• Professor of Economics at London School of Economics

• Won the 4^th Economics Nobel Prize in 1972 with Kenneth Arrow “for their pioneering contributions to general economic equilibrium theory and welfare theory”

• 1939 Value and Capital

• Revision of (Marshallian) consumer theory into its modern form:

  • ordinal utility
  • indifference curves
  • income-compensated demand curve
  • differentiates income vs. substitution effects
  • general equilibrium

• Came up with the “Kaldor-Hicks” criterion for efficiency (in part, with Kaldor)

• Also created the IS-LM model to summarize (his view of) Keynesian macroeconomics (and the idea of a liquidity trap)

• Prove, using the Kakutani fixed-point theorem that (Walrasian) general equilibrium exists

• With additional assumptions about preferences, proved that a unique equilibrium exists if utility functions be strongly concave and twice continuously differentiable

• Extremely general, works even for contingent-claims markets under uncertainty

  • Complete set of prices for all contracts that individuals trade, including contingent-contracts on future delivery of goods based on various conditions, e.g. “1 ton of Winter red wheat, delivered on 3rd of January in Minneapolis, if there is a hurricane in Florida during December”

• Prove that “the Invisible Hand works” under specific conditions

• Arrow is also known for his work in social choice theory

• Want a voting systen that meets the following criteria:

  1. Unanimity/Pareto Criterion: if all individuals prefer X≻Y, then X must be chosen over Y
  2. Transitivity: the social choice mechanism is transitive such that if X is chosen over Y, and Y over Z, then X must be chosen over Z
  3. Unrestricted Domain: all individuals are able to rank all alternatives
  4. Independence of Irrelevant Alternatives: pairwise comparisons between two alternatives are not affected by the rank of other alternatives
  5. Non-dictatorship: there is no individual that always gets their way regardless of other voters

• Formalistic methods

• Neoclassical synthesis between neoclassical microeconomics and Keynesian macroeconomics

  • the leading mainstream

• 1946 Foundations of Economic Analysis

• 1948 Economics: An Introductory Analysis

  • best-selling economics textbook for decades
  • 19 editions, coauthored with William Nordhaus, 4 million sold

• Almost single-handedly established MIT as a powerhouse in economics

• Won the 2^nd Economics Nobel Prize (first American to do so):

“More than any other contemporary economist, Samuelson has helped to raise the general analytical and methodological level in economic science. He has simply rewritten considerable parts of economic theory. He has also shown the fundamental unity of both the problems and analytical techniques in economics, partly by a systematic application of the methodology of maximization for a broad set of problems. This means that Samuelson's contributions range over a large number of different fields.” — Nobel Prize Committee

• Foundations of Economic Analysis, his magnum opus based on his doctoral dissertation

• Inspired by classical thermodynamics (and friends with William Gibbs)

“[Goal is to] examine underlying analogies between central features in theoretical and applied economics and study how operationally meaningful theorems can be derived with a small number of analogous methods.”

• Unifies many branches of economics into a series of repeated models: maximizing agents & stable equilibrium

• Comparative statics method of comparing equilibria

“By a meaningful theorem, I mean simply a hypothesis about empirical data which could conceivably be refuted, if only under ideal conditions.”

• Counterweight to Paul Samuelson’s formalism and counterweight to Keynesian macroeconomics

• Methodology: positivism & “as-if” modeling (see Class 1.2)

• Work on consumption, demand, monetary theory and history

• Free-market classical liberalism

• 1976 Nobel Prize in Economics “for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy”

“In discussions of economic policy, “Chicago” stands for belief in the efficiency of the free market as a means of organizing resources, for skepticism about government affairs, and for emphasis on the quantity of money as a key factor in producing inflation.” “In discissusion of economic science, “Chicago” stands for an approach that takes seriously the use of economic theory as a tool for analyzing a statingly wide range of concrete problems, rather than as an abstract mathematical structure of great beauty but little power; for an approach that insists on the empirical testing of theoretical generalizations and that rejects alike facts without theory and theory without facts,” (quoted in Landreth & Colander, p. 400)