Remembering Paul Samuelson and his ideas

Remembering Paul Samuelson and his ideas
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First Published: Tue, Dec 15 2009. 12 30 AM IST

Updated: Thu, Dec 31 2009. 09 21 PM IST
When a young Paul Samuelson finished his dissertation defence at Harvard University in 1941, his PhD adviser Joseph Schumpeter asked another star, Wassily Leontief: “Well Wassily, have we passed?” An apocryphal aside, it said a lot about his abilities as an economist. This savant from the world of economists passed away on Sunday, aged 94.
The year 1941 was a placid one for economics. John von Neumann and Oskar Morgenstern’s Theory of Games and Economic Behavior was three years away. Kenneth Arrow’s Social Choice and Individual Values 10 years distant. Gerard Debreu’s Theory of Value lay 18 years in the future. The senseless blurring of lines between mathematics and economics, a distant dream. In a sense, Samuelson unleashed this storm. But all along his career, he never indulged in mathematics as an end in itself. To the end, he remained a careful consumer of mathematical ideas.
So what should he be remembered for? The Nobel committee statement said it best when he was awarded the prize in 1970 “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 is a general statement. There are four areas of Samuelson’s work for which he will always be remembered.
Generations of students have learnt their first faltering lessons in economics from his book Economics: An Introductory Analysis. First published in 1948, it has been translated into 40 languages and has sold millions of copies worldwide. It is currently in its 19th edition. It is a model of clarity and careful exposition of ideas for those on a journey of discovering economic ideas. It did more to convince people about the value of free markets (and ideas) than anything else.
There is an interesting story about the book. Alexander Gerschenkron, a Harvard economist, recounted how Economics was translated into Russian. Impressed with its success, Soviet authorities secretly had the book translated. An undergraduate text, it was elevated to a graduate one so as to protect the students from “false” ideas. Many parts of the book (especially on classical thinkers such as Malthus and Marx) were censored. Copious notes were added to “clarify” matters and Samuelson declared a bourgeois thinker. In the end, the book survived, not the Soviets.
Most economists find it hard to fathom Marxian economics. Apart from a very different worldview, Marx’s texts are a study in denseness. But a one-line version of it is this: Workers create “surplus value” that is “appropriated” by capitalists, leaving the former high and dry. His original explanation is in terms of “values”, a somewhat metaphysical concept (Amartya Sen said as much). He promised to later show how values could be converted into prices, the modern metric of measurement. He never could. Despite this grave weakness in his schema, Marxists have clung to his framework.
Enter Samuelson. In two papers, Wages and Interest: A Modern Dissection of Marxian Economic Models (1957) and Understanding the Marxian Notion of Exploitation: A Summary of the So-Called Transformation Problem Between Marxian Values and Competitive Prices (1971), he laid bare the fatal weakness of Marxian economics. Marx’s procedure to “transform” values into prices was nothing more than an “eraser theorem”. One simply wiped off the wrong values that were obtained because of an erroneous calculating procedure. Samuelson showed that equality between values and prices was possible only in very rudimentary economies such as those of hunters and gatherers.
In developing countries, the distinction between public and private goods is lost sight of during the development process. By definition, one person’s consumption of a public good does not reduce its availability to others. Examples include clean air, equality of opportunity and security of life and property, among others. This is different from consuming a loaf of bread: One person’s consumption will only reduce what is left for another person. Governments often forget that. Electricity, potable water, public transport, fuel and a large number of other goods are transformed from private into public goods.
In three papers in the 1950s, Samuelson showed how this distinction could not be erased. There were fundamental barriers in eliciting the preferences of citizens. There is no market-based mechanism to find these preferences. In its absence, voting with one’s feet is the only way to find this out. This is what governments assume when they come to power with votes. But because price discovery is well-nigh impossible, losses, shortages and discontent are the result.
No discussion of Samuelson’s life can be complete without his work on international trade. If there is one truth in economics,?it is that trade between countries is beneficial. His work along with Wolfgang Stolper led to a famous result. A relative rise in the price of a product will lead to higher returns to the more intensively used input in making the product. A higher price for Toyota cars can lead to higher wages for Japanese workers. Techies in India get more money as the demand for IT services goes up.
He also showed that gains from globalization could be had without moving from one country to another. In that sense, he is the father of some powerful motivating ideas behind globalization.
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Siddharth Singh is deputy editor (views) at Mint
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First Published: Tue, Dec 15 2009. 12 30 AM IST