Paul Samuelson

Economist and educator

• Born: May 15, 1915
• Birthplace: Gary, Indiana
• Died: December 13, 2009
• Place of death: Belmont, Massachusetts

A respected economist, Samuelson provided a mathematical foundation for contemporary economic ideas. He also made other contributions to the field, among them the Phillips curve, the multiplier-accelerator relationship, and the factor price equalization theorem.

Early Life

Paul Samuelson (SAM-yewl-suhn) was the grandson of Jewish immigrants from Poland, who arrived in America before the Civil War. His father was a pharmacist. Samuelson was born in Gary, Indiana, but he grew up in Chicago. He was educated in the Chicago public school system and then at the University of Chicago. Planning to major in mathematics, he took an economics course and saw how mathematics could help revolutionize economics by making it more precise and scientific.

Samuelson won a fellowship to support his graduate education; but the fellowship stipulated that he could not continue his studies at the University of Chicago. Samuelson went to Harvard University, earning a Ph.D. in 1941. His doctoral dissertation (published in 1947 as Foundations of Economic Analysis) provided the mathematical foundation for much of contemporary economics.

Samuelson liked Cambridge a great deal, and he wanted to remain there after receiving his doctorate. However, Harvard did not offer him a teaching position, likely because the university had a quota for hiring Jews at the time. Seeking employment in the Boston area, Samuelson was hired by the Massachusetts Institute of Technology (MIT), and he taught there his entire professional career. Over the years, Samuelson helped build the MIT economics department into one of the best in the world.

Soon after he started teaching, Samuelson wrote a best-selling textbook, Economics: An Introductory Analysis. Published in 1948, it brought the economic theories of John Maynard Keynes to America, and it has been used to teach economics to several generations of students. The textbook promulgated the idea of a “neoclassical synthesis.” Combining the ideas of neoclassical or standard microeconomics with Keynesian macroeconomics, it argued that the two were consistent. The book was in its nineteenth edition when Samuelson died, and it had been translated into forty languages. Frequently Samuelson would quip: “I don’t care who writes a nation’s laws—if I can write its economics textbooks.”

Samuelson advised PresidentsJohn F. Kennedy and Lyndon B. Johnson on how to lower unemployment and to improve economic performance. Seeking an even broader audience, he wrote weekly columns for Newsweek magazine, bringing economic ideas to the general public and making a case for Keynesian economic policies.

Life’s Work

Samuelson made major contributions in three main areas of economics: consumer choice, international trade, and macroeconomics. These contributions earned him the Nobel Prize in Economics in 1970, the second prize ever awarded in the field.

Before Samuelson, economists explained consumer behavior in terms of preferences; preferences, in turn, were defined by behavior. Essentially, economists believed that people bought what they bought, something consistent with all behavior and something that was not refutable. Samuelson recognized that this theory was circular, and he sought to take consumer choice theory away from the untestable assumption that consumers maximized utility and make it more scientific. To do this, he argued that consumer spending reveals the utility that consumers get from different goods. This information could then be employed to test assumptions about consumer behavior. For example, most economists think consumer decisions are consistent. Given existing prices, if the consumer buys A rather than B, and B rather than C, then the consumer would purchase A rather than C if given the choice between these two goods.

In international trade theory, Samuelson examined the economic consequences of free trade and developed the factor price equalization theorem. He showed that free trade equalizes the rewards paid to factors of production in different countries. If wages in the United States were higher than wages in Canada, Canadians could produce goods at lower cost. With free trade, Canada would export goods to the United States. This would increase demand for Canadian goods and raise the wages of Canadian workers. On the other hand, U.S. firms, facing greater competition from abroad, would lower their prices and reduce wages. Wages of U.S. and Canadian workers thus became more equal due to free trade.

Finally, Samuelson made several contributions to Keynesian macroeconomics. During the 1960’s there was heated debate about the relative effectiveness of fiscal and monetary policies. Monetarists held that only monetary policy could affect the economy and looked at fiscal policy as a circuitous route to creating more money. On the other side, many Keynesians likened monetary policy to a string—no matter how hard it might be pushed, more money would not create more jobs; only fiscal policy could achieve this. Samuelson took a middle position, believing that both fiscal and monetary policies could promote an economic expansion and that both should be used to create jobs.

With his MIT colleague Robert Solow, Samuelson developed the famous Phillips curve relationship. Economist A. W. Phillips previously found that wage increases were associated with higher rates of unemployment and vice versa. Samuelson and Solow reasoned that since wages accounted for 60 percent to 70 percent of production costs, and since higher costs usually led to higher prices, the rate of inflation should be inversely related to the unemployment rate. Plotting U.S. data on inflation and unemployment between 1933 and 1958, Samuelson and Solow showed that such an inverse relationship did exist. To honor Phillips, it was called the Phillips curve.

Samuelson regarded the Phillips curve as a tool to help policymakers. If concerned about unemployment, they could expand the economy and lower unemployment; this would move the economy along its Phillips curve and lead to higher inflation. On the other hand, if policymakers were concerned about inflation, they could reduce economic growth at the cost of higher unemployment. The Phillips curve indicated to political leaders how much unemployment would have to rise in order to reduce inflation to the desired level, and how much inflation would have to rise to lower unemployment. Good policymaking required selecting the best point on the Phillips curve or making the best of the inflation-unemployment tradeoff.

Samuelson remained active after he retired from MIT. He castigated economists for their blind acceptance of free trade, and he urged president-elect Barack Obama to pass an aggressive stimulus package to prevent another Great Depression. Samuelson died at the age of ninety-four at his home in Belmont, Massachusetts, on December 13, 2009.

Significance

Stressing that economic ideas must always be presented in mathematical terms, Samuelson set the standards for economic discourse in the last half of the twentieth century. Because of Samuelson, economists communicate by developing mathematical models and analyzing the models of other economists. Likewise, graduate education in economics involves learning advanced mathematics and applying these tools to economic issues. Even undergraduate education became more mathematical because of Samuelson’s widely used basic economics textbook. Samuelson saw mathematics as a tool to help understand how the economy works and to help develop better economic policies that will improve the lives of people. Toward this end, he also helped develop Keynesian macroeconomics and showed how it could be used to improve economic performance.

Bibliography

Pressman, Steven. Fifty Major Economists. New York: Routledge, 2006. An introduction to Samuelson’s work and major contributions to economics; accessible to students as well as to professionals.

Samuelson, Paul. “A Synthesis of the Principle of Acceleration and the Multiplier.” Journal of Political Economy 47 (December, 1936): 786-797. Describes the accelerator principle and shows how the accelerator and the multiplier interact.

Samuelson, Paul, and Robert Solow. “Analytical Aspects of Anti-Inflation Policy.” American Economic Review 50 (May 1960): 177-194. Develops the Phillips curve and presents evidence for the existence of an inverse relationship between unemployment and inflation.

Szenberg, Michael, Lall Ramrattan, and Aron Gottesman, eds. Samuelsonian Economics and the Twenty-First Century. New York: Oxford University Press, 2006. A collection of essays that assess the main economic contributions of Samuelson and their influence on the economics profession.