Samuelson's Last Hurrah
Samuelson's Thinking Has Gradually Shifted from Keynesian to Classical Economics
MARCH 01, 1998 by MARK SKOUSEN
“Ours is the ‘ruthless economy.’” —Paul A. Samuelson,“Valediction,” Economics (1998)
Paul A. Samuelson, the MIT professor and Nobel laureate who introduced Keynesian economics to millions, has just published the 50th anniversary edition of Economics (Irwin/McGraw-Hill, 1998, 16th edition). It is the most popular textbook of any kind ever written: it has sold over 4 million copies and has been translated into 46 languages. The new edition may be his last.
Back to the Future: From Keynes to Adam Smith
As readers of The Freeman know, this column has documented the dramatic changes in Samuelson’s thinking over the past few years. Along with the rest of the economics mainstream, he has shifted gradually from standard Keynesian analysis to the Classical model of Adam Smith. In the new edition, Samuelson replaces the old anti-saving doctrine known as the “paradox of thrift” with a major section bemoaning the low saving rate in the United States. Deficit spending, a perennial policy recommendation in earlier editions, is now anathema. Today monetary policy dominates fiscal policy. “The growing orientation toward the market,” writes Samuelson, “has accompanied widespread desire for smaller government, less regulation, and lower taxes” (p. 735).
The 16th edition is remarkable in many ways. Samuelson and his coauthor, Yale professor William D. Nordhaus, cite free-market economists Gary Becker and Julian Simon. They include a major biographical sketch of Joseph A. Schumpeter, an Austrian-born economist who later became one of Samuelson’s valued professors at Harvard. (Schumpeter is best known for his emphasis on the role of the entrepreneur, criticism of the welfare state, and defense of big business.) And Samuelson finally admits that lighthouses were originally privately owned in Great Britain, after long maintaining that they were public goods that the free market could not provide.
Not Enough Friedman
However, his conversion to Classical free-market economics has often been grudging and incomplete. Take his treatment of Milton Friedman, the most influential free-market economist of the twentieth century. While Samuelson’s new edition contains biographies of Adam Smith, John Maynard Keynes, Karl Marx, and even his colleague Robert Solow, there’s none on Milton Friedman. Friedman cannot be ignored, of course, and he is cited briefly for his contributions to monetarism, the Phillips Curve debate, the natural rate of unemployment hypothesis, and the negative income tax. But nowhere does Samuelson credit him for his most important contribution, for which he won the Nobel Prize: his monumental work (coauthored with Anna J. Schwartz), A Monetary History of the United States, 1867–1960 (Princeton University Press, 1963). In particular, Friedman demonstrated that government (the Federal Reserve), not free enterprise, caused the Great Depression by permitting the money supply to decline by one-third from 1929 to 1933.
Why did Samuelson deliberately omit Friedman’s vital contribution? Because the old Keynesian cannot break with his mentor, Keynes, whom he proclaims as “this century’s greatest economist” (p. 734). Samuelson still clings to the old-fashioned Keynesian view that blames the Great Depression on unbridled laissez-faire capitalism. His newest edition gives only the Keynesian interpretation of the 1930s. In his introductory remarks, “A Golden Birthday,” he asserts: “The Great Depression of 1929–1935 had finally been licked by forceful programs that threw out the window the old orthodoxies of do-nothing monetary and fiscal policies” (p. xxiv). I’d hardly call tight-money deflation of the Fed, massive tax increases, and Smoot-Hawley tariffs as “do-nothing” policies!
Friedman and other economic historians have demonstrated quite powerfully that inane government policies, not the free workings of the marketplace, are the cause of the debacle of the 1930s.
Classical vs. Keynesian Models: Which Comes First?
Samuelson and Nordhaus have also kept the Keynesian model first and foremost ahead of the Classical model. The Keynesian short-term model of business cycles (aggregate supply and demand or AS-AD) is introduced in Part 5 of Economics, and the Classical long-term model of economic growth is in Part 6. I have pointed out that long-term growth is more important than short-term business cycles (see The Freeman, August 1997), but Samuelson and Nordhaus are determined to stick with this traditional approach. Gregory Mankiw’s new popular textbook, Economics (Dryden Press, 1997) does just the opposite—it puts the Classical model first as the “general” theory, and the Keynesian model last as the “special” case. By making this counterrevolutionary change, Mankiw, who considers himself a New Keynesian, has essentially betrayed Keynes. But Samuelson and Nordhaus refuse to do so.
Samuelson ends his 50th anniversary edition on a sour note. He senses that his view of economics has gradually lost out to the new dynamic forces of the global marketplace. He lashes out at the “ruthless” economy characterized by the “relentless pursuit of profits.” He complains of the “growing” inequality of incomes and the “harsh” competitive environment where “old-fashioned loyalty to firm or community counts for little.” I guess he’s never read David Packard’s The HP Way or noticed the growing number of firms offering profit-sharing and 401(k) plans. He admits there’s a “silver lining behind this ruthlessness”—millions of new jobs in the dynamic U.S. economy versus rising unemployment in welfare-statist Europe. But does this new competitiveness generate “good jobs, adequate income, and a safe environment”? He doubts it.
Throughout his career, Samuelson has always praised the glories of the “mixed economy,” free-market capitalism with a heavy dose of government interventionism. Now he must be content with what he unenthusiastically labels the “limited mixed economy.”
- See my columns in The Freeman, March 1994; October 1995; February 1996; September 1997. See also my article, “The Perseverance of Paul Samuelson’s Economics,” The Journal of Economic Perspectives (Spring 1997).
- See my article, “Keynesianism Defeated,” Wall Street Journal, editorial page, October 9, 1997.