MillenniumPost
Beacon

The Nobel Series : Architect of modern economics

Exploring the many contributions of Paul Samuelson in the scientific application of economics to the challenges — groundbreaking work that has even greater relevance at a time when globalisation is facing its greatest threat

The Nobel Series : Architect of modern economics
X

My first brush with Paul Samuelson was in the first year of the undergraduate Economics Honours programme in Delhi. The prescribed textbook for Microeconomics was simply titled 'Economics' and was authored by Paul Samuelson. One still can't forget the 'guns vs butter' graph used in the textbook to explain the production possibility frontier (this is a graph illustrating the various combinations of outputs that can be produced with a given level of inputs. A point on the frontier indicates the combination of the maximum output that can be produced with the given level of inputs and technology).

Indeed, this memory will put a smile on many students of economics across the world since the textbook has been published continuously since 1948 (later editions were taken up by the economist William Nordhaus). The textbook has been translated into 41 languages and has sold more than a million copies worldwide. But Paul Samuelson was more than an author. He made significant contributions to all branches of economics from consumer theory and international trade to welfare economics and general equilibrium.

Main work

Samuelson did his undergraduate studies at the University of Chicago and PhD from Harvard University. His PhD dissertation in 1941 was titled 'Foundations of Economic Analysis', published by Harvard Press in 1947. At 25, Samuelson began to teach at the Massachusetts Institute of Technology, where he remained for the rest of his career, becoming one of the youngest full professors at 32.

Samuelson's first published article, 'A Note on the Measurement of Utility,' came when he was a doctoral student at Harvard in 1936. Two years later, while still a student, he introduced the concept of 'revealed preference' in a 1938 article. This concept basically states that it is possible to conclude whether a consumer was better off or not after a change in prices by observing a consumer's choices. In other words, the consumer revealed his preference by choices he made — hence the term 'revealed preference'. However, Samuelson's fundamental contribution came in the PhD dissertation referred to above. This was titled 'Foundations of Economic Analysis' and showed how any economic problem can be reduced to maximising or minimising a function subject to a constraint. Another hallmark of this work was the extensive use of mathematics to solve these economic problems.

Samuelson's other major contribution was in welfare economics. The Bergson-Samuelson welfare function was originally proposed by Abram Bergson in 1938 and further developed by Samuelson in his PhD dissertation referred to above. The social welfare function is an aggregation of individual preferences and tells us whether a particular social state is better, worse or equal to another social state. The concept of social welfare functions was criticised because of their abstract nature but is still used to compare the effects of economic policies. (In fact, after Kenneth Arrow proposed his impossibility theorem, social welfare functions were even proved to be logically incorrect and therefore non-existent).

Samuelson's contribution to public finance is also well known, particularly his theory of public goods. The conditions under which public goods will be supplied are still widely used in public policy. In particular, he suggested the optimal allocation of resources between public and private goods.

Samuelson is also well regarded for his work on international trade. For one, he built on David Ricardo's concept of comparative advantage and showed how trade contributed to growth, but also affected workers more adversely. His other well-known work is the Stolper-Samuelson theorem, also known as the factor equalisation theorem. This theorem basically says that when two nations trade, not only will the price of traded goods converge, but also the wages of those producing those goods.

Finally, Samuelson's work on incorporating Keynesian economics into the neoclassical framework is now accepted widely. Samuelson was torn between the 'might of the market' ideas that he had learnt in the University of Chicago as an undergraduate student. However, after he joined Harvard University as a graduate student and a faculty at MIT, he was attracted more to Keynesian economics. According to him, Keynesianism was more applicable in the Great Depression and its aftermath. He later synthesised the two approaches into what is now known as the 'neoclassical synthesis'. The textbook economics referred to above popularised this approach.

Samuelson and public policy

Samuelson himself was involved in many organisations and held many posts which dealt with economic policy and planning. As the Nobel Prize website informs us, he worked for the National Resources Planning Board from 1941-1943 (in charge of war-time planning for continuing full employment); the War Production Board and Office of War Mobilisation and Reconstruction in 1945 (economic and general planning programme); the United States Treasury, 1945-1952; the Bureau of the Budget in 1952; the Research Advisory Panel to the President's National Goals Commission from 1959-1960; the Research Advisory Board Committee for Economic Development in 1960. But his most high profile assignments were perhaps as an economic advisor to the Kennedy and Johnson administrations in the 1960s. During this period, Samuelson thought that the most crucial problem that the US would face for the next 20 years was inflation. In particular, he was more concerned about cost-push inflation, which is basically a supply-side phenomenon since it is triggered by the rise in the cost of inputs such as labour, raw materials etc.

But more than the posts he held, it was his works that are still relevant in many areas of economic and public policy. In particular, his works in international trade (the factor equalisation theorem), has become relevant in today's world when countries are reverting to tariff barriers and the two largest trading nations, US and China are involved in a tariff war. Samuelson's work showed that trade affects wages and livelihoods and hence he would perhaps have rooted for fiscal policy to help the 'losers' from the processes of globalisation. Further, his work on social welfare suggests that he was deeply concerned with distributive justice and hence would have used this yardstick to choose those trade policies that provided for compensation to the losers.

Another area where Samuelson's work continues to resonate in public policy is the theory of public goods mentioned above. As we know, it applies to goods which are consumed collectively or jointly. According to this theory, public goods have two characteristics: non-excludability, i.e., once a good is provided, the benefits flowing from it can't be stopped for anyone and non-rivalry in consumption, i.e., one person's consumption does not reduce the quantity available for others. Some common examples of public goods are the police, national defence, recreation parks, basic television, and radio, etc. After Samuelson, the work on public goods was taken forward by New Institutional economists such as Ronald Coase and Mancur Olson.

Finally, Samuelson introduced the concept of the neoclassical synthesis as noted above, which combined the neoclassical framework with Keynesian macroeconomics. According to Samuelson, government intervention via fiscal and monetary policies is required to achieve full employment. At full employment, the market works well, except at providing public goods and handling problems of externalities. James Tobin, who got the Nobel Prize in 1981, called the neoclassical synthesis one of Samuelson's greatest contributions to economics.

Conclusion

Samuelson died in 2009 at the age of 94 but left behind a rich legacy in the form of his contributions as a teacher, researcher and adviser to students. Samuelson was the last of generalists in economics and had contributions in virtually all branches of economics as discussed above. In that sense, he is justifiably referred to as the father of modern economics. In his own words:

"In this age of specialisation, I sometimes think of myself as the last 'generalist' in economics, with interests that range from mathematical economics down to financial journalism. My real interests are research and teaching…"

Samuelson's work continues to be relevant in many areas of public policy such as public goods, finance and international trade. In particular, when the consensus on free trade is fraying at the edges, tariff wars are common, WTO is in an existential crisis and Brexit looms, his work is important to guide how we can move from 'deglobalisation' back to 'globalisation'. After all, free trade can still lead us to more optimal outcomes, provided losers can be compensated through programs such as retraining of the labour force and better social security.

Views expressed are personal

Next Story
Share it