Originally posted by John Cassidy at The New Yorker,
In the fall of 1996, I arranged to interview Paul Samuelson in his office at M.I.T. for an article I was writing on the state of economics, which is available online to subscribers. At the allotted time, 12:00 if I remember rightly, there was no sign of Samuelson, who was then eighty-one. A few minutes went by. Then he bounced in on the soles of his feet, a diminutive man dressed in a light gray suit, a red-and-white-striped shirt, and a snazzy bow tie. He had gray, frizzy hair, shaggy eyebrows, and a wicked smile. His usual parking space had been occupied, he shouted to his secretary, so he had been forced to park in somebody else’s. “I hope it’s Franco’s. He’s out of town.” (Franco was Franco Modigliani, a fellow M.I.T. Nobel Laureate, who died in 2003.)
Befitting a scholar of his stature, Samuelson had a big airy office that overlooked the Charles River. Books and journals lined the walls and floors, but Samuelson’s desk was neat. On the blackboard, there was a note of congratulations from his colleagues for winning the “National Medal of Science,” which he had received at the White House earlier that year. Samuelson joined M.I.T.’s faculty in 1940. He wrote more than four hundred journal articles, numerous monographs and a famous undergraduate textbook, which, he proudly informed me, had sold “three million or four million copies—I can’t remember which.” When he was awarded the Nobel Prize, in 1970, the citation read: “By his contributions, Samuelson has done more than any other contemporary economist to raise the level of scientific analysis in economic theory.” Almost forty years later, few would quibble with that description.
I began by asking Samuelson whether he was still a Keynesian. Early in his career, he helped to formulate the income-expenditure framework that John Maynard Keynes put forward in his 1936 book, “The General Theory of Employment, Interest, and Money,” capturing its essential elements in a simple diagram that is still used in elementary economics classes.
“I call myself a post-Keynesian,” Samuelson replied.“The 1936 Model A Keynesianism is passé. Of course, it doesn’t meant that it wasn’t right for its time.” He recalled attending an event that was held in Cambridge, England, in 1986 to mark the one-hundred-and-fiftieth anniversary of Keynes’s birth. “Everybody was there. And they all stood up and said, ‘I am still a faithful Keynesian. I am still a true believer.’ I was a bit rude. I said,‘You remind me of a bunch of Nazis saying, I’m still a good Nazi.’ It’s not a theology: it’s a mode of analysis. I think I am a different Keynesian than I was ten years ago.” Samuelson then quoted Keynes himself. “When my information changes, I change my views. Don’t you, Sir?”
Q: At this stage, how would you rank Keynes?
A: “I still think he was the greatest economist of the twentieth century and one of the three greatest of all time.”
Q: “Who are number one and number two?”
A: “Adam Smith and Leon Walras.”
Walras was a nineteenth century French economist who taught at the University of Lausanne. He was the first economist to write down the equations for a ‘general equilibrium’ of the entire economy, incorporating the markets of everything from sugar to iPods. He is widely regarded as the founder of mathematical economics. “We all march in his footsteps,” Samuelson said of Walras.
Q: “Why did you become a Keynesian?”
A: “I was taught by the best neoclassical economists in the world at the University of Chicago”—Samuelson went to Chicago at sixteen in 1931, two years into the Great Depression and did his B.A. there. He then went to Harvard for his Ph.D.—“I did not throw out my education lightly, but what I was being taught was of no use in explaining what I saw around me. It was the Great Depression. In one year, there were virtually no housing sales in all of Chicago. Model A Keynesianism really fitted what was going on pretty well. It was the best wheel in town, so you used it to explain what was happening.”
“Keynes’s contribution was not just to advocate spending government money in the middle of a recession. Every government had done that going back to the days of the Irish potato famine. What he gave to us was a way of thinking about the magnitude and the dimensions, and so forth.”
Although Samuelson quickly accepted Keynes’s new teachings, many others didn’t.“Inexact sciences like economics advance funeral by funeral,” Samuelson said, and he brought up one of his teachers at Chicago, Frank Knight, a brilliant scholar who is today remembered primarily for the distinction he drew between risk, which can be assessed in probabilistic terms, and uncertainty, which can’t be represented mathematically.
“He”—Knight—“really thought that Keynes was the devil,” Samuelson recalled. “He didn’t believe in God, but he knew a devil when he saw one. He insisted that the old economic system—the neoclassical one worked pretty well, except in the Great Depression.” Samuelson shot me an impish grin. “That’s a pretty good science,” he went on. “One that is true except for its exceptions.”
Q: “Why did Keynesianism go into decline?”
Samuelson answered my question in three parts. Firstly, he said, Keynesian economists and policymakers made the mistake of projecting the experience of the Great Depression onto the post-war era. When the military conflict ended, and defense spending started falling, they expected the economy to go into another slump. “That isn’t what happened at all,” Samuelson said. “People came back (from the war) and they were eager to consume. What is more, they had the wherewithal to consume.”
Secondly, it turned out that, contrary to what Keynes had said in “The General Theory,” monetary policy mattered a lot.“In 1936, money had no important role,” Samuelson recalled. “Interest rates were one-eighth of one-eighth of one per cent. I did some research, and I found that the interest on one million dollars of ninety-day Treasuries was $37. People didn’t even bother to collect it. The Fed wasn’t important. During the war, the rumor went around that it’s authority would be stripped out and given to one of the wartime agencies. Post-war, money did matter. Milton Friedman et al turned out to be right. Where I fault my English colleagues is that they didn’t change when the situation changed. The English Keynesians got stuck too close to Model A Keynesianism.”
The final blow to Keynesianism was stagflation: the combination of rising inflation and unemployment, which emerged in the early nineteen-seventies. In any democracy, Samuelson noted, there is a temptation for the government to try and stimulate the economy, even if that leads to a modest rise in inflation. “You bite the apple,” Samuelson said. “You know you can do it, so you are damn well going to do it. The temptation was to over-use it. It was a disease that Lord Beveridge (an early English Keynesian), Alvin Hansen (an early American Keynesian) and, indeed, Keynes, in some moods, were aware of. They suspected that at really full-employment you would have an incipient inflation problem.” It was this fear, Samuelson recalled, that led to direct restrictions on wages and prices—so called prices and incomes policies—but these measures didn’t have much success. “There’s nothing in Keynesian economics that would allow you to solve stagflation. But there’s nothing in neoclassical economics that would allow you to solve stagflation, either. Except, if you don’t allow unions to exist, or you don’t allow the poorest fifty-one per cent of the population to use the levers of politics in order to shift the income distribution in their way.” Nevertheless, Samuelson went on, “the failure to solve the ongoing problem of stagflation was the most important nail in the coffin of Keynesianism.”
Q: “What is left today of Keynesianism?”
Quite a lot, Samuelson replied. “Fairly simple Keynesianism has worked pretty well in explaining what has happened to the U.S. economy since 1980—certainly much better than it worked in the nineteen-seventies, with the supply shocks.”
Q: “What do you think of Robert Lucas? (Lucas, a professor at Chicago, helped to found the rational expectations approach to macroeconomics, which sees the economy as self-correcting and views attempts to stabilize the economy, by, for example, raising and cutting interest rates, as futile. The previous December, Lucas had picked up a Nobel Prize.)
“I applaud the fact that Robert Lucas received the Nobel Prize last year. I thought it was overdue,” Samuelson said. In terms of economic theory, he went on, the rational expectations approach was very significant, but its practical importance was negligible. “The rational expectations paradigm of analysis had nothing to contribute to the Reagan administration, where it would have been welcome, or, indeed, to the Federal Reserve Board’s outside committee of academic consultants, which I used to attend. There was usually one rational expectations man at each meeting, but it was rarely the same one twice. In terms of practical analysis, they had nothing to teach us.”
“What is real”—of the rational expectations approach—“is that you can’t fool all of the people all of the time,” Samuelson said, but the suggestion that changes in monetary policy don’t impact the economy, at least in the short-term, was plainly wrong. “That is the Achilles heel of the Lucas vision.” Equally troubling, Samuelson went on, were later elaborations of the rational expectations approach, particularly the “real business cycle” theory, which posited that the economy at large was in a continuous state of equilibrium, and that economic outcomes, including mass joblessness, were a product of voluntary choices. “If somebody says, as Friedrich Hayek said when one in four Germans were unemployed, that people are out of work because they are choosing to consume leisure, that, to my mind, is a ridiculous real-business cycle theory.”
The rational expectations approach isn’t just an economic theory: it is an austere theory of human behavior. It assumes that consumers and businessmen are ultra-rational, and that they are endowed with complete knowledge of how the world operates. In one famous adaptation of this idea, Robert Barro, who is now at Harvard, argued that increases in government spending had little or no impact on GDP: they merely prompted people to save more because they know that, ultimately, the increases in spending would have to be financed by higher taxes. Samuelson expressed skepticism about this idea, noting that during the Reagan era there had been enormous budget deficits but no concomitant rise in private saving.
“I’m about as rational a person as you could get, but did I set up a sinking fund to pay off my taxes? No. Was I lazy and irrational? No...At bottom, I’m in the Herbert Simon camp of limited rationality. People are rational, but you are always doing things in a hurry and with limited information. The last thing you can do is a big optimization problem down to five decimal places.”
Samuelson’s role in the evolution of economic methodology is somewhat ambiguous. On the one hand, he was skeptical of the formal methods that Lucas and Barro employed. But it was he, more than anybody else, who helped to turn economics into a branch of applied mathematics. In his 1947 treatise “Foundations of Economics Analysis,” Samuelson showed how many types of economic decisions, such as what good a consumer should purchase, or how many employees a firm should hire, can be viewed as mathematical optimization problems. The framework he elucidated, which employed multivariate calculus, still dominates graduate textbooks. By the mid nineteen-nineties, many economists, including some very eminent ones, were concerned that the formalization of economics had been taken too far: that it had come to dominate the subject at the expense of economic intuition. I asked Samuelson whether mathematics was now too important in economics.
Rather than answering the question directly, he talked about a lecture he attended in the nineteen-thirties by Lionel Robbins, a well-known professor at the London School of Economics. “Lionel Robbins gave an address saying this math stuff is just a passing fad. I was all of twenty-eight, but I thought, ‘Poor fellow, he just doesn’t realize that he’s missing the train.’ That was just a bad understanding of the dynamics of the profession. Math is a problem for everybody in the profession and it has been for years. We all say, math should be used just up to the point that I have used it, and no more...I always say to our graduate students when they are leaving: ‘As a graduate student at a top-notch university, you tend to lose touch with reality. You have been engaged in puzzle solving and learning a new language. When you emerge, you may tend to think you have been asleep for several years.’ The paradox is that the best people in practical terms are the Jim Tobins, the Bob Solows—the guys who are awfully good at the technical stuff as well.” Samuelson also brought up his colleague Modigliani, whose parking space he may have been occupying, noting “he has done more for Italy than pizza,” and the prevalence of technically adept M.I.T. graduates in the Clinton administration. (They included Lawrence Summers, Joseph Stiglitz, and Laura Tyson.)
“Like herpes, math is here to stay,” he said. “It takes strong math to defeat misleading math. For example, ordinary least squares”—a standard statistical method—“is misleading. It takes more mathematics than ordinary least squares to understand three-stage least squares, co-integration, or unit roots, all of which are improvements on ordinary least squares. But it does lead to a communication problem. The number of people who can communicate effectively, like Paul Krugman, is very small. I will say something. It won’t be a new John Kenneth Galbraith who cleans of the Augean stables of economics. I think that the big changes in economic doctrines which will be used in the twenty-first century will come from inside the profession.”
Q: “But what about the state of macroeconomics? Is it not troubling?”
A: “A lot of people think that macroeconomics is in a mess, and it is true. But the mess in macro is not that there are now inferior people going into the subject. The problem is that you are dealing with complex, intractable, and imponderable problems. I can, in three afternoons, think up a new puzzle in portfolio theory and work out its implications. But that doesn’t enable me to translate that knowledge into cleaning up the mess in macroeconomics. Macroeconomics is in a mess because we have made so much progress in the control of the old-fashioned business cycle. When macroeconomics was crucial, during the Great Depression, things were by no means as clear as they are now.”
At this point, Samuelson again gave credit to Keynes, for enabling economists to think through the causes and solutions to economic slumps. He brought up the economic situation in Japan, which was enduring a lengthy period of stagnation following the bursting of a stock market and property bubble. “The Japanese government doesn’t have the power to expand the economy through monetary policy because interest rates are at half a per cent. That’s pure Keynes. That’s the liquidity trap. That’s a little bit of 1936 Model A Keynesian economics.”
Moreover, he said, it wasn’t just the Keynes of “The General Theory” that remained valuable. He cited one of Keynes’s earlier books, “A Tract on Monetary Reform,” in which he put much more emphasis on money and interest rates. “I think nineteen-twenties Keynesianism—the Keynes of the Tract on Monetary Reform—that is what is needed in a well-run market economy. You lean against the wind and you try to do it intelligently.” By this, Samuelson meant that during an economic downturn the Fed should reduce interest rates to stimulate the economy; when the economy has recovered, the Fed should raise interest rates to head off a speculative boom. At the time of the interview, Alan Greenspan and his colleagues were holding off from raising interest rates despite the fact that the economy was chugging along. The previous day they had again held rates steady. “I think the Federal Reserve made a mistake in not raising interest rates yesterday,” Samuelson said.
Samuelson’s comments proved prescient. The Fed’s reluctance to raise interest rates eventually resulted in the stock market bubble of 1998-2000 and the real estate bubble of 2003-2007.
When I had finished asking my questions, Samuelson inquired about the article I was writing. “Is it going to be one of those interminable New Yorker pieces?” he asked. I assured him that these days we tried to keep things at more manageable lengths—perhaps five thousand words, or so. “Nice work if you can get it,” he said, looking at his watch and leaping up for his chair. The weekly faculty lunch was about to begin. “I’ve gotta go,” Samuelson said. And with that, he marched out of the office.