Paul Samuelson: Ipse Dixit

by Mario Rizzo  

It is possible to agree with someone’s conclusions but wonder if he has the slightest basis for them. That’s how I feel about Paul Samuelson’s latest article.  

Now I beg forgiveness for criticizing an article by a man who is 94 years old. God willing, I should be so good at that age. Nevertheless, it is instructive for the rest of us to look carefully at the latest from one of the fathers of the neoclassical “synthesis”.  

There are two points Samuelson makes:  

1. Economics “can never be an exact science” and so prediction is impossible. The example he gives is Irving Fisher, the great economist, continually mispredicting the stock market in 1929 and then in the early thirties. He lost a number of fortunes (Glad he had a number of fortunes in the first place.) And then there was Joseph P. Kennedy who was presumably without much knowledge of economics but who continually sold stocks short and made a fortune. (In addition, of course, he made money from illegal activities.) But, then, somehow Kennedy knew when the New Deal would work and turned to buying property.  

Samuelson’s lesson here is not clear. Either there is some knowledge more important than economics or  the predictions were simply a matter of luck. In the first case perhaps a distinction such as Hayek’s “scientific propositions,” on the one hand, and “knowledge of the concrete circumstances of time and place,” on the other, might be relevant.  

2. The Chinese will eventually (perhaps soon) not want to hold dollars anymore. This will cause big problems for the U.S. economy. Now, I won’t be so petty as to say: “Hey, he just got finished saying prediction is impossible.” Let us assume he is making Hayek’s distinction between “pattern prediction” and more precise quantitative predictions. The Chinese prediction, we can say, is the former kind.  

In the first place, Samuelson spent his whole life mathematizing, quantifying, and generally making fun of Austrians who said that there were strict limits on the “scientific” (in the positivist sense) nature of economics. He never had time for Hayek’s subtle distinctions. Now he cautions us. Okay.  

In the second place, the enormous debt that the U.S. has recently run up is due essentially to the Keynesian policy prescriptions Samuelson did so much to advance. “We owe it to ourselves…” Oops that was a different era.  

I worry that I am being uncharitable. Maybe so. But there are important lessons to be learned, especially for young people. The chief lesson is: We are in the current mess for a reason. In my personal view, Keynes himself is far less to blame that those who promoted an agenda that invoked hydraulic or mechanical Keynesianism. (Shall I also mention that Samuelson was totally wrong on the Soviet Union and the great issue of our time: whether rational  economic calculation is possible under socialism? Let that pass.)

16 thoughts on “Paul Samuelson: Ipse Dixit

  1. Just yesterday, I was reading Salerno’s intro to Man, Economy and State and came across this fascinating quote from Samuelson:

    “When I was 20 . . . I expected that the new econometrics would enable us to narrow down the uncertainties of our economic theories. We would be able to test and reject false theories. We would be able to infer new good theories. . . [I]t has turned out not to be possible to arrive at a close approximation to indisputable truth [and] it seems objectively to be the case that there does not accumulate a convergent body of econometric findings, convergent on a testable truth.”

    Oops! There go 60 years of “synthesis”!

  2. The “we owe it to ourselves” notion is so retarded.

    If I borrow from myself, and then malinvest my resources, what does it matter that I owe it to myself? I am still down whatever resources were squandered, and can only pay off my debt to myself if I work harder to make up the difference. In other words, I am worse off, even if the money I hold stays constant.

    It seems to me that a lot of economists have been fooled by accountants. They see the money transfer from one person to another, and conclude that net wealth must remain constant. I suppose this situation has arisen because accountancy records are an easy way to gather data, and we all know that if economics is to enjoy the authority and prestige a real science, economists need lots of data to analyse using complex statistical tools.

    macreconomists seem to believe in magic. As long as “we owe it to ourselves”, malinvestment doesn’t matter. Or perhaps more precisely, it’s government debt that is magic, because no matter how many resources public officials squander, there are no real costs to the economy, after all, “we owe it to ourselves”.

    Can you say “court economist”?

    In any case, prediction is always possible. Some people even manage to predict the winning numbers in a lottery. The problem is that even if we understand how the economy works in principle, gathering the data needed to derive precise predictions is an impossible feat. We can still make precise predictions and be correct, it’s just that our formal knowledge of economics isn’t going to help us much.

  3. To be fair, decades ago Samuelson admitted that the role he had planned for econometrics in his 1940-1950s model of “economic science” was a complete bust, and it turned out that econometrics and quantitative statistics utterly failed to fulfill the role his “economic science” demanded of it.

  4. Samuelson and the “mainstream” economists really are “on the hook” for what is happening to us — and the disaster which lies on the horizon.

    Just like Greenspan, these folks will be working night and day to fool others into believed they really don’t belong “on the hook” for what they have done.

  5. “To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”

    — that’s MIT trained economist Paul Krugman in 2002.

    Yes. Blame the economists.

    If you’ve followed Greenspan’s recent interviews, it seems evident that Krugman had the ear of Greenspan and the Fed.

  6. Greg asked:It there any “Austrian” business cycle theorist who also played the markets?

    Victor Sperandeo was a very successful stock trader who made a small fortune and used Austrian economic “business cycle” theory to assess the market. There are others who find the Austrian methodology useful.

    I don’t think an academic like Skousen,et. al. could be as successful. Stock trading is like any other business and requires obsessive attention to your “customer” and an almost in-human focus on profit potential. Academics have too many ways to make a living which distract them from Trading.

  7. What I find interesting is the response #8 which notes Krugman, a Nobel Prize winner and past professor at Yale, MIT and Stanford who I must agree had a hand in advising the government to lower rates and the loan standards to expand the economy. Krugman should have his Nobel Prize taken away and Greenspan and the Congress and FNMA directors and officers that supported such a policy should no longer get their pensions as they were all responsible for millions of Americans loosing their hard earned investments, IRA and pensions. This elite group manufactured the housing bubble and they should be popped.

    The main stream economy has been sinking since 1973 mainly because of disappearance of blue collar manufacturing jobs. Over the past 30+ years we have been in a downward spiral loosing manufacturing jobs. There have been some highlights and upward swells with some autos, the TV industry, then the computer industry prompt it up, and after that it was the industry and finally the Housing. During most of that time the US capitalists took advantage of cheap foreign labor and resources converting our manufacturing from the US soil to foreign countries enabling the US parent corporations for the most part to keep pace with shareholder expectations. We now find ourselves manufacturing considerably less and over the past 35+ years we have shipped our big profit machines one by one abroad: TVs, Washers, Dryers, Cars, Computers, Software, Radios, Small Appliances, Small Electronics, Fruits and Vegetables. To make matter worse US goods are no longer considered high quality or value products.

    And giving 2 trillion dollars to our Senators and Congressman to dole out to their constituents with the label of economic stimulus for political favors does not help the economy. It only increases the life time debt for a temporary non-permanent fix.

    Only good paying manufacturing or professional will improve things. US wages and the cost of resources must be lowered so that our goods and services will be competitive with the rest of the world. The trick will be how to do so, without lowering the foreign wages as they will be the ones to buy our products once they are competitive.

    A permanent downward spiral of lower wages and lost jobs will result in a world wide depression of massive proportions. I am not sure that will happen with China and especially India emerging, but things will never be the same in the US.

    Krugman, Greenspan, and our friendly politicians all contributed to our demise. But I cannot blame them 100% because during this time I believe we found many of us eating and drinking at the same trough as those pigs.

    I still think they should loose their prizes and pensions, we are paying for loosing ours, they should pay right along with us.

  8. Fisher’s losing a fortune, or three, and Kennedy’s making a fortune, or two, have nothing to do with economics, and everything to do with business and market misjudgement in Fisher’s case, and good judgement in Kennedy’s.
    Neither predicted anything in the sense that an astronomer uses the laws of physics to predict the return of Haley’s comet.

    Recently there were some stocks selling at less than net asset value (assets – operating liabilities) with robust cash flow. You didn’t have to know anything about either economics or physics to figure that they were reasonably good bets. If Samuelson missed out, it’s probably not because of his economics, or his apparently conflating acting on business and market judgement with predicting natural phenomena.

  9. I have been trying to understand the formal consequences of a number of “no quantitative predictions” theses.

    Is it part of your view then that only ordinal preferences are legitimate, and there are no cardinal risk measures?

  10. I would just like to say that I have had dealings with Mr Sperandeo in a professional context. He is in no way a real Austrian and his practical methodology is, in any case, simply one of the ‘technical analysis’ of futures contracts – no Mises or Rothbard required. FWIW, while he may have been living quite comfortably, he did not appear to have held on to very much of whatever vast fortune he is supposed to have made in the past

  11. I find the comment about the loss of manufacturing jobs interesting. I worked in the finance department of a factory, and I do not want my children to work a manufacturing job. They are noisy, dirty and dangerous. I am often perplexed by this pining of manufacturing jobs. To my ear, it is the same as bemoaning the loss of those good chicken plucking jobs. Anyone who mourns the loss of manufacturing jobs never worked in a factory.

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