Paul Samuelson’s Legacy

Paul Samuelson died last Sunday, at 94. For some historical perspective on the role he played, consider that, for the entire history of modern economics, all 250 years of it, from its beginnings during the Enlightenment of the eighteenth century to the present day, the discipline has been dominated by five canonical textbooks – and only five (though, of course, each had many imitators). Those who found compelling the authority of these texts became economists. Those who didn’t became something else – sociologists, political theorists, anthropologists, psychologists, historians, lawyers, reformers, businessmen, religious leaders.

The first of these texts, in 1776, was An Inquiry into the Nature and Causes of the Wealth of Nations, by Adam Smith. Smith explained the mechanisms underlying Great Britain’s long consumer boom – the world’s first — with a clarity that still rings true today. His book wasn’t the first word about these topics; instead it was, in some sense,  the last. Before Wealth of Nations, there were philosophers and pamphleteers. Afterwards, there was a community of scholars around the world working collaboratively on a set of problems that they called political economy.

Forty years passed before David Ricardo’s The Principles of Political Economy and Taxation appeared in 1817 — “to correct the errors in Smith,” the author explained. The world had changed. England had suffered through nearly twenty years of population explosion and desperate war with France. Ricardo (and his friend Thomas Robert Malthus, coming at it from a slightly different angle) envisaged a world soon running out of natural resources, of arable land, of food itself. Their ideas were taken up with great excitement in London. Within the newly-formed Political Economy Club they won disciples; outside of it, they sparked criticism and ridicule.

The third great text, Principles of Political Economy, by John Stuart Mill, was published in 1848. It was apparent by then that Great Britain was again growing rich. The idea was to update Smith’s vision in light of the Industrial Revolution. But, as Jürg Niehans has written, “whereas Adam Smith’s synthesis had conquered the world, Mill’s synthesis… conquered only the classrooms.” Mill’s book eclipsed Ricardo; it shouldered aside the upstart Karl Marx, as well; and established the author as the great economist of his age, at least in the popular mind. But behind the scenes, in a dozen nations around the world, a small corps of analysts went to work on a more rigorous formulation. New sciences with new methods were springing up. Economists aspired to better analytic tools.

In 1890, Principles of Economics, by Alfred Marshall, of Cambridge University, supplied them. Marshall was the first master teacher to be a university professor (Mill had worked for the East India Company, Ricardo as a wealthy stockbroker, and Malthus was a country parson. Still writing almost entirely in literary terms, he gathered together strands of work from thinkers on three continents in a tradition that in time would be called “marginalism.” With these doctrines economists could focus on changes, not in aggregate quantities, but in small increments of quantities, a little more of one thing, a little less of another, such as to permit the application of differential calculus to economic theory. This was economics of the Victorian age, sufficiently different from what Adam Smith and the others had done before as to require differentiation from the classics – it was “neoclassical” economics. Marshall’s text went through eight editions, the last in 1924. So well-crafted was it that its influence would last another quarter century, sixty years altogether, through many revolutions and two world wars.

The fifth great text appeared in the years just after World War II, except that this time two books were required, not just one, both of them written by the 32-year-old Paul Samuelson., who was already recognized as a leader, perhaps the leader of his generation. Foundations of Economic Analysis, which appeared in 1947, was written for first-year graduate students. Economics: An Introductory Analysis, which followed the next year, was written for the masses – at least those who took a college economics course. The new split-level approach was necessitated by the development of the field. In the years since Marshall, economics had finally become thoroughly professionalized. Economists now wrote mainly for each other.

Samuelson’s thesis had carried the subtitle, The Operational Significance of Economic Theory. Both books were an elaboration of Keynesian ideas about national income and its fluctuations that Samuelson and others had developed in response to the Great Depression and the demands of wartime finance during the 1930s and early 1940s. Samuelson was not bashful about describing his findings as scientific, or apologetic for the way he expressed them. “Mathematics is a language,” stated the frontispiece of Foundations, attributed to J. Willard Gibbs, Yale’s great physicist, chemist and mathematician (1839-1903), and, for the first time, mathematical notation appeared in the body one of the five texts. In fact, Foundations was virtually written in equations. Translating these essentially simple mathematical statements into literary exposition, Samuelson wrote, was, at least for serious researchers, mostly a waste of time.

There is a story behind that frontispiece, naturally. Here is the way that the 29-year-old Muriel Rukeyser described it in Willard Gibbs, her wonderful 1942 biography of the scientist (she became far better known as a poet):

He would come to meetings – these faculty gatherings so full of campus politics, scarcely veiled maneuvers, and academic obstacle races – and leave without a word, staying politely enough, but never speaking. Just this once he spoke. It was during a long and tiring debate on elective courses, on whether there should be more or less English, more or less classics, more or less mathematics. And suddenly everything he had been doing stood up – and the past behind him, his [philologist] father’s life, and behind that, the long effort and voyage that had been made in many lifetimes – and he stood up, looking down on the upturned faces, astonished to see the silent man talk at last, and he said, with emphasis, once and for all: “Mathematics is a language.”

Young Paul Samuelson heard the story from E.B. Wilson (who had been Gibbs’s protégé at Yale), and liked it so much that he used the short sentence to begin Foundations. He patterned his collected scientific papers after those of Gibbs. But Gibbs died in 1903, and narrowly missed receiving the then-new Nobel Prize. William James wrote of him, “’They laugh best who laugh last.’ Wait till we’re dead twenty years. Look at the way they’re now treating poor Willlard Gibbs, who during his lifetime can hardly have been considered any great shakes at New Haven.” Samuelson determined not to have that happen to him.

It was while listening to Wilson lecture on thermodynamics in 1935 that Samuelson inferred “an eternal truth that was independent of its physics or economics exemplification.” Anyone who knows his way around a right triangle understands how useful the Pythagorean theorem can be in a variety of settings, whether celestial navigation, geography, architecture, not to mention chemistry, electronics, statistics, medical imaging, phonetics, crystallography and a host of others. In Samuelson’s case, this first great idea was French chemist Henri Le Chatelier’s recognition in 1884 that when a system in equilibrium is disturbed, it shifts in the direction which tends to minimize, or counteract, the effect of the disturbance. Very useful it turned out for, say, increasing the yield in a chemical reaction; useful, too, for gauging the “extensive magnitudes and their conjugate forces” between prices and quantities, costs and production, as Samuelson later put it, in a complicated economy. The method, which came to be known as the investigation of duality, could be applied to render measurable (if not necessarily tractable) nearly every kind of problem in economics.

So in 1947 the John Bates Clark Medal was invented and given to Samuelson; and, twenty-two years later, he became the second winner of the new Nobel award for economics. For finer-grained accounts than this of his contributions, see the appreciations last week by Avinash Dixit and Paul Krugman.

There is, of course, a whole other aspect to the life. Consider Samuelson the man.

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Paul Samuelson truly was the smartest guy in the room – with the exception of the occasional meetings with John von Neumann. From the beginning he enjoyed a reputation as an enfant terrible. The joke was that when he defended his dissertation, one professor on Samuelson’s committee asked him, “Did we pass?” He was no easier on the investors and financiers whose practices he studied.

When in the 1950s he was just starting to study options pricing, Samuelson asked a storied trader in New York to explain the conventions of the business as they had evolved over several hundred years. “It’s no use,” replied the trader. “What we do is something no American could understand.” Thereafter, when Samuelson wrote down the beginnings of the theory of option trading, the sort of option that could be exercised only on its expiration date, he designated it a European option; the more complicated variety, which may be exercised at any time after it is written until its expiration date, Samuelson named the American option. “He never sacrificed brashness for maturity,” his friend and fellow Nobel laureate James Tobin would joke.

Harder to convey is the remarkable zest, egalitarian zeal and personal modesty with which he exercised his gifts – except to note that it was contagious. Michael Weinstein, who obtained a PhD at the Massachusetts Institute of Technology, put it this way in a long and careful obituary in The New York Times. “Despite his celebrated accomplishments, Mr. Samuelson preached and practiced humility. The MIT economics department became famous for collegiality, in no small part because no one else could play prima donna if Mr. Samuelson refused the role, and, of course, he did.” Office politics were beneath him. For that he had long-time department head E. Cary Brown.

He was incurious, for the most part, about game theory, though he defended pioneer strategist Edward Chamberlin to the end. Nor did Friedrich von Hayek succeed in capturing his attention very much. In the wake of the panic engendered by Lehman Brother’s failure, Samuelson reached out to Robert Lucas, of the University of Chicago, perhaps with good results. He was always interested in markets, in money markets in particular. He knew Warren Buffett, was pals with John Bogle, and when in 1968 Stanley Marsh called him away from a game of tennis to pepper him with questions, the conversation led to the founding of Commodities Corp., an early and successful hedge fund (sold to Goldman Sachs in 1997). In the 1970s, he helped bring J.C.R. Licklider, father of the Internet, into the MIT economics department for a time.

A few years ago I began to think that most roles in economics are somehow conserved. I devoted a couple of weeklies to the topic: Samuelson as Our Marshall (it turned out that, in the third edition of their masterful survey, The Academic Scribblers, William Breit and Roger Ranson had beat me to the punch!); Milton Friedman as The Man Who Became Keynes. This was not some series of mystical spiritual successions I had in mind, such as the case of the Dalai Lama is said to be. I noted various sorts of causal mechanisms by which such replication could be achieved. Samuelson had deliberately set out to overturn Marshall; Friedman had emulated Keynes’ tactics and achieved similar success in the policy realm. As with Samuelson and Marshall, the two men never met.

Sometimes, though, the influence is direct and personal. The economist who most nearly resembles Samuelson today, it seems to me, is one whom he knew well, Richard Zeckhauser (b. 1940), of Harvard’s Kennedy School of Government.

Like Samuelson, Zeckhauser was an economics prodigy (at Harvard College rather than the University of Chicago), and, like Samuelson, a junior member of Harvard’s elite Society of Fellows. Like Samuelson, he was snubbed by Harvard’s economics department, and, like Samuelson, simply moved across town rather than leave Cambridge (Samuelson a mile or so down Massachusetts Avenue to MIT; Zeckhauser, across Harvard Square to the Kennedy School). Like Samuelson, Zeckhauser settled down as part of an economic ensemble, one that included Thomas Schelling and Howard Raiffa, and for 40 years produced a stream of outstanding work (in microeconomics rather than macroeconomics). He invested, played expert bridge and, for twenty years,s with Samuelson, tennis.

There were differences. Samuelson hardly ever collaborated. Zeckhauser hardly ever wrote anything alone. Samuelson eschewed behavior and psychological economics; Zeckhauser specialized in it. The evidence of the deepest points of correspondence between the two men lay in Samuelson’s regular attendance at Zeckhauser’s executive workshops on Investment Decisions and Behavioral Finance, especially when practitioner speakers were involved: Charlie Munger, Bruce Kovner, Mark Kritzman, Seth Klarman, Jeremy Grantham. The economists knew the investors and found them fascinating, because they know they make money from the foibles of others.

The Samuelsonian ethos is a nonrival good. Many others share it, some to a great degree. To name only the most obvious: his research partner and office-mate of sixty years, Robert Solow (though the Solovian ethos is itself a subset of considerable interest); William Nordhaus, of Yale University, Solow’s student, who has taken over revising Samuelson’s introductory text; Dixit, of Princeton University, who has assumed Samuelson’s role as an arbiter of professional originality; and, revealingly, Karl “Chip” Case, of Wellesley College, who retired from teaching last week, rather than continue to test his short-term memory for students’ names against his slowly encroaching Parkinson’s Disease, and who assimilated civic values not from Samuelson himself but from Samuelson’s friend Richard Musgrave.

Among those of the younger generation, it is Zeckhauser who, to my mind, comes closest to filling those unfillable shoes. Who knows where Zeckhauser got it? But the heroine and hero of the Samuelson saga are Aunt Frieda and Uncle Sam. In 1917, when he was two, a tumultuous year in which the United States entered the Great War in Europe and the Samuelson family pharmacy in Gary, Indiana, came under unusual stress, Samuelson’s mother sent her second-born child to the Valparaiso dunes, twenty miles or so away, to live for most of the next three years with foster parents. “I must have thought it liberating to have been in two cultures,” Samuelson said on the occasion of his seventieth birthday: “the rural one of my immigrant parents and the rural old-American one of Aunt Frieda,” The going rate for such childcare was $1 a day. Many years later he said, “A dollar a day bought love.”

“I think of Samuelson as a good friend,” Zeckhauser once said, “not my good friend, but a good friend.” That, more than any single intellectual contribution (or even all of them put together, as the exemplar of an intellectual epoch), is probably the way Paul Samuelson is best remembered. As the father of the “mixed economy,” he was a generalized good friend to every citizen of the world.