No economist influenced the economics profession in the second half of the twentieth century as much as Paul Samuelson, who died Sunday at the age of 94. As the New York Times noted, “Samuelson was credited with transforming his discipline from one that ruminates about economic issues to one that solves problems, answering questions about cause and effect with mathematical rigor and clarity.”
Unfortunately, Samuelson’s influence was not as positive as the Times would have it. Samuelson turned economics from a social science that tried to figure out how the world worked into an pseudo-science that tried to turn the world into a mathematical model — a model that failed to account for the realities of individual human desires, incentives, and diversity. As a result, by 1960, economists, politicians, and would-be central planners were misled into viewing the economy as a machine that could be controlled by pulling levers, i.e, passing laws, issuing regulations, and setting tax and discount rates.
The economy is not a machine. As Michael Rothschild showed in his book, Bionomics, the economy is more like an ecosystem. One implication is that the economy is so complex that, when you pull a lever (pass a law, issue a regulation, create a tax), the unintended consequences are likely to be far greater (and far more negative) than the intended ones.
Rothschild, a computer programmer who helped write WordStar, believed his 1990 book was an attack on the entire economics profession. In fact, it was only an attack on Samuelsonian economics — which, admittedly, was the dominant paradigm at the time.
Pre-Samuelson economics was a form of anthropology, asking how people make decisions about allocating scarce resources. While anthropologists focused on undeveloped societies, economists practiced their anthropology in developed nations. They recognized that people had developed several different institutions for allocating resources: markets, political systems, and religions. These institutions work very differently from one another.
Samuelson was basically an applied mathematician. His famous Ph.D. thesis used calculus to prove numerous economic ideas that were already generally accepted without the deep math. At the time it was published in 1947, physics had become the Queen of Sciences, having developed the bomb that won the war. Perhaps feeling discredited by the Great Depression, economists were suffering from the inferiority complex of being “only” social scientists, not true scientists. Samuelson’s thesis seemed to turn economics into a true science.
As a result, post-Samuelson economists considered their job was to turn everything into mathematical equations and models, heavy on the calculus. Everything was based on equilibrium models, which means everything was pretty static. But reality is dynamic and it is more complex than can be described in a mathematical model. The sad fact was that the more mathematical economics became, the more out of touch it was with reality.
Not all economists followed Samuelson’s lead. Some, such as Friedrich Hayek, never changed their old ways. They inspired others to go back to the old questions: how do people allocate scarce resources? While Samuelson’s models focused on markets, the new breed of economists such as James Buchanan and Gordon Tullock asked, how does the political system allocate resources?
Samuelson’s market-focused models encouraged some people to think that central planners could simply use those models to imitate market results. But Buchanan and Tullock found that the incentives in political systems were so different that planners could never achieve the efficiency found in markets. Samuelson was a Keynesian — i.e., a supporter of government interventions in the economy — because his models failed to recognize the perverse incentives in government that Buchanan revealed.
Samuelson was the first American to win the Nobel Prize in Economics, but Hayek, Buchanan, and other non-Samuelsonian economists would soon follow. In the long run, the Antiplanner suspects economic historians will recognize that Samuelson pointed the profession in the wrong direction, while economists like Hayek, Buchanan, and fellow Nobel laureate Milton Friedman led the way back.