Paul Samuelson and the Foundations of Modern Economics

K. Puttaswamaiah

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781351324786
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Paul A. Samuelson was the first American Nobel Laureate in economics, and the second overall. He was credited 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 science." That recognition is now thirty years old and Samuelson remains at work in the cutting edge of the discipline. He is also widely known for a basic textbook that became a landmark learning tool throughout the second half of the twentieth century. This excellent collegial appreciation focuses heavily on Samuelson's Foundations of Economic Analysis. In that work, and a series of brief essays, he has contributed to an integration of statics and dynamics by way of the correspondence principle. He has also combined the multiplier and accelerator mechanisms in a model of economic fluctuations; he has reformed the foundations of consumption theory by his concept of revealed preferences; he has developed or improved several major theorems within international trade; and created theories of maximum efficiency and maximum growth rate. Finally, he has clarified the role of collective goods in resource allocation. In considering the work and life of Samuelson, editor Puttaswamaiah, has assembled a worthy group of brilliant commentators. Among the analytic papers in this volume are "An essay on the Accuracy of Economic Prediction" by L.R. Klein, "Analytical Aspects of Anti-Inflation Policy" by Robert M. Solow, a paper by Vittorangelo Orati on Samuelson's linkage to Schumpeter and Keynes, "Money and Price Theory by Carlo Benetti and Jean Cartelier, and a concluding essay on "The Role of Samuelson's Economics " by Michael Emmett Brady. Most unusual in works of this kind are some strong critical statements, including a pungent examination of vanity as well as creativity in Samuelson's work. What emerges is a clear picture of a special scholar. Scholars and students will welcome it alike-a result that well fits the purpose and character of Samuelson. The festschrift has its origins in several issues of the International Journal of Applied Economics and Econometrics. Professor K. Puttaswamaiah has more than three decades of editing journals in economics. He is a member of the journal; Savings and Development issued at the University of Milan. He is author of Economic Development of Karnataka, Cost-Benefit Analysis, and Nobel Economists: Lives and Contributions.

Contributions of Paul A. Samuelson

K. Puttaswamaiah*

Paul A. Samuelson was awarded the Second Nobel Prize for Economics in 1970, the First U.S. recipient. The Swedish Academy while declaring this award has rightly said that Samuelon has done "more than any other economist to raise the level of scientific analysis in the field of economic theories. He has rewritten considerable parts of central economic theory and has in several areas achieved results which now reach among the classical theorems of economics". He is an outstanding economist who has tried his best to shape U.S. economic and fiscal policies all through. In fact, he has done probably more than any other economist in the U.S. to recast the policy implications of the "General Theory" to suit the U.S. economic and political environment.

Paul A. Samuelson was awarded the Nobel Prize in 1970 for his "scientific work through which he has developed static and dynamic economic theory and actively contributed to raising the level of analysis in economic science." ¹

The Nobel Prize Committee on Economic Science of the Royal Academy of Sciences consisting of Bertil Ohlin (Chairman), Assar Lindbeck, Erik Lundberg, Ingvar Svennilson and Herman Wold has said in the citation while awarding the Prize to Samuelson that "Samuelson's extensive production, covering nearly all areas of economic theory, is characterised by an outstanding ability to derive important new theorems, and to find new applications for existing ones. By his many contributions, Samuelson has done more than any other contemporary economist to raise the level of scientific analysis in economic theory . . . His best-known work is his Foundations of Economic Analysis, 1947. In this work, as well as in a large number of articles, he has rewritten considerable parts of central economic theory, and has in several areas achieved results which now rank among the classical theorems of economics. Thus, he has contributed to an integration of statics and dynamics by way of his 'correspondence principle'; he has combined the multiplier and accelerator mechanisms in a model of economic fluctuations; he has reformed the foundations of consumption theory by his theory of 'revealed preferences'; he has developed and improved several important theorems within the theory of international trade, such as the 'factor equalisation theorem'; he has created a theory of inter-temporal efficiency and formulated the 'turnpike theorem', determining the highest possible growth rate, and, finally, he has clarified the role of collective goods in the theory of optimum allocation of resources". ²

Samuelson's rise to the top of the economics profession was very rapid. Born in Gary, Indiana, U.S.A. in 1915, he attended the University of Chicago from which he secured his B.A. degree in 1935. He took his M.A. degree at Harvard University in 1936 and Ph.D. degree in the same University in 1941.

During the next 25 years, after his education he has virtually won every honour that the profession could offer. In 1947, when only 32, he was awarded the first John Bates Clark award for the most distinguished work by an economist under 40. From 1935 to 1940 he taught 'iconoclastic' economics at Harvard with the new wave of Keynesianism and monopolistic competition. He left the Harvard University in 1940 after the completion of his Ph.D. and moved to MIT. He was elected to the Society of Junior Fellows, a position which elevated him into the upper strata of academic circles in Cambridge. His work as a graduate student includes some of his best contributions to the field: three articles on the theory of consumer choice later were expanded into a new approach to that problem. It was a graduate student in Hansen's Seminar that he developed his contribution on the Multiplier-Accelerator Principle. During 1941, he won the David A. Wells award for the outstanding economics dissertation at Harvard. In 1947, it was published as "Foundations of Economic Analysis", a classic statement of the mathematical foundations of economic theorem. In an era, when academic promotion was generally slow, Samuelson became a full-fledged Professor at MIT when he was 32. Well before the finished his work at Harvard, it was clear that Samuelson was one of the brightest young economists in the United States. By the end of the 1940's, MIT ranked with the best departments in the country. In 1948, he published the text book "Economics: An Introductory Analysis" which has become world famous and has sold over 10 million copies. In 1958, he jointly published along with Robert Solow and Robert Dorfman "Linear Programming and Economic Analysis" a path-breaking work which examined the economic implications of the concept. Joseph Stiglitz, Students of Samuelson, Robert C. Merton, Hiroaki Nagatani and Kate Crowley have published "Collected Scientific Papers of Paul Samuelson" in five volumes wherein are included about 400 articles written by their professor. One of the most original areas of Samuelson's Foundations was his treatment of consumer welfare. He was able to bring some sort of unity and cohesion to seemingly unrelated and seemingly contradictory aspects of economics and gave them a mathematical under-pinning. It was for such work that the Swedish Academy of Sciences awarded him the 1970 Nobel Prize in Economics, noting that he has done "more than any other living economist to rise the level of scientific analysis in the field of economic theory". When the award was announced, he remarked that "they don't give Nobel Prizes for writing text books". Samuelson is a man of colourful personality know for his brilliant intellect and academic thrust. He is prolific in his contribution and master of the arts of both spoken and written English.

Samuelson has been active in a number of honorary and professional organisations. He is a member of the American Academy of Arts and Sciences, a fellow of the American Philosophical Society and the British Academy; he is a member, and past-president (1961) of the American Economic Association; he is a member of the editorial board, and past-president (1951) of the Econometric Society; he is a fellow; council member and past vice-president of the Economic Society. He is a member of Phi Beta Kappa.

Samuelson is recipient of a number of honorary degrees. They include LLD (Hon.), University of Chicago (1961); LLD (Hon.), Oberlin College (1961); D.Litt (Hon.), Ripon College (1962); LLD (Hon.), Boston College (1964); D.Sc. (Hon.), East Anglia University (1966); LLD (Hon.), Indiana University (1966); LLD (Hon.), University of Michigan (1967) and; LLD (Hon.), Claremont Graduate School (1970).

His contribution range over the most divine tracts as elucidated earlier ever covered by any economist, some esoteric and some on policy question. As he said in a presidential addres to the American Economic Association: "My own scholarship has covered a wide variety of fields. And many of them involve questions like welfare economics and factor-price equalization: turnpike theorem and oscillating envelops: non-substitutability relations ... balanced budget multipliers under conditions of balanced uncertainty". His stream of output is astounding for its quality, diversity, and its stimulating and seminal nature.

How Samuelson Became an Economist?

Paul A. Samuelson has described "how he became an economist?" in his article My Life Philosophy: Policy Credos and Working Ways.³ Let us start from his own words: "Many economists — Alfred Marshall, Knut Wicksell, Leon Walras,. . . became economists, they tell us, to do good for the world. I became an economist quite by chance, primarily because the analysis was so interesting and easy — indeed so easy that at first I thought that there must be more to it than I was recognising, else why were my older classmates making such heavy weather over supply and demand? (How could an increased demand for wool help but lower the price of pork and beef?)

Although positivistic analysis of what the actual world is like commands and constrains my every move as an economist, there is never far from my consciousness a concern for the ethics of the outcome. Mine is a simple ideology that favours the underdog and (other things equal abhors inequality)." ⁴

His parents were 'liberals'. As a young man, Samuelson wasn't sure that he wanted to do with his life. He was interested in all of the social sciences as well as most of the sciences, and he could have gone off in any of a dozen directions. But his choice of a college presented no problem; he would attend the University of Chicago, which was within walking distance of his home.

The New Deal was about to begin. America was headed into a period of intense liberal reformism, one in which the tenets of free enterprise capitalism would come under heavy and continued attack. And at the height of this movement, Samuelson would study at the school which, then as now, was the citadel of laissez-faire economic thought.

"What Harvard was becoming for Keynesianism, Chicago already was for neo-classical economics. Frank Knight, a leading figure in the attack on Keynes, was a star of the economics department and in his prime. Jacob Viner, the conservative economic historian, made his contribution too, as did Henry Simon, who rehabiliated monetary theory and used it as a weapon against Alvin Hansen and his Harvard colleagues. These men were training the next generation of neo-classicists — Milton Friedman was at Chicago when Samuelson arrived, and so was George Stigler, whose dry wit would later make him one of the few economists capable of matching Galbraith in irony and metaphor. . . Samuelson came to the University with a deficiency in economics, and so he was enrolled in an introductory course taught by Aaron Director, perhaps the most libertarian member of the faculty—who later became Milton Friedman's brother-in-law and beside whom the more famous economist seemed almost a socialist. Director and others at Chicago challenged Samuelson's innate reformism at a time when it seemed the American economic system was cracking up and change was in the air. Samuelson enjoyed the clashes but did not become a believer. Rather, as the Hoover Administration appeared to founder, he drifted further into a Keynesian orbit. Thus, he was something of an intellectual loner as an undergraduate— and he seemed to enjoy this too . . . Through most of this period he was undecided as to his major and toyed with the idea of a career in sociology, biology, or anthropology. Given a stimulating teacher, Samuelson would become a temporary convert to the discipline, if not to an ideology. This would continue until he came across the next interesting person or subject, when the process would be repeated. Apparently Samuelson continued to do well in whatever he undertook, and he remained cocky and self-confident, no small accomplishment in the depths of the Great Depression . . . Toward the end of his stay at Chicago, Samuelson decided to become an economist."⁵ Chicago was a central place for study of the Keynesian economics and Samuelson very much liked the place. To quote him: "Chicago was a good place to learn economics at that time precisely because it was a stronghold of classical economics, a subject which had reached its culmination thirty years earlier in the work of Cambridge's Alfred Marshall. Economics itself was a sleeping princess waiting for the invigorating kiss of Maynard Keynes, and if one had to spend one's undergraduate days marking time before that event, Chicago was a better place to do so than would have been Harvard, Columbia, or the London School. Cambridge University was never within my ken, but since economics was also waiting for the invigorating kiss of mathematical methods, it would have been a personal tragedy if I had become merely a clever First in the Economics Tripos there."⁶

Samuelson was a positive scientist who was certain of the results of any of his doctrinaire. He was more circumspect when interpreting specific problems. John kenneth Galbraith and Samuelson were in agreement on many economic matters, they also used to differ in certain others. Both were followers of John Maynard Keynes. Samuelson climbed the academic ladder with ease, but Galbraith has struggled to write a lot. Galbraith's contributions to science of economics and applied economics with particular reference to United States and to the under developed nations in general are plenty. His "The Affluent Society" and "The Age of Uncertainty" are the masterpieces, but these two economists, as said earlier, were at opposite poles on policy matters at times. To quote: "These two also are at opposite poles within the profession, for they stand for different roles economists might play in our culture. Galbraith presents a model for those who hope to achieve celebrity and influence the thinking of the general public; more than anyone else, he has, made the subject intelligible to laypeople. As for Samuelson, he is one of a long line of scholars who have shown students the ways to achieve professional success, the esteem of their peers, and a distinguished if limited public role."⁷

Samuelson was very much concerned with inflation in the U.S. economy and many times, he has offered his solutions. It is an economic ill which cannot be got away with easily. It is interesting to quote from Samuelson himself: "Inflation is not like small pox which if you wipe out once would be gone. It is like reducing your weight — you have to tor the rest of your life keep to the same austere programme." ⁸

'Foundations of Economic Analysis' and his Book on 'Economics'

The Nobel Prize for Samuelson was, of course, awarded for his varied contributions. But it was for his original work Foundations of Economic Analysis which won him the Doctorate in 1941 and was published in 1947, which also gave him the Nobel Prize. It is very interesting that in the introductory note to the 14th edition (1992) of 'Economics', Samuelson has said that: "his Foundations of Economic Analysis won him the Nobel Prize in 1970, 25 years later after the book was ready". When he wrote his textbook on Economics in 1948, some economists had remarked that the textbook is not a research work. Samuelson was not upset by this remark and says: "Linus Pauling, so great a scholar and humanist that he was to win two Nobel Prizes, had already written a leading chemistry text just as the great Richard Feynman was later to publish classic physics lectures. William James had long since published his great Principles of Psychology. Richard Courant, top dog at Gottingen in Germany, had not been to proud to author an accurate textbook on calculus. Who was Paul Samuelson to throw stones at scholars like these? And, working the other side of the street, I thought it was high time that we got the leaders in economics back in the trenches of general education." ⁹

He further says that the first edition of the textbook was published in the Autumn of 1948, but it is noteworthy that his 1947 publication, "The Foundations of economic Analysis", gets the Nobel Prize, the one authored an year earlier to his first edition of his textbook "Economics". This book, 'Economics' has become so popular that, since 1948, it has been published 14 times and the 14th edition is a totally revised and enlarged edition and many places rewritten, to go with the current stream of economics. This book is a monopoly of the students of the economics all over the world. It is also worthy to note that this work of his has so far been translated into 40 languages in the world.

"His first edition of Economics put much stress on what might be called "Model T Keynesian macro". With each new edition, the emphasis on monetary policy grew. And with the worst wastes of the Great Depression banished, the micro-economics of efficient market pricing has come to occupy more and more of the text's pages."¹⁰

At times according to the Samuelson:...