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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