Friday, January 29, 2010
Paul Samuelson:The economist and his time (II)
Originally a scientific not an economist, Samuelson set the tone from the beginning. While he was defending his PhD thesis, Schumpeter who was among those present at that moment said:” I do not know whether this jury is able to write something as brilliant as this thesis” .
The contribution to macroeconomics has made Samuelson the real father of Macroeconomics, quite on the contrary to the conventional wisdom which give that credit to Keynes. As usual, public validation goes through a different way to what it should be.
Samuelson `contribution might be summarized as follows: The economic analysis as a conditional optimum (1947)(these days this is known as limited rationality).It made the so called neoclassical synthesis (1948),which means the classical approach plus Keynesian approach, to be applied to the way the economy works: mixing market with the State. Other areas includes Consumption theory,(revealed preferences 1947), International trade theory (The Stolper-Samuelson Theorem) , and the conditions to make equal world prices of capital and labor,(1948).Public economy and markets failure which affect optimality on market result(1954).Economy Growth theory ( 1939) and the accelerator principle ,the first overlapping generation model (1958).On the financial side , Samuelson worked on the efficiency of diversification(1967),and the rules to build a life time efficient portfolio (1969).He gave microeconomics a better mathematical support , such that it allowed to improve the quality of its implications .All of this transformed the economy from the traditional -static social science, to a modern –dynamic science with strong mathematics background.
On the political economics side, he said that both Marx and Friedman were wrong ,which it is true about the Marx interpretation concerning the real forces of History . but unlikely about Friedman statement that inflation is a monetary phenomena, or the nature of market forces and its close ties to human motivations, which add severe limitations to the role of Government in the economy . Friedman was probably wrong concerning his approach about the role of institutions , which apparently he ignored, and his misinterpretation of the strong ability of capitalism to adapt itself to different political regimes. However, it is hard to say that Samuelson had the last word about the way markets and Government works .The recent financial crisis ( 2008-2009 ) proved that both government and market might fail, and what it count more at the end of the day, is to have strong and reliable institutions. Thus, it seems that Douglas North Is the one who has settle down this discussion, although it is not the case to be a shadow on the outstanding Mr Samuelson` contribution .