Though regarded as America's leading standard-bearer for Keynesian economics, he called himself a "cafeteria Keynesian", just picking the bits he liked. His combination of Keynesian and classical economic ideas became known as the "neoclassical synthesis". From his chair at the Massachusetts Institute of Technology and in his column in Newsweek, the self- described "dull centrist" became a fierce critic of the libertarian Chicago School, and especially of Milton Friedman (writer of a rival Newsweek column). Markets are not perfect, he believed, and dire warnings from Friedman, and earlier from Friedrich von Hayek, about the regulation of markets "tells us something about them rather than something about Genghis Khan or Franklin Roosevelt. It is paranoid to warn against inevitable slippery slopes…once individual commercial freedoms are in any way infringed upon." As for Mr. Samuelson's friend of 50 years, Alan Greenspan, once chairman of the Federal Reserve, "the trouble is that he had been an Ayn Rander" — a devotee of laissez-faire capitalism. "You can take the boy out of the cult but you can't take the cult out of the boy," Mr. Samuelson told the Atlantic this summer. "He actually had [an] instruction, probably pinned on the wall: ‘Nothing from this office should go forth which discredits the capitalist system. Greed is good'." – The Economist
Dominant Social Theme: A legend passes.
Free-Market Analysis: Since we don't want to speak ill of the dead, we shall write first that we are sure Dr. Samuelson was a good and kind man and that his family loved him. Now onto this Economist obit. (We will be criticizing the obit, OK, not the man, directly. Best we can do.)
This obit has all the signifiers of what the Economist is — one of the premiere mouthpieces for the Anglo-American elite on the Anglo side of the pond. One reads the entire article without one mention of FA Hayek or Ludwig von Mises or even the Austrian school.
Now 20 years ago, pre-Internet, the amount of Austrians you could find in the United States let alone Europe could comfortably fit into a phone booth. Today, type in Ludwig von Mises on the Internet and you liable to find MORE cites for Mises than for Keynes. But do the bright editors and reporters at the Economist newspaper notice this? Noo-ooo.
And that, dear reader, is why Rupert Murdock writhes like a wretched, ink-stained Hamlet, why Business Week was put on the block for a buck, why the New York Times almost went under, why Time and Newsweek had to cut circulation, why newspapers in America (and Europe too) are going out of business every day. How can you write this obit, in 2009, for goodness' sake and not include even a mention free-market economics?
In fact from our point of view, this article encapsulates everything that is wrong with the mainstream media and why in the age of the Internet it will continue to shrivel unless those who run decide to tell the truth when it comes to the information they put on the page. There is more truth, dear reader (or at least a broader and sincerer perspective) in this tiny electronic missive brought to you by the Bell (and in free-market commentary on the ‘Net in general), than you will find in most articles in the Economist or even in the mainstream press on a daily basis. That's because our frame of reference includes free-market economics whereas the mainstream media's often does not.
Of course Samuelson himself didn't have much use for free-market economics either. And as this article points out he preferred to use Friedman and Greenspan as examples of free-market economists when he had to present an alternative point of view. Since Greenspan ended up as head of the Federal Reserve and Friedman's best idea was a "steady state" central bank that would somehow take the guess work out of issuing money, it's difficult to see why he considered either sterling examples of free-market thinking. But that's just the point, just how the game is played.
The Hegelian dialectic, which the Economist and other mainstream publications use regularly, sets up opposing arguments. Usually a socialist argument (which those in power favor) and then one that is supposedly a contrast. In this case the real opposite to Keynesian-socialist economics of the kind espoused by Samuelson would be Austrian economics. But then the Economist would be drawing attention to real free-market economic philosophers. (Heaven help us.)
So what does the Economist do? It creates a "free-market" opposition (as Samuelson did) of Greenspan and Friedman. In fact, both are statists in that career-wise and even in terms of their evolving philosophies they believed in using the levers of the state to manage market economies. Here's more from the article:
He was the last of the great general economists, making important contributions on trade, macroeconomics, public finance and consumer behaviour. Yet he decided, at around 50, that to remain academically competitive he had to specialize. Perhaps because it was close to his beloved mathematics, the specialist field he chose was financial economics.
His work helped lay the foundations for two of the field's biggest ideas: the efficient-market hypothesis and options pricing. In 1965 he published a paper explaining that in well-informed and competitive speculative markets, price movements over time will be essentially random — a concept at the heart of the efficient-market hypothesis later described in its full majesty by Eugene Fama, whom Mr. Samuelson believed ought to win a Nobel prize.
In the 1950s it was Mr. Samuelson who had rediscovered the pioneering early work of Louis Bachelier, a French mathematician whose insights would later underpin the Black-Scholes option-pricing model; and it was Mr. Samuelson who suggested the assumption, that share prices move according to geometric Brownian motion, which makes this model workable. Mr. Samuelson remained close to Robert Merton, who won a Nobel for his work with Fischer Black and Myron Scholes on options pricing.
Yet Mr. Samuelson also understood that beyond the ivory tower the conditions necessary for efficient markets rarely existed; they needed regulating. "To understand economics you need to know not only fundamentals but also its nuances," Mr. Samuelson would explain. "When someone preaches ‘Economics in one lesson' I advise: Go back for the second lesson." The latest crisis (for which he felt some responsibility, since he had helped develop financial derivatives that company executives did not understand) proved that "free markets do not stabilize themselves. Zero regulating is vastly suboptimal to rational regulating. Libertarianism is its own worst enemy!"
Of course, we would have to ask in response to the above, what is "rational regulating" and who exactly is supposed to do it – Barney Frank? We can see in the above excerpt, all the shibboleths of modern economics – derivatives pricing, the efficient market theory and the general fascination with econometrics. In fact, about the only thing you won't see in Samuelson's work is the idea that central bank money printing distorts the economy and makes most of his cherished theories – and Keynesianism in general – improbable or impossible.
Since we don't want to be overly critical of a person who has just passed on, we shall quote an excerpt from some one else instead. That someone is E. C. Harwood, who reviewed Samuleson's "Economics, An Introductory Analysis" (5th edition published by McGraw-Hill Book Company, NY) way back in 1961. The heading on the review (excerpted below) informs us that it appeared in Economic News, published by the American Institute for Economic Research, Great Barrington, MA, Vol.IV, No. 8, October of 1961). As follows:
Erroneous assertions are scattered through this book. For example, Professor Samuelson asserts (p 286) that the Great Depression of the 1930's was the longest "sustained" in the Nation's history. The National Bureau of Economic Research, whose research in this aspect of economic developments is far more extensive and detailed than that of any other agency, reports that the duration of the 1873-82 recession and recovery from peak to peak was 101 months compared with 93 months for the depression of the early 1930's.
On page 377 Professor Samuelson refers to "classical views that there can never be unemployment." This representation of the classical views also is erroneous. The classical economists argued that unemployment would be extensive if some elements of labor refused to accept lower wages whenever that was indicated in order that they might be employed.
Also, on page 406 Professor Samuelson says, "From the early 1870s to the middle 1890s, depressions were deep and prolonged, booms were short-lived and relatively anemic, the price level was declining." That the price level was declining is correct, but the National Bureau's record shows that, from the time the gold standard was resumed in 1879 until 1895 there were 4 recessions having an average duration of less than 20 months, almost exactly the average for more than 100 years. None of the 4 was "deep and prolonged," and during this period the Nation enjoyed its most rapid and consistent growth as measured by the expansion of industrial production.
When he attempts to discuss "money," Professor Samuelson gives his readers inadequate information. For example, what is meant by the words on a $10 bill, "The United States of America will pay to the bearer on demand Ten Dollars"? I could find no evidence in the Professor's discussion that he knows of this promise or its significance, in spite of his attributing West Germany's "miracle" to "currency reforms," a principal feature of which has been a sound currency now redeemable in gold on demand. Surely, differentiating between dollars (1/35 of an ounce of gold) and promises to pay dollars is elementary in any attempt to describe a money-credit system. The foreign central bankers who have demanded that such promises be kept in recent years, with a resulting loss to the United States of more than $5,000,000,000 in gold, have a clear understanding of the difference between promises to deliver something and the thing promised. Should not American students be equally well informed?
Apparently in an attempt to justify in-creasing Government debt Professor Samuelson asserts (p.399), "If there were no public debt… (1) charitable institutions would have to be supported by public and private contributions more than by interest on endowments, (2) social security and annuities would have to take the place of rentier interest, and (3) service charges by banks would have to be increasingly relied upon instead of government bond interest," Evidently he is not aware that virtually all the private colleges in the United States, until a few decades ago, depended largely on endowment funds invested primarily in other than government bonds. Moreover, in those days, when there were almost no U.S. Government bonds in existence, most banks not only had no service charges but also paid interest even on checking account balances in excess of specified minimum amounts.
The review continues, but you can see it for yourself here:
In our opinion, Samuelson was just one in a long line of apologists for state control who was useful to the power elite at a time when it was apparently important to try to underpin various power grabs (such as central banking) with some sort of intellectual justification. Econometrics, as Mises showed us in Human Action doesn't work, because people will always change their behavior before the crisis (or whatever) is realized, thus throwing econometrical predictions (of the kind of which Samuelson was so fond) into chaos. That's why central banking (and price-fixing in general) doesn't work and why sooner or later – if only for a little while – we think some sort of honest money metals standard will emerge out of the current chaos of the fiat system. Paul Samuelson will not have lived to see it – and in his life worked hard to put off its day of reckoning, which, ironically, may have brought that day closer.