences be derived from observing actual

choices made by the individuals). Culminated in establishing the

‘strong’ and ‘weak’ axiom of revealed preferences, later refined by

John Hicks and others

◮ International Trade Theory: So-called Stolper-Samuelson

theorem. In the context of the Heckscher-Ohlin standard

neoclassical pure trade model: changes in the relative price of a

good with a dominance of a particular factor of production imply a

relative change in the price of this factor.


The Neoclassical Synthesis and the New Classical Economics

The Neoclassical Synthesis and the New Classical

Economics

This section deals with three basically distinct, but conceptually similar

fields:

◮ Performing regiorous mathematical analyses of generalizations of

neoclassical microeconomics

◮ Approaches in order to combine neoclassical elements with

Keynesian economics

◮ Re-introducing classical/neoclassical equilibrium elements into

macroeconomics


The Neoclassical Synthesis and the New Classical Economics Arrow (1921-2017)


Economics

Kenneth Arrow (1921-2017)



Vita and Academic Career

◮ Born Aug/23/1921 in New York into a family of Romanian

emigramts

◮ Studies of mathematics (and later also economics) at Columbia U.

MA in mathematics in 1941

◮ After his military service (as a weather officer) return to Columbia

in 1946 and later to the U. of Chicago. Ph.D. in Economics from

Columbia in 1951

◮ Prof. of Economics at Stanford since the mid-1950s (with an

intermediate position at Harvard between 1968 – 1972)

◮ In the 1960s: Member of the Council of Economic Advisors

◮ John Bates Clark Medal in 1957; Nobel Prize in Economics in

1972 (together with John Hicks)



Major Academic Fields

◮ Impossibility Theorem: It is impossible to encounter social

preferences which (simultaneously) fulfill all five properties

◮ non-dictatorship◮ individual sovereignty◮ unanimity◮ independence of irrelevant alternatives◮ uniqueness of group ranking

◮ General Equilibrium Theory

◮ Fundamental Theorems of Welfare Economics

◮ Uncertainty Issues


The Neoclassical Synthesis and the New Classical Economics Friedman (1912-2006)


Economics

Milton Friedman (1912-2006)



Vital Dates

◮ Born Jul/31/1912 in Brooklyn, NY, as the son of an immigrant

family from Carpathian Ruthenia / Ukraine

◮ College years at Rutgers University; major in economics and

mathematics

◮ M.A. in economics from the University of Chicago in 1933

◮ Various appointments as lecturer and research assistant at

Columbia University, NYC, and the University of Chicago; 1935 -

1943: assistant for the National Resource Committee, the NBER,

and the Treasury Dept.

◮ Ph.D. in economics from Columbia in 1946

◮ 1946: move back to Chicago; full professor of economics: 1948

◮ 1976: Nobel prize in economics (for his consumption studies)



Major Works

◮ Essays in Positive Economics. Chicago: Univ. of Chicago Press

1953

◮ A Theory of the Consumption Function. Princeton: Princeton

University Press 1957

◮ A Monetary History of the United States, 1867-1960 (with Anna J.

Schwartz). Princeton: Princeton University Press 1963

◮ The Optimum Quantity of Money, and Other Essays. Chicago:

Aldine 1969



Major Contributions

◮ Consumption Theory

Household consumption depends mainly on permanent income

(in addition to temporary consumption depending on temporary

income):

y = yp + yt, c = cp + ct and cp = k(·) · yp

with yp as a statistical measure of permanent income derived from

a typical lifetime income, yt as a temporary component, cp and ct

as the associated consumption levels, and k(·) as a function with

interest rates, a wealth/income ratio and household preferences

as arguments

◮ Phillips curve

Importance of inflationary price expectations in the location of the

u, π-curve (π: inflation; u: unemployment rate). Long-run Phillips

curve as a vertical line



Major Contributions (cont.)

◮ Critique of Keynesian Economic Policies

◮ Lag problem

(recognition lag, legal lag, execution lag etc.)

◮ Ineffectiveness of discretionary policies when expected

◮ Monetary Policy

◮ In sharp contrast to Keynes, F. stressed the importance of moneyfor stabilizing an economy in case of high inflation and high

unemployment: “Money matters!”

◮ Rules for monetary activities

◮ Steady growth of the money stock (M1, M2, etc., not only central

bank money (!))

◮ Cardinal utility theory (v. Neumann-Morgenstern utility): Possibility

of S-shaped expected utility function in order to allow for risky

(gambling) behavior of individuals at certain occasions



Public Activities

◮ Various activities as economic policy advisor for

◮ the Eisenhower, Nixon, Ford and Reagan administrations

◮ the Pinochet administration in Chile after the military coup against

Salvador Allende

◮ the administrations in Iceland, Estonia, Hongkong (before the

independency)

◮ Regular column in Newsweek from1966 to 1984; ten part TV series

on economic policy

◮ Advocat for a variety of so-called ‘liberal claims’. Examples:

◮ Abolition of industrial regulation

◮ No farm price supports

◮ No minimum wages

◮ But: claim for free drug availability, strict antitrust policy, indexation

of wages, negative income tax for the poor


Evolutionary Economics


Basic idea:

Is it possible to transpose the ideas of (biological) evolution (as

proposed by Charles Darwin) to economics?

Major topics

◮ Application of Darwinian ideas to questions of economic

development

◮ How does new knowledge (e.g. about technical progress)

emerge?

◮ Research in innovation activities in personal, subjective contexts

(entrepreneurship) and network phenomena

◮ Business cycle research


Evolutionary Economics Schumpeter (1883-1950)


Joseph Alois Schumpeter (1883-1950)



Vita and Education

◮ Born Feb/8/1883 Triesch (now Czech rep.)

◮ Law student in Vienna; 1908 doctorate in law

◮ attended lectures by Bohm-Bawerk, who later acted first as a

supporter and eventually as an opponent

◮ visits to Berlin/London/Cambridge universities

◮ marriage with G.L. Seaver, early divorce. 2nd marriage with an

early death of his spouse; 3rd marriage with Elizabeth Boody in

1926 (who was responsible for the posthumous publication of his

History

◮ Died on Jan/8/1950 from a stroke in Taconic/Connecticut.



Academic Career

◮ Move to Egypt (Kairo); habilitation 1908 in Kairo

◮ “Privatdozent” Wien; 1909: Franz-Joseph Universitat Czernowitz

(today Ukraine)

◮ 1911: Karl-Franzens-Universiat Graz

◮ 1913/14: 6 months visit to Columbia University, NYC

◮ 1919-1932: activities in the political field and in business sectors.

1919 Austrian Minister of Finance (“Staatssekretar fur Finanzen”

in the Renner II administration, in duty for seven months only) and

president of a private bank (tremendous losses after speculation

failures)

◮ 1932: Full Professor of Economics at Harvard University

◮ 1940/41: President Econometric Society

◮ 1948: President American Economic Association



Major Contributions

◮ Theorie der wirtschaftlichen Entwicklung. Leipzig: Duncker &

Humblot 1912

◮ Capitalism, Socialism and Democracy. New York: Harper 1942.

◮ Business Cycles. 2 volumes, New York: McGraw-Hill 1939

◮ March into Socialism. American Economic Review, Papers and

Proceeding 15, p. 446-456, 1950

◮ History of Economic Analysis, (published posthumously, ed.

Elizabeth Boody Schumpeter), New York: Oxford University Press

1954.



Major Contributions

◮ Entrepreneurship: the entrepreneur as the essential driving force

of economic evolution. Person who exploits (own or external)

important inventions for the purpose of turning them into

innovations and realizing profits from the emerging new products

(or production techniques). (Similarity with Marx’ views on the

dynamics of capitalist societies).

◮ Business Cycles (driving force)

Important role of the entrepreneur in the generation of cycles: in

depressions→ active role of the entrepreneur who is looking for

possible profit realizations in the form of performing innovations→‘creative destruction’ of old structures and establishment of new

products→ imitation by other suppliers→ ceasing of profit

opportunities→ downturn→ eventual repetition of the process by

new innovations due to entrepreneurial activities.



Major contributions (cont.)

◮ Business Cycles (structure)

Superposition of cycles with different lengths:

1 Kontratieff-C. ≈ 6 Juglar-C. ≈ 18 Kitchin-C.

◮ History of Economic Thought

◮ Encyclopedic treatment of the subject in the History of EconomicAnalysis (1954). 1184 pages (!)

◮ Covers the history of thought from ancient times to Keynes

◮ Dwells into fields usually unnoticed by biographs and reviewers


Evolutionary Economics Nelson (1930-) and Winter (1935-)


Richard R. Nelson (1930-) Sidney Winter (1935-)


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