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. LevelConsumptionInvestmentGov. PurchasesExportsReal ExpendituresSamuelson 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 ExpendituresA $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 ExpendituresA $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.
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
