The Making of Modern Economics the Lives and Ideas of the Great Thinkers Mark Skousen

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The Making of Modern Economics The Lives and Ideas of the Great Thinkers Mark Skousen Chapter 14 – Paul Raises the Keynesian Cross: Samuelson and Modern Economics Samuelson’s Goal: To Raise the Keynesian Cross Atop a New House of Economics • Paul Samuelson – The “Keynesian cross” income-expenditure diagram (Figure 14.1) o Savings (S) increases with national income (NI) o Investment (I) is autonomous and independent of saving o Equilibrium (M) is the point where S = I which falls short of full-employment income (F) How the Multiplier Works Magic/ The Paradox of Thrift Denies Adam Smith • Two ways for the economy to grow and reach full employment under Keynesian theory o Shift investment schedule (I) upward o Shift saving schedule (S) to the right • In the Keynesian model, if the public decides to save during a recession, it only makes matters worse. o “Under conditions of unemployment, the attempt to save may result in less, not more, saving” (Samuelson 1948: 271). Solow’s Growth Model • Figure 14.6 – Solow Growth Model Diagram gave Robert Solow two conclusions o 1st – Increased saving has a positive impact on economic growth, but saving is subject to the law of diminishing returns. o 2nd – 4/5 of the growth in US output per worker was attributed to technical progress. Keynesian Economics Makes a Comeback: The Creation of Aggregate Supply and Demand • Figure 14.7 – The Phillip’s Curve o Shows the trade-off between inflation and full employment Post – Keynesian Economics Today • Paul Krugman argues that 4 Keynesian ideas are prevalent in today’s economics o Economies often suffer from lack of aggregate demand Æ involuntary unemployment o The market response to shortfalls in demand happen slowly o Government policies can make up for this shortfall in demand by reducing unemployment o Monetary policy may not always be sufficient in stimulate private sector spending .

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