Death of an Economist

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.

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22 thoughts on “Death of an Economist

  1. jwetmore

    ROT you are on fire. This is another exceptional post in your recent string of great posts. I guess some time “off the grid” has led to some excellent work.

    Bionomics was a book I was looking for a number of years ago to confirm my idea that economics could best be understood by analogy to biological evolution. While the book is good, I think that Rothschild held a number of biases gained through an MBA that took away from objective and deep analysis of the evolution of knowledge and the fittness of certain categories of memes. Samuelson economics is an example of a meme which is extremely fit (despite its apparent failings of working as advertised) because it serves the interests of individuals who crave power.

  2. C. P. Zilliacus

    The Antiplanner wrote:

    > 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.

    [Emphasis added above]

    As at least some readers of this blog are aware, The Antiplanner has, in the highlighted text above, just described how most travel demand forecasting models work.

    Now this does not (in my opinion) mean that computer models are bad and should not be used, be they for economic or traffic or even weather forecasting. But it does mean that in order to use the results of such models, it is vital that the assumptions used by the developers of the model and the input data to the model also be understood.

    An honestly-developed model is a set of tools that provide data that can be used to inform decisions about the future. But those decisionmakers should also know what the assumptions that went in to the forecasts were. And beware of “black box” models, where the developer of the model will not discuss or disclose the inner workings of the model.

  3. Dan

    I tried to read Bionomics, but it was full of cr– and I’m sure I sold it to a used book store, as it is no longer on the shelf. Presumably it is kindling for a wood stove.

    Nonetheless, this

    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.

    is only half the story. Imagine undereducated publics making decisions, biased publics pulling levers, irrational actors acting, misinformation promulgated throughout the dissemination channels (tobacco, creationism, API and climate change, chemicals and environmental health burdens) making negative outcomes, defunding of public education making calculating Pareto optima nearly impossible… fetishizing that individuals acting together scale up to optimum outcomes…come now. This has been shown to be cr–.

    And the assertion that unintended consequences are far more negative than intended consequences? Evidenceless cr–.

    Is this sort of ‘logic’ the best the small minority can come up with?

    DS

  4. K-Dog

    Imagine undereducated publics making decisions, biased publics pulling levers, irrational actors acting… DS

    Undereducated, biased and irrational? (Insert pot and kettle metaphor here.)

  5. the highwayman

    Autoplanner: The economy is not a machine. As Michael Rothschild showed in his book, Bionomics, the economy is more like an ecosystem.

    THWM: No shit. Our ECOnomy is part of the worlds ECOsystem.

  6. msetty

    THWM: No shit. Our ECOnomy is part of the worlds ECOsystem.

    Funny how such a fundamental fact escapes the libertarian, objectivist et al fundamentalists here.

  7. the highwayman

    msetty said: Funny how such a fundamental fact escapes the libertarian, objectivist et al fundamentalists here.

    THWM: It’s not complicated to understand, it’s hard to be rational with some one that doesn’t want you to even exist.

    They don’t want railroads & mass transit to exist. They don’t want mixed use walkable development to exist, etc.

    Of course there are those that want to drive every where or live in the middle of no where & that’s fine. Though don’t sabotage the lives of those that don’t want to drive all the time or live in the middle of no where.

    The agenda of O’Toole, Cox, Rubin, etc. Isn’t about freedom, it’s about control.

  8. K-Dog

    Saith the highwayman:
    They don’t want railroads & mass transit to exist. They don’t want mixed use walkable development to exist, etc.

    You may pursue any form of transport you wish, as long as you’re willing to pay for it.

    The agenda of O’Toole, Cox, Rubin, etc. Isn’t about freedom, it’s about control.

    I repeat: (Insert pot and kettle metaphor here.)

  9. the highwayman

    K-Dog said: You may pursue any form of transport you wish, as long as you’re willing to pay for it.

    THWM: Again, they don’t want railroads & mass transit to even exist. They don’t want mixed use walkable development to even exist, etc.

    Again, the agenda of O’Toole, Cox, Rubin, etc. Isn’t about freedom, it’s about control!

  10. prk166

    You really want to call people retarded? Really? What are you, 6 years old? Are you really incapable of understanding how mean that is to those who have learning disabilities and other problems that have struggled for so long to get people to treat them like humans and not call them retards?

  11. the highwayman

    Ok, here is my part of why you guys have earned the title of “libertards”.

    You don’t want to even acknowledge that over 100,000 miles of railroad are missing in the US.

    You don’t want to even acknowledge that countless miles of streetcar line are missing.

    The reasons for this are political, not economic.

    I favor a fair market, though that means being fair.

    Road & rail can co-exist, so the moment you start being fair, you’ll no longer be “libertards”.

  12. prk166

    That doesn’t excuse invoking and using a term like retard. Apparently you really are incapable of understanding how cruel that is to those who have learning disabilities and other problems. People that have long struggled to get people to treat them like human beings and not call them retards. Or, worse, you don’t care. You’re willing to do whatever you feel like.

  13. Dan

    HM: you have no evidence for your assertion AFAICT. If you have an argument with evidence and cogent analysis, great. Otherwise you are embarrassing yourself from here.

    DS

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