Paul A. Samuelson and the evolution of modern economics

For thirty years after the Second World War, the teaching of introductory economics in the US was dominated by a single textbook, initially titled Economics: An Introductory Analysis, later shortened to just Economics. When the first edition appeared in 1948, its author, Paul Samuelson, was only 33 years old. As far as most other young economists were concerned, the book provided an account of what had rapidly become the accepted way of thinking about problems of unemployment. If there was high unemployment, government could and should increase the level of spending to create new jobs; the money spent by those in government jobs would employ more people in private sector jobs, creating an additional stimulus to employment. These economists well understood that too much government spending could be inflationary, but in times of high unemployment, modest government deficits were a good thing. The traditional conservative view that deficits were always bad was completely unfounded.

Samuelson’s claim that, in times of unemployment, government had a responsibility to take action—that American capitalism could work properly only if government played a role—was a red rag to conservatives. His book, of which preliminary drafts were circulated and tried out on students at MIT, was attacked even before it was published. The notion that government needed to stabilize a capitalist economy, and that this stabilization might sometimes require modest government deficits was, so his critics’ claimed, tantamount to communism, a charge that came to have even greater political resonance in the McCarthy era. Yet, though Samuelson paid careful attention to his wording as he revised the book, he did not compromise: he knew that even if businessmen and many in the Republican administration disagreed, he had the support of most economists of his generation.

Where did Samuelson get these ideas and how did he get into the position of eminence that he had clearly achieved by 1948? He had been a student at Harvard of the great Austrian students of the business cycle, including Joseph Schumpeter and Gottfried Haberler. However, his initial reputation was based on his ability to recast economic theory in mathematics. His PhD thesis was an exercise in abstract economic theory demonstrating the value of using mathematics. More than that, it explained the importance of “operationalizing” economic theory—the importance of generating predictions that could be tested against data.

Initially Samuelson’s views were conservative, insofar as he could be conservative and support Franklin Roosevelt. But whatever his politics, there is no evidence that he took any interest in the policy questions that were later to fascinate him, and which were to be a major theme of his textbook. He changed because of two events. The first was the arrival of Alvin Hansen at Harvard, one of America’s leading business cycle theorists. He clearly saw in Hansen’s theories of the business cycle an opportunity to make use of his knowledge of mathematics, solving a problem that Hansen, who was no mathematician, could not solve; but he also became very close to Hansen, developing a respect for his work. Samuelson eventually made his debut into journalism in 1945, with articles endorsing Hansen’s internationalist political philosophy – that the United States had a responsibility to provide economic support to the devastated economies of Europe.

The second event was the Second World War. Even before Pearl Harbor, the United States government had started planning for the “post-emergency” situation, fearful that, as after most previous wars, there would be an economic slump. Anxious to avoid being classified as unfit for military service, Samuelson threw himself into government work, first for the National Resources Planning Board and, when that was disbanded in 1943, for the War Production Board. Commuting fortnightly from Cambridge, Massachusetts, where he continued to teach in an MIT geared up to training military officers, he became involved in the community of young economists scattered through government agencies in Washington. He engaged in the debates through which the theory of stabilization policy—arguably the key issue when the government deficit rose to twenty percent of national income—was worked out.

He and his younger colleagues learned that the old myths, that the government should never run a deficit, did not hold. Government could and should take responsibility for the level of spending and hence the level of unemployment. American capitalism needed government action for it to work. This was the social philosophy that helped to make the textbook a bestseller and incurred the ire of conservative critics.

Featured image credit: money coins finance cash by Tookapic. Public Domain via Pexels.