My first encounter with Paul Samuelson dates back to the first year of the Honors Economics undergraduate program in Delhi. The prescribed textbook for microeconomics was simply titled “Economics” and was written by Paul Samuelson. One still cannot forget the “guns vs butter” graph used in the textbook to explain the production possibility frontier (this is a graph illustrating the different combinations of outputs that can be produced with a level of A point on the boundary indicates the combination of the maximum output that can be produced with the given level of inputs and technology).
Indeed, this memory will bring smiles to many economics students around the world since the textbook has been published continuously since 1948 (later editions were taken over by economist William Nordhaus). The manual has been translated into 41 languages and has sold over one million copies worldwide. But Paul Samuelson was more than an author. He has made significant contributions to all branches of economics, from consumer theory and international trade to welfare economics and general equilibrium.
Samuelson did his undergraduate studies at the University of Chicago and his doctorate at Harvard University. His doctoral dissertation in 1941 was titled “Foundations of Economic Analysis”, published by Harvard Press in 1947. At age 25, Samuelson began teaching at the Massachusetts Institute of Technology, where he remained for the rest of his career, becoming the one of the youngest full professors at 32.
Samuelson’s first published paper, “A Note on the Measurement of Utility”, appeared while 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 paper. This concept basically states that it is possible to conclude whether or not a consumer was better off after a price change by observing a consumer’s choices. In other words, the consumer has revealed his preference through the choices he has made — hence the expression “revealed preference”. However, Samuelson’s seminal contribution came in the doctoral dissertation mentioned above. It was called “Foundations of Economic Analysis” and showed how any economic problem can be reduced to the maximization or minimization of a constrained function. Another feature 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 developed by Samuelson in his doctoral thesis mentioned 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 has been criticized for its abstractness but is still used to compare the effects of economic policies. (In fact, after Kenneth Arrow proposed his impossibility theorem, the social welfare functions were even found to be logically incorrect and therefore non-existent).
Samuelson’s contribution to public finance is also well known, especially his theory of public goods. The conditions under which public goods will be provided are still widely used in public policy. In particular, he suggested the optimal allocation of resources between public and private goods.
Samuelson is also renowned for his work on international trade. On the one hand, he drew on David Ricardo’s concept of comparative advantage and showed how trade contributes to growth, but also affects workers more negatively. His other well-known work is the Stolper-Samuelson theorem, also known as the factor equalization theorem. This theorem essentially says that when two nations trade, not only do the prices of the traded goods converge, but also the wages of those who produce those goods.
Finally, Samuelson’s work on incorporating Keynesian economics into the neoclassical framework is now widely accepted. Samuelson was torn between the ideas of “market power” he had learned at the University of Chicago as an undergrad. However, after joining Harvard University as a graduate student and professor at MIT, he was more drawn to Keynesian economics. According to him, Keynesianism was more applicable in the Great Depression and its aftermath. Later he synthesized the two approaches in what is now known as “neoclassical synthesis”. The economics textbooks mentioned above have popularized this approach.
Samuelson and public policy
Samuelson himself was involved in many organizations and held many positions related to economic policy and planning. As the Nobel Prize website tells us, he worked for the National Resources Planning Board from 1941 to 1943 (responsible for wartime planning for the pursuit of full employment); the War Production Board and Office of War Mobilization and Reconstruction in 1945 (economic and general planning program); the United States Treasury, 1945-1952; the Budget Office in 1952; the Research Advisory Group to the President’s National Goals Commission from 1959 to 1960; the Research Advisory Board Committee for Economic Development in 1960. But perhaps his most high-profile assignments were as economic adviser to the Kennedy and Johnson administrations in the 1960s. the United States would face over the next 20 years was inflation. In particular, he was more concerned about cost inflation, which is essentially a supply-side phenomenon since it is triggered by the rising cost of inputs such as labor, raw materials , etc.
But more than the positions he held, it is his work that is still relevant in many areas of economic and public policy. In particular, his work on international trade (the factor equalization theorem) has become relevant in today’s world as countries return to tariff barriers and the two largest trading nations, the United States and China, are involved in a tariff war. Samuelson’s work showed that trade affects wages and livelihoods, and therefore he might have advocated fiscal policy to help the “losers” from globalization processes. Moreover, his work on social welfare suggests that he was deeply concerned with distributive justice and therefore would have used this criterion to choose trade policies that provided compensation for losers.
Another area where Samuelson’s work continues to resonate in public policy is the public goods theory mentioned above. As we know, it applies to goods that are consumed collectively or in common. According to this theory, public goods have two characteristics: non-exclusivity, i.e. once a good is provided, the benefits derived from it cannot be stopped for anyone, and non-rivalry in consumption, that is, a person’s consumption does not decrease. the amount available to others. Some common examples of public goods are police, national defense, amusement parks, basic television and radio, etc. After Samuelson, work on public goods was continued by economists of the new institution such as Ronald Coase and Mancur Olson.
Finally, Samuelson introduced the concept of neoclassical synthesis as shown above, which combined the neoclassical framework with Keynesian macroeconomics. According to Samuelson, government intervention via fiscal and monetary policies is necessary to achieve full employment. At full employment, the market functions well, except for providing public goods and managing the problems of externalities. James Tobin, who received the Nobel Prize in 1981, called neoclassical synthesis one of Samuelson’s greatest contributions to economics.
Samuelson died in 2009 at the age of 94, but left a rich legacy in the form of his contributions as a teacher, researcher and student advisor. Samuelson was the last of the generalists in economics and had contributions in virtually every branch of economics, as noted above. In this sense, he is rightly called the father of modern economics. In his own words:
“In this era of specialization, I sometimes consider myself the last “generalist” in economics, with interests that range from mathematical economics 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 around the edges, tariff wars are common, the WTO is in an existential crisis, and Brexit is looming, his work is important in guiding how we can move from “de-globalization” to “globalization”. After all, free trade can still lead us to more optimal outcomes, provided the losers can be compensated through programs such as labor retraining and better social security.
Opinions expressed are personal