Abstract
Samuelson’s eighth edition of his Economics presented an excellent elaboration on and explanation of Keynes’s overall analysis in the General Theory. Samuelson covered the reasons why a “free” market, Laissez Faire economy, operating with minimal government, would never be able to provide a full employment amount of investment in real capital. Thus, Investment spending will always be ”highly variable” and “relatively unpredictable “unless counteracted by the appropriate mix of necessary expansionary and contractionary fiscal and monetary policies over time. Samuelson covered the connection between expectations and uncertainty, as well as covering the real possibility of a liquidity trap, where the impact of a collapse of confidence in expected returns from durable investment results in a liquidity preference “uncertainty floor”, where monetary policy can’t work because of the interest rate bound of 0 %.Samuelson treated uncertainty as extrinsic uncertainty .Hence ,the impact of uncertainty is modeled as occurring outside the pure, formal, economic model based on microeconomics alone. It is modeled as creating unexpected and unanticipated, large shifts in the relevant microeconomic demand and supply curves. These shifts cause Investment expenditures, at the aggregated macro level, to be ” highly variable” and “relatively unpredictable” over time, leading to involuntary unemployment unless counteracted by continuous and vigorous government (public) intervention. There is no “Invisible Hand” that will allow the private sector to self adjust internally by itself. At the micro level, the result will be a “very slowly adjusting disequilibrium” that could require decades to eliminate, assuming that there are no other uncertain impacts that occur in the intervening period of time while the adjustment process to the initial uncertain event takes place. If uncertainty is pervasive, then the initial disequilibrium is never eliminated because another uncertain event impacts the economic system before such adjustment can take place. The private sector is thus in a permanent state of disequilibrium due to ambiguity about the business cycle, expectations, irrational exuberance,innovation, technological change, the threat of obsolescence, etc., that cause the mec schedule to shift unpredictably through time.Samuelson’s mastery of chapter 12 of the General Theory allowed him to accurately predict the Dot.com implosion and recession of 2000-2001 in 1996 (Cover,Kindleberger, 3rd edition). Predictions with comparable accuracy to Samuelson’s would be American Brigadier General Billy Mitchell’s 1924 prediction that sometime in the future at 7:30 AM on a Sunday morning, the Japanese Imperial Navy will launch a surprise attack on Pearl Harbor from aircraft carriers and Bertrand Russell’s prediction in 1948 that a man would be landed on the Moon by 1975.
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