Samuelson RIP

Paul Samuelson died last weekend, and its a fitting time to assess his economic output. People I knew who knew him never failed to note his great intelligence, which was probably off the IQ charts. Given that cleverness is probably the most important quality of an economist-respected economist, his prominence is mainly a 'he's *SMART*' response everyone has when discussing his work.

Samuelson was an economist's economist, publishing almost a paper a month in his prime. His papers were rigorous, and often invoked obscure theorems as if everyone knew them. His Foundations of Economic Analysis laid down the rigorous methodology, showing how economics can be fruitfully studied as the solution to maximization problems explicitly employing differential and integral calculus: equilibrium based on the solution to maximizing agents. Little remembered was he also stressed a 'correspondence principle', so that equilibria needed a certain degree of robustness, stability, to be important. This property was later basically ignored. He gave us our first understanding of how randomness is consistent with ration expectations, overlapping generations model, revealed preference theory, and several other major tools in the economic modeling toolkit.

But the best way to evaluate Samuelson's thinking on economics is to look at the evolution of his Principles text, which dominated the field for 30 years. He built up what was to become orthodox Keynesianism: that Government spending was basically the same as Investment (in that old C+I+G), in that both added to the capital stock. Via the Multiplier, Government spending magically created 3 times its spending in output. This implied that expenditures were almost always a free lunch. He focused on the Paradox of Thrift, the idea that economies tend to save too much, retarding growth, and necessitating government deficit spending when below full employment (which is always the case in real time). He believed private enterprise is afflicted with periodic acute and chronic cycles in unemployment, output and prices, which government had a responsibility to alleviate. "The private economy is not unlike a machine without an effective steering wheel or governor," Samuelson wrote. "Compensatory fiscal policy tries to introduce such a governor or thermostatic control device" (Principles, 1948)

Samuelson generally thought taxes were innocuous at worst, but often morally just, and productive. Several editions displayed a chart showing that poor, underdeveloped countries had a tendency to tax less, relative to national product, suggesting causation (Principles, 1958). He thought the Laffer-curve was incorrect, and that greater progressivity to taxes would not only stimulate the economy directly (because the rich consumer less than the poor at the margin), but taxes might actually make some people "work harder in order to make their million."

He emphasized market failure as endemic to capitalist systems, including imperfect competition, externalities, inequities, monopoly power and public goods. Samuelson pointed out that the government could take of "an almost infinite variety of roles in response to the flaws in the market mechanism" Explanations of market failure deserve a counterbalancing discussion of government failures, which are not difficult to document, but this was not considered very important to Samuelson, relatively.

Just before the fall of communism in the thirteenth edition (1989), Samuelson and Nordhaus declared, "the Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive." Six years later in the fifteenth edition (1995) they noted that Soviet Communism was a "failed model". He did not have much to say about the free market success stories, from West Germany's post war recovery, or the success of countries Korea, Singapore, Taiwan, Indonesia, Malaysia and Thailand. If it couldn't be traced to a government program, it wasn't that interesting.

He made market perfection the enemy of the good, ignoring the government failures Public housing, international aid, Africa, India, the lowered labor participation of African Americans, higher levels of debt, the destructive effects of unions on the US steel and auto industries, all irrelevant, relative to various market failures. His students include Krugman and Stiglitz, who clearly were influenced by Samuelson's natural skepticism of the market.

But, he had good faith, and was a disciplined, honest, and thoughtful person. He avoided engaging in the ad hominem and bad faith assumptions that are so common in Krugman and Stiglitz's op-eds (Samuelson wrote op-eds for Newsweek for a long time). Yet, he was wrong about the biggest issues in his main area of expertise. To me, this highlights that the really important truths in life aren't black and white truths you can discern through sufficient effort and intelligence. It's like giving a random person a big computer with a googleplex of RAM, CPU, and access to the internet: that person will not become productive with a high probability. Getting right answers seems based on some pre-deliberative assumptions, prejudices, and there I think his intuitions led him astray. Rest in peace.