Samuelson was educated at the University of Chicago B. He also served as an economic adviser to the United States government. Samuelson contributed to many areas of economic theory through powerful mathematical techniques that he employed essentially as puzzle-solving devices. His Foundations of Economic Analysis provides the basic theme of his work, with the universal nature of consumer behaviour seen as the key to economic theory.
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Find out more For 30 to 40 years after the end of the Second World War, Paul Samuelson was one of the best-known economists of all time. His name would have been familiar not just to other economists and students but to readers of The New York Times, The Washington Post and, above all, Newsweek, where he had a regular column for 15 years.
His reputation was based on his mathematical economics — abstract theories that would mean nothing to non-economists. However, within a decade of obtaining his doctorate in , Samuelson published an introductory economics textbook that became canonical in part for its success in presenting the subject in an accessible way, quite unlike the dry tomes of his predecessors in both content and appearance.
The first 11 editions sold more than 3 million copies. The book uses hardly any mathematics and is full of data about American households, firms, labour unions and government activities. The answer is to be found in the years just before and during the Second World War.
At that time, Samuelson, mentored by Alvin Hansen a professor of economics at Harvard University , began to think about how government spending could be used to make sure that there was never another Great Depression. To understand why the question gripped Samuelson, it is necessary to know a little about who he was, and how he became an economist. They moved to Hyde Park, then a predominantly Jewish suburb of Chicago, where they ran a fried chicken restaurant called Plantation Chicken Barbecue.
In , Samuelson started as an undergraduate at the University of Chicago, as a commuting student. He was in the first cohort taking the programme instituted by the new principal, Robert Maynard Hutchins, aimed at providing a very broad education.
Samuelson received what he believed to have been an excellent education, and chose to specialise first in social science and then in economics.
Nobel Laureate Paul A Samuelson. Courtesy the MIT archives He was a precocious undergraduate, brimming with confidence, who was allowed to take the key graduate course in economic theory. Samuelson, as an undergraduate, had nothing to lose. Samuelson left Chicago with the best training in economic theory any undergraduate could have had at the time.
However, of greatest importance to Samuelson was the American polymath Edwin Bidwell Wilson, a mathematician, aeronautical engineer, social statistician, economist and managing editor of the Proceedings of the National Academy of Sciences for 50 years. Under the tutelage of these three, Samuelson wrote articles on the theory of the consumer, the theory of the firm, and the theory of international trade.
Typically, his articles took a long-recognised economic problem, used algebra to capture the essence of it, and then solved it in a way that made it unnecessary for economists who came after to grapple with the literature that had come before him. It required stating assumptions precisely and then using algebra to derive implications from those assumptions In , when Samuelson came to write his doctoral dissertation, he sensed that, although he was studying apparently diverse fields, he kept encountering and solving the same problems over and over.
The economics might differ in each subfield, but the mathematical structure of the problems was the same. They were all about choosing the best possible outcome given the constraints facing people. Mathematicians now call it constrained optimisation. For example, a business will aim to make as much profit as possible but has to accept the prices it faces in the market and the technological limitations that determine the inputs required to produce different levels of output.
Samuelson tried to put the problem in mathematical terms that could then be applied to different situations in economics. For such a statement to be meaningful, we must be able to derive and test its consequences.
If, for example, economists could show that utility maximisation implied that, when the price of a commodity rose, the quantity a consumer would buy fell, then the theory was operationally meaningful. Prices and quantities bought can be observed and we can see whether the theory is right. Comparative statics tells us how, when some variable changes, the whole equilibrium changes. To economists, it sounds an obvious point but it was one that, before Samuelson, no one had made it so forcefully.
When Samuelson published his doctoral dissertation as Foundations of Economic Analysis , it was virtually a how-to manual for economic theory. The book represents a conception of theory, as mathematical modelling, that stood apart from most economic theorising before the Second World War.
It required stating assumptions precisely and then using algebra to derive implications from those assumptions. Samuelson was not the only economist working this way — the Econometric Society, formed in , helped to create a substantial community of economists who applied mathematics to economics.
The approach resonated with the intellectual values of all the economists who had been engaged in technical war work.
Like Samuelson, many had worked alongside natural scientists, engineers and mathematicians, before returning to academia in the lates. But the more mathematics-oriented approach to economic theory that Samuelson represented was rapidly gaining ground.
By the s, any graduate student in economics had to get a certain training in mathematics, an expectation very different from that prevailing even a decade earlier. Economic theory had changed, and Samuelson was one of the key figures responsible for that change. The Nobel committee implicitly recognised his role in making economics more quantitative and scientific when they awarded him the Nobel Prize in Economic Sciences in Alongside the mathematics genius, there was also another side to Samuelson — a teacher, policy analyst and great communicator.
Innocent of mathematics, Hansen was a very different type of economist from Schumpeter, Leontief and Wilson. He was committed to policy analysis, with an ongoing connection to the Federal Reserve. Samuelson began attending the Fiscal Policy Seminar run by Hansen and a colleague, John Williams, which brought together academic economists and policymakers, and Hansen soon became his most important mentor.
Using a simplified mathematical model, Samuelson wrote two articles considered foundational for postwar business-cycle analysis. Samuelson started his policy-related work by applying his mathematical tools to the problem of the business cycle. Inspired by the renowned British economist, this involved analysing the behaviour of the economy in terms of aggregates such as gross domestic product, and using interest rates, government spending and taxation to smooth out the business cycle.
Teaching navy officers at MIT was one such activity, but Hansen also drew him into government service. Samuelson took joint leadership of a project to estimate what the level of consumption was likely to be after the war, a key piece of knowledge, according to Keynesian theory, if the US was to avoid a postwar major depression.
This project folded with the closure of the agency in which it was based, but Samuelson took on other consultancy roles with the government. He was working not as a mathematical economist but as an expert on data analysis, in the newly emerging field of national accounting. It would soon come to be known as Keynesian economics. Samuelson also spent much of working as a mathematician in the MIT Radiation Laboratory, solving technical problems arising out of the use of radar to control gunfire on warships.
After the war, the victorious Allies moved to establish the institutions that would come to dominate international economic relations, such as the International Monetary Fund. In order to avert the threat posed by Soviet communism, the US was also undertaking European reconstruction.
Hansen was arguing that it was in the interests of the US to support the rest of the world, and that a retreat from the international stage would be very damaging. Samuelson wrote articles for The New Republic, arguing for a more active US role in the world economy. When the war ended, he resumed teaching at MIT. Virtually all MIT students most of whom were scientists and engineers had to take courses in economics, which were very unpopular. One might expect that the author of Foundations of Economic Analysis would have a bias towards mathematics and economic theory, especially at MIT, but Samuelson veered in the other direction.
Because the study of economics was designed to broaden the education of MIT students, he decided to take the book away from engineering: to teach them not just to measure and calculate but to write as well. New editions have appeared every three to four years for the past 70 years. The legendary textbook adopted a conversational style, one some critics considered to be flippant, and it conveys economic ideas in colloquial ways.
It started with household finance — something to which students could easily relate — before going on to companies and the government, and finally linking these sectors through the idea of national income. Samuelson focused on topical issues, and was one of the first textbook writers to cover the problem of discrimination against women and people of colour.
As economic problems evolved, he changed the focus, putting great effort into revising the book. In the s, Samuelson began writing regular appraisals of the US economy for the Financial Times in the UK, and by the end of the decade he was also writing for newspapers in Australia and Japan. In these articles, he assessed what professional forecasters were saying before offering his own analyses.
He would discuss problems such as the effects of a steel strike, or whether autoworkers were likely to accept a wage offer and the implications of his prediction. Through his association with Hansen, Samuelson had developed a political commitment, as a liberal and supporter of the Democratic Party. During the s, he was increasingly critical of the economic policies of the Dwight Eisenhower administration, and became one of a group of academics advising the presidential candidate Adlai Stevenson.
At the end of , John Kennedy approached Samuelson for economics advice. In , a new opportunity presented itself for Samuelson, one to reach his biggest audience yet.
The magazine Newsweek made the decision to modernise its economic columns, hiring three economists — Samuelson, Milton Friedman and Henry Wallich representing Left, Right and centre, respectively — to write regular columns. For 15 years until , Samuelson wrote a column every third week, covering the state of the economy, personal investing and many other topics. As an intellectual and economist, there were two Samuelsons. There was the mathematical savant who had learned his trade at the feet of Viner, Leontief, Schumpeter and, above all, Wilson.
This work had raised him above most of his contemporaries, enabling him to speak with the authority of one of the leading economists of his generation. However, his more popular work was not just a distillation of his abstract theories; it rested not on complex mathematical arguments but involved careful data analysis and familiarity with the way that economic institutions worked. This was the Samuelson, mentored by Hansen during the Second World War, who wrote Economics and whose views were sought by the press and government.
He and his first wife, Marion, had inherited a small amount of money, and by he was also earning a very substantial royalty from his textbook. Discussions of investment with his high-school mathematics teacher around the time of the Wall Street Crash and the Great Depression also constituted background for his attention to finance.
Then at MIT, there were colleagues with similar interests, some of them engaging in commodity speculation, and the competitive environment encouraged demonstrating that you were smarter than your fellows. Samuelson developed the theory of efficient markets, arguing that, if information is freely available, those involved in buying and selling stocks will take it into account.
For example, if you have a formula that tells you what a stock option is really worth, while the rest of the market is relying on an inaccurate rule of thumb, you might be able to make a fortune.
The basic idea of efficient markets is simple but there was a lot of resistance to it, especially from brokers and professionals whose reputation for being able to beat the market was at stake.
So proof of the efficient market theory was very important. In times of economic crisis, people wonder whether economics and economists are to blame. This happened in the s and it happened again in after the global financial crisis. What the two sides of his work show is that, like many of the best economists of his generation, he was well aware of the limitations of mathematical theories: that models are simplified and sometimes fail to take into account factors that turn out to be important. Roger Backhouse is professor of the history and philosophy of economics at the University of Birmingham in the UK and at Erasmus University Rotterdam in the Netherlands.
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Find out more For 30 to 40 years after the end of the Second World War, Paul Samuelson was one of the best-known economists of all time. His name would have been familiar not just to other economists and students but to readers of The New York Times, The Washington Post and, above all, Newsweek, where he had a regular column for 15 years. His reputation was based on his mathematical economics — abstract theories that would mean nothing to non-economists. However, within a decade of obtaining his doctorate in , Samuelson published an introductory economics textbook that became canonical in part for its success in presenting the subject in an accessible way, quite unlike the dry tomes of his predecessors in both content and appearance. The first 11 editions sold more than 3 million copies. The book uses hardly any mathematics and is full of data about American households, firms, labour unions and government activities.