Paul A. Samuelson

A Legendary Economist

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 tradeoff between more equality and more cumulative progress?”— for us to ponder, died on December 9th 2009 .

GRK Murty

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 the University of Chicago. Being

“never one to blindly accept adult advice”, he, despite the advice

of his mentors in Chicago 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 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 Economics, first published

in 1948, has become the bestselling economic textbook of all

time. Paul Krugman, who examined the original edition of 1948

before launching himself on writing a new book, said that “it is an

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 18th edition, as his greatest 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!

*****

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