Paul Samuelson: Developing Economic Science

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Table of Contents

Overview
Revealed preference theory
Equalizing factors of production prices
Consumer choices
The OLG model
Works Cited

Overview

Paul Samuelson has awed people through his works in economics. Before 1930s, presentation of economics was in the form of diagrammatic models and verbal explanations. Samuelson introduced mathematical analysis and different methodologies (theories).

For these reasons, he is highly valued for raising economic science to the next level. This explains why his works made him the first American economist to win a Nobel Prize from the Nobel Memorial Prize in Economic Sciences.

Revealed preference theory

Samuelson introduced the ‘revealed preference’ theory to elaborate that people living in representative agent economies, should allow free trade to serve the purpose of improving the economic status of all people.

If free trade cannot benefit all people, countries should opt to ignore conducting free trade with other countries. With this, Samuelson was able to create the general equilibrium approach, which showed that in a trade where there are losers or winners, the winners could compensate losers so that none has to incur economic losses. This forms the basis of our economic polices today (tariff barriers elimination and lobbying for trade protection) (Rogof, 1-6).

Equalizing factors of production prices

Bertil Ohlin, the Swedish economist highlighted that international trade equalizes factors of production prices. For example, trade between the United States and India can narrow the existing wage-rate differentials.

Through mathematical tools, Samuelson exhibited the conditions under which differentials could amount to zero thus leading to creation of factor-price equalization theorem. Factor-price equalization theorem also made people understand the reason why trade liberalization relatively benefits the factor of production that is in abundance (skilled labor in the US case).

It also made people understand the reason trading in goods equalizes opportunities effectively just like trade in capital and people. The reason behind this was that if countries rich in labor export more labor-intensive goods whilst the countries poor in labor export more capital-intensive goods, there would be equalization of prices of goods.

Samuel easily proved this and came up with conditions that could allow trade in factors to substitute trade in goods. In simple terms, he provided a demonstration to show that trade in goods could equalize return on capital rates and wages across countries (University of Pennsylvanian 3-9).

Consumer choices

Samuelson made it possible to observe consumer choices and tell how a change in prices could affect the consumers. He did this by coming up with comparative statics, which made it possible to indentify changes present at the equilibrium of constrained maximization problem. The comparative statics produce positive results as long as one constraint is slightly tight or relaxed (University of Pennsylvanian 10-11).

The OLG model

Perhaps the major step that Samuelson made in his work was introducing the Overlapping Generations (OLG) model. The model shows how people undergo different economic times, thus creating cycles that can help individuals think about personal monetary economics.

People can only maximize their economic capabilities to the fullest when in the young phase (when young). However, as they become older, their lifetime utility or consumption does not stop and hence, they have to maximize their productive years during the young phase.

This has formed the basis of retirement benefit schemes where people get to save money during the young phase so that it can benefit them in their unproductive years. To sum up, we can say that Samuelson has greatly contributed in methodological and analytical economic science (Rogof, 7).

Works Cited

Rogof, Kenneth. Paul Samuelson’s Contributions to International Economics. Harvard University Department of Economics, 2005, Web.

University of Pennsylvanian. Notes on the OLG Model. University of Pennsylvania Arts and Science, 2011, Web.

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