Letters: Unintended consequences

The observations of Amartya Sen on Paul Samuelson place the latter’s seminal contributions in various fields of Economics in proper perspective (“Samuelson was the pre-eminent economist of our times”, December 19). However, there is one surprising comment. Sen says: “This link, between micro and macro, became a subject in economics only after Keynes. What came to be called the ‘microeconomic foundations of macroeconomics’ — that is what many others who were influenced by Samuelson developed.” There is an aggregation problem or fallacy of composition in economics where the sum of the parts does not add up to the total.

Keynes demonstrated how a rise in the savings of individuals in a country at the micro level would eventually result in a decline in the total amount saved. It is one of the foundations of the Keynesian revolution. When individuals save more, they lower effective demand, creating unutilised capacity in the economy and unemployment. This leads to the lowering of investments which, in turn, results in lower incomes and hence savings in the aggregate, ceteris paribus, calling for government intervention to fill the output gap. This link was taken up for further development by the post-Keynesians, building systemic models. Incidentally, Samuelson rated Sukhamoy Chakravarty very highly and is reported to have described him as “an economist of economists”. It is unfortunate that Chakravarty could not geta Nobel.

A Seshan, on email