Transcript Paul Samuelson, 1915 -

Confidence and Effective Demand in Keynes’
Economics
UNCERTAINTY
Rush to liquidity in a
crisis only reduces
prices of securities
 i UP
“Quasi –
rents”
Yields/Profits
Interest Rate
Price of Capital Asset, Pk
(What it’s worth)
vs.
Price of Investment, PI
(What it costs to build)
Investment Spending
Multiplier
Effective Demand, Output and Employment
Stabilizing an Unstable Economy
Financial Instability Hypothesis:
•Hedge finance
•Speculative finance
•Ponzi finance
Hyman Minsky
1919 - 1996
Student of Simons/
Schumpeter
Two types of risk affect the volume of
investment.
…The first is the entrepreneur's or
borrower's risk and arises out of doubts in his
own mind as to the probability of his actually
earning the prospective yield for which he
hopes. If a man is venturing his own money,
this is the only risk which is relevant.
…But where a system of borrowing and
lending exists, a second type of risk is
relevant which we may call the lender's risk.
GT, Chapter 11.
A Minsky Cycle
•Displacement (invention, easy money)
•Boom…successful speculation
•Euphoria…financial innovation
•Profit taking
•Panic
Price of capital assets
PK
Borrower’s Risk
PI
Internal funds
Io
I1
Investment
When expectations are disappointed, investment collapses … but debts remain
Mehrling on Minsky
• How to infer financial conditions:
– Speculative financing requires periodic refinance
So Increased financial fragility
 Increased difficulty rolling over loans
 Increased demand for bank loans…But banks
finance “speculatively”
 Problems of bank refinancing
• Evolution of financial fragility:
Post WWII: Treasury bills  refinancing “automatic”
Banks reduced T-bill held  Money market financing
• But Fed not responsible for money market
• Fed policy of “brinksmanship”
 lender of last resort only in crisis
Increased volatility of short-term rates
Higher s-t rates  refinancing by pledging ever greater
future cash amounts.
So refinance increases fragility rather than restores
robustness. Natural thrust toward fragility is amplified, not
dampened, by financial system.
Refinance becomes impossible for some overextended
units  crisis erupts.
They default  efforts of others to refinance upset.
OR they attempt to “make position by selling position”
 fire
sale
 Undermine collateral support for the existing
debt structure.
Mehrling on Minsky
• Periods of tight liquidity  short rates rise (incentive for
stretching liquidity)
– Value of today’s cash flows rises relative to cash
flows in the future.
• Demand price of capital assets (Pk) falls
• Supply price of investment goods (Pi) rises
(interest is a cost of production).
– The incentive to invest is reduced.
• The greater danger:
» collapse of investment spending
» reduced aggregate income
» cash flows elsewhere in the economy fall
short of expected levels
» hedge finance units  speculative units
» speculative units  Ponzi units,
» the fragility of the system increases.
– An investment slump might amplify the financial
problems of a few units and bring the whole system down
in a cascade of debt deflation.
Macroeconomics: Keynes’ Legacy
Left
State
Intervene
P
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I
C
Y
F
U
N
A
M
E
N
T
A
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S
M
o
d
e
r
n
Right
Market
Laissez-faire
Keynes
Friedman
Samuelson
Brunner
Modigliani
Meltzer
Tobin
Klein
Taylor
Shiller
Bernanke
P
r
o
g
r
a
m
Hicks
Samuelson
Saltwater
Fischer
Blanchard
Freshwater
Lucas
Sargent
Prescott
Paul Samuelson, 1915 - 2009
• BA, Chicago, 1935
• PhD, Harvard, 1941
• Let those who will
write the nation’s
laws – if I can write
the its textbooks.
• Economists have
correctly predicted nine
of the last five
recessions.
• Investing should be more
like watching paint dry or
watching grass grow. If
you want excitement,
take $800 and go to Las
Vegas.
• In this age of
specialization, I
sometimes think of
myself as the last
generalist in economics
• Funeral by funeral,
theory advances.
– Foundations of
Economic Analysis,
published 1947
• M.I.T. 1940 – 2009
– Radiation Lab
– Economics text
• 1st edition, 1948
• 17th edition, 2007
– Clark Medal 1947
– Nobel Memorial
Prize, 1970
Paul Samuelson, Notable Concepts
Mathematical economics:
constrained optimization
• Revealed preference
• Factor price equalization
• The transfer problem: improved on Hume
• Economics of public goods
• Turnpike theorem for growth
• Overlapping generations framework
• Randomness of speculative prices
 efficient market hypothesis
• The U.S. Phillips Curve (with Solow)
 a policy menu?
– 1964 Kennedy – Johnson Tax Cut
– 1968 Vietnam War Surtax
• “…Adam Smith gave two resounding cheers for
individualism; but for state interference of the pre-19th
century type he could muster only a bronx cheer.
Make no mistake about it, Smith was right. Most interventions into economic life by the State were then
harmful both to prosperity and freedom…Good intentions by government are not enough; acts do have
consequences that had better be taken into account…”
Keynesian Pantheon
Alvin Hansen
1887 - 1975
“The American Keynes”
•Economic Policy and Full Employment, 1946
•A Guide to Keynes, 1953
Simon Kuznets
1901 – 1985
Nobel Memorial Prize, 1971
•National Income and Its Composition: 1919-1938,
1941.
Ragnar Frisch, 1895 – 1973
•Econometrics, “Macroeconomics”
•Nobel Memorial Prize, 1969
Jan Tinbergen, 1903 – 1994
•First econometric model
•Nobel Memorial Prize, 1969
John Hicks
1904 – 1989
Nobel Memorial Prize, 1972
Mr. Keynes and the Classics, A Suggested
Interpretation, Econometrica, 1937.
Keynesian Pantheon
•A Textbook of Econometrics, 1953
•The Empirical Foundations of Keynesian
Economics, 1954
•An Econometric Model of the United States:
1929 – 1952, 1955
•An Introduction to Econometrics, 1962
Lawrence Klein
1920 –
Clark Medal, 1959
Nobel Memorial Prize, 1980
James Tobin
1918 – 2002
Clark Medal, 1955
Council of Economic Advisors, 1961-2
Nobel Memorial Prize, 1981
•Liquidity Preference as Behavior Towards
Risk, Review of Economic Studies, 1958
•Tobin q / Tobin tax
Walter Heller, 1915 – 1987
•Chair, Council of Economic Advisors, 1961 - 1964
Franco Modigliani
1918 – 2003
Nobel Memorial Prize, 1985
•Liquidity Preference in the Theory of Interest
and Money, Econometrica, 1944
•The Life Cycle Hypothesis of Saving, AER,1963
•MPS: MIT-Penn-System Model
Keynesian Pantheon
Robert Solow, 1924 –
Clark Medal, 1961
Council of Economic Advisors, 1961-2
Nobel Memorial Prize, 1987
•A Contribution to the Theory of Economic Growth,
QJE, 1956
•Analytical Aspects of Anti-Inflation Policy (with
Samuelson), 1960
A.W. Phillips, 1914 – 1975
Paul H. Douglas, 1892 – 1976
“…the greatest of all Senators”
Martin Luther King
U.S. Senator (Illinois), 1949 - 1967
Chair, Joint Economic Committee
•A Theory of Production (with Cobb), AER, 1928
•Real Wages in the United States, 1930
•The Theory of Wages, 1934