Monday, December 14, 2009

Paul A Samuelson & the Keynesians

The great economist Paul Samuelson died last Sunday 13 December 2009 at age 94. He brought mathematics to economic analysis along the line of Keynes. His textbook, "Economics" brought him wealth but it was his PhD thesis on 'The Foundations of Economic Analysis" which brought him fame and the Nobel prize.

There are many excellent orbituaries written on him around the world.

Below I will put in some thoughts on what I was taught about his theories, for the purposes of talking about economic analysis in the hope that it will not be taken as an attempt at a cheap shot at a giant at such a sad moment, which this is not. It is about ideas, not person.

Samuelson can be credited for bringing mathematics into analytical rigour in economic theorising. While many major implications can be brought out from the established framework (or paradigm), nonetheless, the danger, in the views of his opponents, was that it prevented people from thinking outside that established box. Here, Keynes' theory degenerated at the initial attempt by Hicks (with his ISLM model) through Alvin Hansen (Samuelson's teacher) to Samuelson into what is now called the Neoclassical Synthesis.

The Neoclassical Synthesis is an attempt to incorporate Keynes' ideas into a Neoclassical model, resulting in a Neoclassical model with Kynesian characteristics, principally in the form of the demand for money function which replaces the demand for loans equation. The rest remained essentially unchanged.

Disatisfaction by the "true" disciples of Keynes over the Neoclassical Synthesis rages in the form of the Capital Theory Controversy which attempts to show the tautology in the Neoclassical construction. If the profit rate is the return on capital, what is "capital" and how do you calculate it without the resorting to the return on capital which is the profit rate and the rate of interest, in equilibrium. Joan Robinson, followed GC Harcourt and then Paul Davidson won't let go.

The capital theory controversy still lingers in the minds of bored Keynesians, while the rest of the world happily ignores this logical inconsistency and runs the global economy down to ground with zero interest rates. Is there no such a thing as "profit" except the extraction of surplus value?


paul davidson said...

Unfortunately the author of this obit is wrong. I am Paul Davidson and I do not fault Samuelson for the so-called "capital controversy".

The probablem is that Samuelson NEVER understood Keynes's general theory where it was financial markets and liquidity problems that caused persistent less than full employment equilibrium and not sticky wages and prices.

One only has to read chapter 19 of Keynes's General Theory where Keynes states that others attribute unemployment to sticky or rigid money wages -- but his analysis does not require this -- and in fact in this chapter Keynes explains why flexible wages and prices need not restore full employment.

Obviously , as Samuelson told Colander in a printed interview, he [Samuelson] did not understand Keynes's paradigm so he merely assumed Keyners's theory was a walrasian general equilibrium system where money wages were sticky in the short run. Thus he could "synthesize' the classical theory (neoclasical sythesis Keynesianis) with some Keynesian terminology. But this has nothing to do with KEYNES!
In the 19th century, economists already attributede unemployment to the fixity of money wages -- so if Keynes was merely doing what Samuelson claims-- there was nothing revolutionary about the Keynesian Revolution.

You can read the true story about Keyneds and Samuelson in my latest book THE KEYNES SOLUTION: THE PATH TO GLOBAL ECONOMIC PROSPERITY (pALGRAVE 2009).

walla said...

"Hang on to your wallet. Economic laws are truly complicated." - Paul Anthony Samuelson (1915-2009)


On Samuelson's Economics textbook

His Nobel Lecture

Samuelson's Keynesianism

His significance this century

On Social Indifference Curves

The Pure Theory of Public Expenditure

The Gains From International Trade

On Ricardo-Mill Analysis of Globalization

On Samuelsonian Economics

Interviews with Samuelson (4.4mb)

Contributions to International Economics

Samuelson on Leontieff

Making Economics Exciting

On Samuelson's Multiplier-Accelerator Model

On Samuelson's Operationalism of Economics

The Samuelson Rule for Optimal Public Goods

On Samuelson's Submanifolds in Four Space

On The Definition of Economics

Deciphering This Crunch

Battle for the Soul of Economics

The Paradox of Thrift

First Best Rules in Second Best Worlds