Paul A. Samuelson: A Legendary Economist

 Paul A. Samuelson

(1915 - 2009)

"What we know about the global financial crisis is that we don't know very much."

                                                                                    ——Paul A. Samuelson

The seer of economics, a “generalist” who had his “finger in every pie” within the field of economics, leaving his seemingly simple but intrinsically complex question —“Is there not some realistic trade off between more equality and more cumulative progress?”— for us to ponder, died on December 9^th  2009.

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The discipline of economics lost one of its giants in the death of Paul Anthony Samuelson, an Institute Professor Emeritus and Gordon Y Billard Fellow at MIT, who, right from 1932, enlivened the waiting “sleeping beauty of political economy” with his “kiss of new methods, new paradigms, new hired hands and new problems” till he died at his home in Massachusetts at the ripe age of 94.

Paul Samuelson was born in Gary, Indiana, US, in 1915. He earned a bachelor’s degree in 1935 from theUniversity of Chicago. Being “never one to blindly accept adult advice”, he, despite the advice of his mentors inChicago to join Columbia University, moved to Harvard, of course, “by miscalculation”, to obtain a master’s in 1936 and a PhD in 1941. In 1940, when Harvard offered him instructorship, he accepted it, but later, knowing the  'revealed preference' of Harvard University, switched over to the Massachusetts Institute of Technology when they invited him as assistant professor, and later in 1947 became the professor of economics. In a span of seven decades, he transformed MIT into an economics powerhouse—all by virtue of finding early in his life such a kind of work that “has been pure fun”.

As Paul Krugman felt, it is hard to comprehend the full extent of Samuelson’s greatness, for as against the usual craving of every economist to write at least one seminal paper, a paper that fundamentally alters the way economists think about an issue in one’s lifetime, he wrote dozens. “He provided a unified set of principles under which several economic fields could be linked”, said Jagadish Bhagwati of Columbia University. 

His prodigious brilliance became evident right from his nineteenth year when he audited a graduate course taught by the legendary Chicago economist, Jacob Viner, pointing out his blackboard errors.  And when such phenomenal brilliance is married to his passion for economics, which reflects aptly in what he once said, “I was reborn when at age 16 on January 2, 1932, 8.30 a.m., I walked into a Midway lecture hall to be told about Malthusian population”, the outcome cannot be less rewarding: his PhD thesis submitted to Harvard university had resolved the then prevailing contradictions, overlaps and fallacies in the classical language of economics by unifying and clarifying them using mathematics as a tool. And such revolutionary output cannot but, as Samuelson himself said, confront the fellow economists who had been practicing “mental gymnastics of a peculiarly depraved type” like “highly trained athletes who never ran a race”. Indeed, there was an unconfirmed anecdote doing rounds in those days that highlighted Samulson’s exceptional grasp of economic theory: it says that “at the end of Samuelson’s dissertation defense, Schumpeter turned to Leontief and asked, ‘Well, Wassily, have we passed?’”     

Samuelson, on the one hand enjoying the benefit of being the sole protégé of the polymath Edwin Bidwell Wilson (the only protégé at Yale University of Willard Gibbs) at Harvard by way of getting “essential hints that helped in the development of revealed preference…” and on the other hand surprised “at the little help he could garner from the scores of leading mathematicians and physicists like Birkhoff, Quine, Ulam, Levinson, Kac, or Gleason, who had no motivation to waste their time getting intuitively briefed on someone else’s model in the idiosyncratic field of mathematical economics”, and at the same time “self-taught [mathematics] by spending himself in the library stacks on mathematics”, brought relevant mathematics into economic thinking to present a unified mathematical structure for predicting how businesses and households would respond to changes in economic forces, how changes in wages would affect employment, and how changes in tax rates would affect tax collections.  With his acumen to use mathematics as a language to explain how consumers react to changes in prices and income, he came out with his theory of ‘revealed preference’ in microeconomics. Pushing the mathematical analysis to a higher plane of sophistication, he used comparative statics and dynamics to propose the ‘correspondence principle’—the theoretical link between the behavior of individuals and the aggregate stability of the entire economic system—which he later applied to successfully explain the dynamic stability of general equilibrium.  

He had developed a mathematical model to study the impact of trade on different groups of consumers and workers. His famous Stolper-Samuelson theorem established that competition from imports of consumer goods from underdeveloped countries is all set to drive down the wages of low-paid workers in industrialized countries. He even stated that the US economy could get hurt if productivity of its trading partners rose. In his interview to William A. Barnett in Macroeconomic Dynamics he categorically said: “Free trade need not help everybody everywhere.” Yet, he remained an advocate of open trade proclaiming that it is the higher productivity that helps but not ‘protectionism’. Driven by such philosophy, he supported the North American Free Trade Agreement, and also signed a letter supporting expanded trade with China. Nonetheless, Stolper-Samuelson theorem became the intellectual lever in the hands of the opponents of the globalization to drive home their argument. It is no wonder therefore for Stiglitz to say, “Some of the work he [Samuelson] did—Trade theory and international economics—is more important today than it was then.”

Samuelson developed the commonly known “Bergson-Samuelson social welfare functions”, followed by formulating the theory of ‘public goods’—goods that can be offered effectively only through collective or government action. For instance, Air force is one such public good— it is non-exclusive and also eliminates rivalry among consumers, which means that the amount of security that citizen ‘A’ consumes does in no way reduces what citizen “B” is entitled to. It otherwise means that public goods cannot be sold in markets because there is no incentive for the consumer to pay voluntarily; instead they look for a free ride. He had successfully tied “public goods” with neoclassical theory.

He had also formulated the modern theory of production. His theory of capital, though contentious, is well received. In association with Solow, he initiated the analysis of dynamic Leontief systems. He developed linear programming for the use of central planners or corporates to estimate how to produce preset levels of goods and services at the least cost. Introducing “surrogate” production function, he became the main adversary of Joan Robinson in the ‘Cambridge Capital Controversy, but being a man who “hate[s] to be wrong” and “hate[s] much more to stay wrong”, he subsequently relented graciously.

In macroeconomics, his multiplier-accelerator macrodynamic model—rudimentary mathematical business cycle model that defined the inherent tendency of market economies to fluctuate—that could show how markets can magnify the impact of, say, one dollar increase in foreign investment into a several dollar increase in total domestic income, to be followed by a decline, is rightly famous. So is the case with the presentation of the Philips curve jointly with Solow. Similarly, he is much acclaimed for popularizing the ‘overlapping generations’ model along with Allais that was later used for many applications in macroeconomics and monetary theory—many scholars used the model to study the functioning of the Social security system and the management of public debt.   

Later, directing his attention to financial markets, he put together mathematics to predict stock price movements. Indeed, his work on speculative prices is a pointer to the efficient market hypothesis. His work on ‘diversification’ and the ‘lifetime portfolio’ is equally well known. It is these mathematical analyses that constitute the platform from which Merton and Scholes have come up with their Nobel Prize winning ‘Option Pricing model’ which is extensively used by the Wall Street to trade on derivatives. He is recognized as one of the founders of modern finance.

Over and above all these astonishing mathematical conclusions and economic theorems, Samuelson—whose “Chicago trained mind resisted tenaciously the Keynesian revolution; but reason won out over tradition and dogma”—is known more for his marrying Keynes’ The General Theory’s main paradigms pragmatically and opportunistically to conventional economics and ultimately developing the neoclassical synthesis. He had almost a life-long debate with his neighbor from Chicago, Milton Friedman—a monetarist and a staunch believer that governments do not know the welfare of people— on how even modern free market economies could get trapped in liquidity traps during periods of depression needing pump-priming from government or tax-cuts, in addition to easy monetary policy, to come out of them. Indeed, Samuelson, who had the real experience of the boom-bust economic effects of World War I, and the Great Depression, taking Keynes as his intellectual hero, articulated all along that economic stability and growth required government intervention. In fact, he walked his talk: as adviser to the newly elected President Kennedy, Samuelson told him that the nation was heading into a recession and so he should push through tax-cut to head it off. The government had of course implemented his advice and the economy bounced back. Even the recent global financial crisis vindicates Samuelson’s strong faith in Keynesian philosophy.

Samuelson, best known for his methods and innovations but not politics, had been invited by two presidents —Kennedy and Johnson—to join the Council of Economic Advisers, but as Solow, a Nobel Laureate in economics who sat next to Samuelson in MIT for 50 long years, once observed, Samuelson, in his preference for “the role of an idea person” rather than being “a person for an everyday routine, for committee meetings and that sort of thing”, declined their invitation saying he did not want to put himself in a position in which he could not say and write what he believed.

Ultimately, it is this singular asserted focus of him that enriched his life with a long list of accomplishments: won David A. Wells prize in 1941 for writing the best doctoral dissertation—The Foundations of Economic Analysis—at Harvard University, which in the words of Kenneth Arrow, “is a treatise … that has so much originality in every part that it is entitled to be accepted as a thesis”; was awarded the John Bates Clark medal in 1947, given annually by the American Economic Association to the outstanding economist under the age of 40 on his publishing the book,  Foundations of Economic Analysis, one of the grandest tomes that helped revive Neoclassical economics and launched the era of the mathematization of economics; he was the first American to be awarded Nobel prize in economics in 1970 by the Swedish Royal Academy “for the scientific work through which [he] has developed static and dynamic economic theory and actively contributed to raising the level of analysis in economic theory”; and finally the National Medal of Science, America’s top science honor, in 1996, for his “fundamental contributions to economic science, specifically general equilibrium theory and macroeconomics, and to economic education and policy over a period of 60 years.

Samuelson was the most prolific writer of his profession. Besides five books, he had published 550 academic papers on topics ranging from the theory of production to consumer choice  to international trade to finance to growth theory, setting the agenda for generations of scholars. His Econimics, first published in 1948, has become the best selling  economic text book of all time. Paul Krugman, who examined the original edition of 1948 before launching  himself on writing a new book, said that "it is extraordinary work, lucid, accessible without being condescending and deeply insightful." According to him, Samuelson's discussions on speculation and monetary policy are particularly striking, for it brings Keynesian economics to America——which is perhaps, more relevant today than ever. No wonder, it has been translated into many world languages and sold four million copies so far. Some economists consider this book, currently into its 19th edition, as his great contribution.    

Paul Samuelson’s was a life of fulfillment: during his long journey as a teacher, he simply “transformed everything he touched: the theoretical foundations of his field, the way economics was taught around the world.…” His contribution to the field of economics is aptly summarized by Robert M. Solow, his colleague for 50 years at MIT, thus: When economists “sit down with a piece of paper to calculate or analyze something, you would have to say that no one was more important in providing the tools they use and the ideas that they employ than Paul Samuelson.”    

Despite such celebrated accomplishments, Samuelson, it is said, preached and practiced humility—economists “have much to be humble about.” His MIT economics department became famous for collegiality. It reflects in Samuelson’s article—“International Trade and the Equalization of Factor Prices” in The Economic Journal: “I have been teaching this theorem [Ohlin-Heckscher theorem] … for a number of years. When recently a student challenged this result, I availed myself of the usual teacher’s prerogative of referring him to the textbook … But doubt once provoked is not so easily lulled: neither the class nor its instructor found the relevant passages quite satisfactory,” and of course, he went ahead with research to plug the gap. Isn’t it a lesson for teachers how to practice teaching? 

The only way we can honor the memory of this great man is by practicing the values he practiced, and by praying: May such souls revisit the planet at least once in every century!

  GRK Murty