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Economist Paul Samuelson, Dead at 94

Leo Kolivakis's picture





 


Submitted by Leo Kolivakis, publisher of Pension Pulse.

Michael Weinstein of the NYT reports that Paul A. Samuelson, Economist, Dies at 94:

Paul
A. Samuelson, the first American Nobel laureate in economics and the
foremost academic economist of the 20th century, died Sunday at his
home in Belmont, Mass. He was 94.

 

His death was announced by the Massachusetts Institute of Technology, which Mr. Samuelson helped build into one of the world’s great centers of graduate education in economics.

 

In receiving the Nobel Prize
in 1970, Mr. Samuelson was credited with transforming his discipline
from one that ruminates about economic issues to one that solves
problems, answering questions about cause and effect with mathematical
rigor and clarity.

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,” said Robert M. Solow, a fellow
Nobel laureate and colleague.of Mr. Samuelson’s at M.I.T.

 

Mr. Samuelson attracted a brilliant roster of economists to teach or
study at the university, among them Mr. Solow as well as such other
future Nobel laureates as George A. Akerlof, Robert F. Engle III,
Lawrence R. Klein, Paul Krugman, Franco Modigliani, Robert C. Merton
and Joseph E. Stiglitz.

 

Mr.
Samuelson wrote one of the most widely used college textbooks in the
history of American education. The book, “Economics,” first published
in 1948, was the nation’s best-selling textbook for nearly 30 years.
Translated into 20 languages, it was selling 50,000 copies a year a
half century after it first appeared.

 

“I don’t care who writes
a nation’s laws — or crafts its advanced treatises — if I can write its
economics textbooks,” Mr. Samuelson said.

 

His
textbook taught college students how to think about economics. His
technical work — especially his discipline-shattering Ph.D. thesis,
immodestly titled “The Foundations of Economic Analysis” — taught
professional economists how to ply their trade. Between the two books,
Mr. Samuelson redefined modern economics.

 

The textbook introduced generations of students to the revolutionary ideas of John Maynard Keynes,
the British economist who in the 1930s developed the theory that modern
market economies could become trapped in depression and would then need
a strong push from government spending or tax cuts, in addition to
lenient monetary policy, to restore them. No student would ever again
rest comfortably with the 19th-century nostrum that private markets
would cure unemployment without need of government intervention.

 

That lesson was reinforced in 2008, when the international economy slipped into the steepest downturn since the Great Depression,
when Keynesian economics was born. When the Depression began,
governments stood pat or made matters worse by trying to balance fiscal
budgets and erecting trade barriers. But 80 years later, having
absorbed the Keynesian preaching of Mr. Samuelson and his followers,
most industrialized countries took corrective action, raising
government spending, cutting taxes, keeping exports and imports flowing
and driving short-term interest rates to near zero.

 

Lessons for President Kennedy

 

Mr.
Samuelson explained Keynesian economics to American presidents, world
leaders, members of Congress and the Federal Reserve Board, not to
mention other economists. He was a consultant to the United States Treasury, the Bureau of the Budget and the President’s Council of Economic Advisers.

 

His
most influential student was John F. Kennedy, whose first 40-minute
class with Mr. Samuelson, after the 1960 election, was conducted on a
rock by the beach at the family compound at Hyannis Port, Mass. Before
class, there was lunch with politicians and Cambridge intellectuals
aboard a yacht offshore. “I had expected a scrumptious meal,” Mr.
Samuelson said. “We had franks and beans.”

 

As a member of the
Kennedy campaign brain trust, Professor Samuelson headed an economic
task force for the candidate and held several private sessions on
economics with him. Many would have a bearing on decisions made during
the Kennedy administration.

 

Though Professor Samuelson was
President Kennedy’s first choice to become chairman of the Council of
Economic Advisers, he refused, on principle, to take any government
office because, he said, he did not want to put himself in a position
in which he could not say and write what he believed.

 

After the 1960 election, he told the young president-elect that the nation was heading into a recession and that Mr. Kennedy should push through a tax cut to head it off. Mr. Kennedy was shocked.

 

“I’ve
just campaigned on a platform of fiscal responsibility and balanced
budgets and here you are telling me that the first thing I should do in
office is to cut taxes?” Professor Samuelson recalled, quoting the
president.

 

Kennedy eventually accepted the professor’s advice
and signaled his willingness to cut taxes, but he was assassinated
before he could take action. His successor, Lyndon B. Johnson, carried out the plan, however, and the tax cut reinvigorated the economy.

Adding a Bite to Academia

 

In
the classroom, Mr. Samuelson was a lively, funny, articulate teacher.
On theories that he and others had developed to show links between the
performance of the stock market and the general economy, he famously
said: “It is indeed true that the stock market can forecast the
business cycle. The stock market has called nine of the last five
recessions.”

 

His speeches and his voluminous writing had a
lucidity and bite not usually found in academic technicians. He tried
to give his economic pronouncements a “snap at the end,” he said, “like
Mark Twain.”
When women began complaining about career and salary inequities, for
example, he said in their defense, “Women are men without money.”

 

Remarkably
versatile, Mr. Samuelson reshaped academic thinking about nearly every
economic subject, from what Marx could have meant by a labor theory of
value to whether stock prices fluctuate randomly. Mathematics had
already been employed by social scientists, but Mr. Samuelson brought
the discipline into the mainstream of economic thinking, showing how to
derive strong theoretical predictions from simple mathematical
assumptions.

 

His early work, for example, presented a unified
mathematical structure for predicting how businesses and households
alike will respond to changes in economic forces, how changes in wage
rates will affect employment, and how tax rate changes will affect tax
collections.

 

His relentless application of mathematical analysis
gave rise to an astonishing number of groundbreaking theorems,
resolving debates that had raged among theorists for decades, if not
centuries.

 

Early in his career, Mr. Samuelson developed the
rudimentary mathematics of business cycles with a model, called the
multiplier-accelerator, that captured the inherent tendency of market
economies to fluctuate. The model showed how markets magnify the impact
of outside shocks and turn, say, an initial one-dollar increase in
foreign investment into a several-dollar increase in total domestic
income, to be followed by a decline.

 

The Stolper-Samuelson Theorem

 

Mr.
Samuelson provided a mathematical structure to study the impact of
trade on different groups of consumers and workers. In a famous
theorem, known as Stolper-Samuelson, he and a co-author showed that
competition from imports of clothes and similar goods from
underdeveloped countries, where producers rely on unskilled workers,
could drive down the wages of low-paid workers in industrialized
countries.

 

The theorem provided the intellectual scaffold for
opponents of free trade. And late in his career, Mr. Samuelson set off
an intellectual commotion by pointing out that the economy of a country
like the United States could be hurt if productivity rose among the
economies with which it traded.

 

Yet
Mr. Samuelson, like most academic economists, remained an advocate of
open trade. Trade, he taught, raises average living standards enough to
allow the workers and consumers who benefit to compensate those who
suffer, and still have some extra income left over. Protectionism would
not help, but higher productivity would.

 

Mr. Samuelson also
formulated a theory of public goods — that is, goods that can be
provided effectively only through collective, or government, action.
National defense is one such public good. It is non-exclusive; the
Navy, for example, exists to protect every citizen. It also eliminates
rivalry among its many consumers; that is, the amount of security that
any one citizen derives from the Navy subtracts nothing from the amount
of security that any other citizen derives.

 

The features of
public goods, Mr. Samuelson taught, stand in direct contrast to those
of ordinary goods, like apples. An apple eaten by one consumer is not
available to any other. Public goods, he concluded, cannot be sold in
private markets because individuals have no incentive to pay for them
voluntarily. Instead they hope to get a free ride off the decisions of
others to make the public goods available.

 

‘Correspondence Principle’

 

Mr.
Samuelson pushed mathematical analysis to new levels of sophistication.
His “correspondence principle” showed that information about the
stability or instability of a theoretical economic system — whether,
after a disruption, the economy returns to fixed levels of prices and
output or, instead, flies out of control — could be used to predict the
aggregate outcome of decisions taken by consumers and business firms.
He showed, for example, that only a stable economic system would
undergo ordinary business cycles like those captured by Mr. Samuelson’s
multiplier-accelerator model.

 

He analyzed the evolution of
economies with a mathematical model, called an overlapping generations
model, that scholars have since used to study, for example, the
functioning over time of the Social Security System and the management of public debt.

He also helped develop linear programming, a mathematical tool used by
corporations and central planners to calculate how to produce pre-set
levels of various goods and services at the least cost.

 

Late
in his career, Mr. Samuelson laid out the mathematics of stock price
movements, an analysis that became the basis for Nobel-prize-winning
research by his student Mr. Merton and Myron S. Scholes. They designed formulas that Wall Street analysts use to trade options and other complicated securities known as derivatives.

 

But
beyond his astonishing array of scientific theorems and conclusions,
Mr. Samuelson wedded Keynesian thought to conventional economics. He
developed what he called the Neoclassical Synthesis. The neoclassical
economists in the late 19th century showed how forces of supply and
demand generate equilibrium in the market for apples, shoes and all
other consumer goods and services. The standard analysis had held that
market economies, left to their own devices, gravitated naturally
toward full employment.

 

Economists clung to this theory even in
the wake of the Depression of the 1930s. But the need to explain the
market collapse, as well as unemployment rates that soared to 25
percent, gave rise to a contrary strain of thought associated with Lord
Keynes.

Mr. Samuelson’s resulting “synthesis” amounted to the
notion that economists could use the neoclassical apparatus to analyze
economies operating near full employment, but switch over to Keynesian
analysis when the economy turned sour.

 

Midwestern Roots

 

Paul
Anthony Samuelson was born on May 15, 1915 in Gary, Ind., the son of
Frank Samuelson, a pharmacist, and the former Ella Lipton. His family,
he said, was “made up of upwardly mobile Jewish immigrants from Poland
who had prospered considerably in World War I, because Gary was a brand
new steel town when my family went there.”

But after his
father lost much of his money in the years after the war, the family
moved to Chicago. Young Paul attended Hyde Park High School, where as a
freshman he began studying the stock market. At one point he helped his
algebra teacher select stocks to buy in the boom of the 1920s.

 

“Hupp Motors and other losers,” he remembered in an interview in 1996. “Proof of the fallibility of systems,” he explained.

 

He left high school at age 16 to enter the University of Chicago.
“I was born as an economist on Jan. 2, 1932,” he said. That was the day
he heard his first college lecture, on Thomas Malthus, the 18th-century
British economist who studied the relation between poverty and
population growth. Hooked, he began taking economics courses.

 

The University of Chicago developed the century’s leading conservative economic theorists, under the later guidance of Milton Friedman.
But Mr. Samuelson regarded the teaching at Chicago as “schizophrenic.”
This was at the height of the Depression, and courses about the
business cycle naturally talked about unemployment, he said. But in
economic-theory classes, joblessness was not mentioned.

 

“The
niceties of existence were not a matter of concern,” he recalled, “yet
everything around was closed down most of the time. If you lived in a
middle-class community in Chicago, children and adults came daily to
the door saying, ‘We are starving, how about a potato?’ I speak from
poignant memory.”

 

After receiving his bachelor’s degree from Chicago in 1935, he went to Harvard,
where he was attracted to the ideas of the Harvard professor Alvin
Hansen, the leading exponent of Keynesian theory in America.

 

As
a student at Chicago and later at Cambridge, Paul Samuelson had at
first reacted negatively to Keynes. “What I resisted most was the
notion that there could be equilibrium unemployment” — that some level
of unemployment would be impossible to eliminate and have to be
tolerated. “I spent four summers of my college career on the beach at
Lake Michigan,” he explained. “It was pointless to look for work. I
didn’t even have to test the market because I had friends who would go
to 350 potential employers and not be able to get any job at all.”

 

Eventually
he was converted. “Why do I want to refuse a paradigm that enables me
to understand the Roosevelt upturn from 1933 to 1937?” he asked
himself.

A Bold Dissertation

 

Mr.
Samuelson was perceived at the outset of his career as a brilliant
mathematical economist. He shot to academic fame as a 22-year-old
l’enfant terrible at Harvard when he began a boldly sweeping and highly
technical doctoral dissertation, published as a book in 1947 by Harvard
University Press.

 

At Harvard, as at Chicago, he was not shy
about critiquing his professors — “respecting neither age nor rank,”
according to James Tobin, a Nobel laureate of Yale University.
The young Mr. Samuelson’s chief complaint against economists was that
they preoccupied themselves with finer economic principles while all
around them people were being thrown into bread lines.

 

His
attitudes did not endear him to the austere chairman of the economics
department at Harvard, Harold Hitchings Burbank, with whom he had a
rocky relationship.

But the publication of his dissertation was
an immediate success. It won him the John Bates Clark Medal awarded by
the American Economic Association to the economist showing the most
scholarly promise before the age of 40; it would eventually help him
win his Nobel Prize, and it was frequently reprinted despite the heavy
resistance of Professor Burbank, selling to economists around the world
for more than 20 years. (“Sweet revenge,” Mr. Samuelson said.)

 

Among
Mr. Samuelson’s fellow students was Marion Crawford. They married in
1938. Mr. Samuelson earned his master’s degree from Harvard in 1936 and
a Ph.D. in 1941. He wrote his thesis between 1937 and 1940 as a member
of the prestigious Harvard Society of Junior Fellows. In 1940, Harvard
offered him an instructorship, which he accepted, but a month later
M.I.T. invited him to become an assistant professor.

Harvard
made no attempt to keep him, even though he had by then developed an
international following. Mr. Solow said of the Harvard economics
department at the time: “You could be disqualified for a job if you
were either smart or Jewish or Keynesian. So what chance did this
smart, Jewish, Keynesian have?”

 

Indeed, American university
life before World War II was anti-Semitic in a way that hardly seemed
possible later, and Harvard, along with Yale and Princeton, was a
flagrant example.

 

During World War II, Mr. Samuelson worked in
M.I.T.’s Radiation Laboratory, developing computers for tracking
aircraft, and was a consultant for the War Production Board. After the
war, having resumed teaching, he and his wife started a family. When
she became pregnant the fourth time, she gave birth to triplets, all boys.

 

Marion Samuelson died in 1978. Mr. Samuelson is survived by his second
wife, Risha Clay Samuelson; six children from his first marriage: Jane
Raybould, Margaret Crawford-Samuelson, William and the triplet sons
Robert, John and Paul; a brother, Robert Summers, a professor emeritus
of economics at the University of Pennsylvania, and 15 grandchildren.

 

A Keynesian Textbook

 

The
birth of the triplets doubled the number of children in the Samuelson
household, which soon found itself sending 350 diapers to the laundry
per week. His friends suggested that Mr. Samuelson needed to write a
book to earn more money.

 

He decided on writing an economics
textbook, but one that would not only be compelling for students but
also sophisticated and complete. And he wanted to center it on the
still poorly understood Keynesian revolution. President Herbert Hoover, he noted, had never referred to Keynes other than as “the Marxist Keynes.”

 

“I never quite understood that venom, Mr. Samuelson said.

 

He
said he “sweated blood” writing his book, employing detailed charts,
color graphics and humor. He wrote: “Economists are said to disagree
too much but in ways that are too much alike: If eight sleep in the
same bed, you can be sure that, like Eskimos, when they turn over,
they’ll all turn over together.”

 

It would be difficult to
overestimate the influence of “Economics.” Business Week, taking note
of the textbook’s publication in Greek, Punjabi, Hebrew, Russian,
Serbo-Croatian and other languages, once said that it had “gone a long
way in giving the world a common economic language.” Students were
attracted to its lively prose and relevance to their everyday lives.
Many textbook authors began to copy its presentation.

“Economics,” together with shrewd investing, made Mr. Samuelson a millionaire many times over.

 

Friendship and Rivalry With Friedman

 

A
historian could well tell the story of 20th-century public debate over
economic policy in America through the jousting between Mr. Samuelson
and Milton Friedman, who won the Nobel prize in 1976. Mr. Samuelson
said the two had almost always disagreed with each other but had
remained friends. They met in 1933 at the University of Chicago, when
Mr. Samuelson was an undergraduate and Mr. Friedman a graduate student.

 

Unlike
the liberal Mr. Samuelson, the conservative Mr. Friedman opposed active
government participation in most areas of the economy except national
defense and law enforcement. He thought private enterprise and
competition could do better and that government controls posed risks to
individual freedoms.

 

Both men were fluid speakers as well as
writers, and they debated often in public forums, in testimony before
congressional committees, in op-ed articles and in columns each of them
wrote for Newsweek
magazine. But Professor Samuelson said he always had fear in his heart
when he prepared for combat with Professor Friedman, a formidably
engaging debater.

 

“If you looked at a transcript afterward, it
might seem clear that you had won the debate on points,” he said. “But
somehow, with members of the audience, you always seemed to come off as
elite, and Milton seemed to have won the day.”

 

Mr. Samuelson
said he had never regarded Keynesianism as a religion, and he
criticized some of his liberal colleagues for seeming to do so, earning
himself, late in life, the label l’enfant terrible, emeritus. The
experience of nations in the second half of the century, he said, had
diminished his optimism about the ability of government to perform
miracles.

 

If government gets too
big, and too great a portion of the nation’s income passes through it,
he said, government becomes inefficient and unresponsive to the human
needs “we do-gooders extol,” and thus risks infringing on freedoms.

 

But,
he said, no serious political or economic thinker would reject the
fundamental Keynesian idea that a benevolent democratic government must
do what it can to avert economic trouble in areas the free markets
cannot. Neither government alone nor the markets alone, he said, could
serve the public welfare without help from the other.

As
nations became locked in global competition, and as the computerization
of the workplace created daunting employment problems, he agreed with
the economic conservatives in advocating that American corporations
must stay lean and efficient and follow the general dictates of the
free market.

 

But he warned that the harshness of the market
place had to be tempered and that corporate downsizing and the
reduction of government programs “must be done with a heart.”

 

Despite
his celebrated accomplishments, Mr. Samuelson preached and practiced
humility. The M.I.T. economics department became famous for
collegiality, in no small part because no one else could play prima
donna if Mr. Samuelson refused the role, and, of course, he did.
Economists, he told his students, as Churchill said of political
colleagues, “have much to be humble about.”

Professor
Samuelson was a giant in economics. His many articles, books and
lectures are a true testimony to his intellectual breadth and depth.
The world lost another great thinker today.

 


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Mon, 12/14/2009 - 15:57 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

From WSJ, Remembering Paul Samuelson. Also read Paul Krugman's obituary, Paul Samuelson, R.I.P., from which I quote:

It’s hard to convey the full extent of Samuelson’s greatness. Most economists would love to have written even one seminal paper — a paper that fundamentally changes the way people think about some issue. Samuelson wrote dozens: from international trade to finance to growth theory to speculation to well, just about everything, underlying much of what we know is a key Samuelson paper that set the agenda for generations of scholars.

Mon, 12/14/2009 - 01:15 | Link to Comment Anonymous
Mon, 12/14/2009 - 01:28 | Link to Comment Anonymous
Mon, 12/14/2009 - 00:58 | Link to Comment Anonymous
Mon, 12/14/2009 - 09:33 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

"And when gold tumbles, I predict we’ll have a thousand comments detailing the “obvious conspiracy”, engineered by any or all of the aforementioned bogeymen."

Priceless...thanks for this comment.

Mon, 12/14/2009 - 00:10 | Link to Comment Anonymous
Mon, 12/14/2009 - 00:50 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

I don't doubt that massive fiscal deficits can lead to a disaster, but what is the alternative? To let the market's "invisible hand" solve our economic woes? It's been invisible for far too long.

Mon, 12/14/2009 - 03:31 | Link to Comment Comrade de Chaos
Comrade de Chaos's picture

I disagree with the "let the market's "invisible hand" solve our economic woes?"

Sometimes the most courageous thing a human being can do is to say I don't know. That's what we should do, try to find an efficient solution rather than rush a quick and costly patch. Also when the rules are fair, well written and well supervised nothing works better than the "invisible hand."  (for most of the goods with the exemption of certain public goods, etc.)

 

And yet again, thank you for your posts, please ignore the haters. 

Mon, 12/14/2009 - 00:54 | Link to Comment Anonymous
Mon, 12/14/2009 - 00:38 | Link to Comment Anonymous
Sun, 12/13/2009 - 23:07 | Link to Comment Anonymous
Mon, 12/14/2009 - 00:47 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

Another ZH moron. If you must know, Bertrand Russell was one of my favorite philosophers. Unlike your pathetic attempt to discredit me, his wit was a pure joy to read. And if you want to know who the greatest economist of all-time was, he didn't win any Nobel prize. Hint: he wrote a book on the treatise on probability.

Sun, 12/13/2009 - 22:31 | Link to Comment Deep
Deep's picture

Leo the cut and paste specialist. Again do you ever post anything origianl? How ZH lets you post is beyond me. Can I be a contributor, I cut and paste great articles from the WSJ.

Mon, 12/14/2009 - 00:01 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

Be my guest...lol...you have no clue how hard it is to write a blog on a daily basis and then respond to idiots like you.

Sun, 12/13/2009 - 21:48 | Link to Comment Lionhead
Lionhead's picture

The only folks that will "miss" this person are the CFA's like you Leo. You have the balls to post an article about a person that wasted his life & education on a failed economic policy?

"The world lost another great thinker today." Really, what planet do you live on Leo? Are you so disconnected from reality, your illusions are your reality. Great thinker & giant in economics; I disagree.

Your posts are terrible. Please no more obituaries of dead Keynesians. Not interested...

Thu, 12/17/2009 - 05:34 | Link to Comment agrotera
agrotera's picture

you are awesome Lionhead...excellent roar!

(no offense Leo, I see you took off your gloves, so i don't think you need anyone's sympathy.)

Mon, 12/14/2009 - 00:06 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

Samueson was a giant and you're an idiot for posting this reply. And I never wanted to be a CFA. I have a Master's in Economics and tons of pertinent work experience. Some of you need a basic course in history of economic thought because to dimiss Samuelson so casually just confirms your ignorance on the subject.

Mon, 12/14/2009 - 00:44 | Link to Comment Anonymous
Mon, 12/14/2009 - 01:23 | Link to Comment Anonymous
Sun, 12/13/2009 - 21:04 | Link to Comment Comrade de Chaos
Comrade de Chaos's picture

thanks for the update Leo.

 

RIP

Paul S.

Sun, 12/13/2009 - 20:47 | Link to Comment Anonymous
Sun, 12/13/2009 - 19:16 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

Another Keynesian bites the dust. Good riddance. Nobody is going to miss a Keynesian minion, except perhaps the bankers/governments. Seriously folks, if these Keynesian a--holes are all going to take that long to die off and live till freakin' 94, we're totally f--ked.

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