They Don’t Make Them Like They Used To! Why Even the Best Post-war Economist Ended Up a Tragic Figure

The Crash of 2008 and its ghastly aftermath was not just an economic crisis but also a crisis aided and abetted by economics.

Previously I have written about the Econobubble (the handmaiden of the “real” Bubble) and the toxic theories of economists who were very recently rewarded with the Nobel Memorial Prize in Economics.  Following those tirades, a number of colleagues (and students) put it to me that economics is not what it used to be.  Once upon a time, they suggest, economists were giants whose intellect informed the public and who would have reined in the current crop of mindless hacks whose inane creed took over the great Economics Departments sometime in the 1970s.

There is an element of truth in their suggestion.  In every realm of economic analysis, and within each school of economic thinking, standards have slipped.  Compare and contrast a John Maynard Keynes with the economists who carried the torch of Keynesianism in the 1980s and 1990s; a Piero Sraffa with the Sraffians; a Paul Sweezy or a Maurice Dobb with their successors;1 even a Milton Friedman with Robert Lucas and his New Classical clones.  Undoubtedly, the economics discipline doesn’t make them like it used to.

Having conceded that the economists of yesteryear were intellectual titans compared to the sorry lot that followed after 1970 or so, I shall not concede the main argument: namely, that economists of the previous generation were wise and vigilant enough to put the brakes on the slide into the economic superstition that provided intellectual reinforcements to the “dark side” — e.g. to the post-1980 financialization drive.  To make my highly controversial case, I shall focus on Paul Samuelson, an economist endowed with all the qualities that seem to be missing today: not only extraordinary analytical skills, but also a feel for what makes capitalism tick, a deep understanding of the human costs of recessions, a keen interest in shaping public policy, a zeal for educating the young on the intricacies of economic life, etc.

And what is my case?  It is that economics has always been a source of obfuscation and an ally of the nasty side of politics, even when brilliant public intellectuals, like Paul Samuelson (whose heart was definitely not in the wrong place), were at the discipline’s helm.  If I am right, the problem is not that in recent decades the Nobel Memorial Prize in Economics has gone to the wrong people.  It is, rather, that a Nobel Memorial Prize has been established for the wrong discipline: the discipline of economics, which, by design, subverts even the best intention to serve humanity.

Paul Samuelson, like his contemporaries Paul Sweezy and John Kenneth Galbraith, was deeply marked by the Great Depression.  In Chapter 1 of the first edition of his famous primer (Samuelson 1948, p. 3),2 he introduces his reader to the subject of “economics” with a warning which, in our post-2008 times, sounds exceedingly prophetic:

When, and if, the next great depression comes along, any one of us may be completely unemployed — without income or prospects. . . .   There is no vaccination or advance immunity from this modern-day plague.  It is no respecter of class or rank. . . .  From a purely selfish point of view, then, it is desirable to gain understanding of the first problem of modern economics: the causes on the one hand of unemployment, overcapacity, and depression; and on the other of prosperity, full employment, and high standards of living.  But no less important is the fact . . . that the political health of democracy is tied up in a crucial way with the successful maintenance of stable high employment and living opportunities.  It is not too much to say that the widespread creation of dictatorships and the resulting World War II stemmed in no small measure from the world’s failure to meet this basic economic problem adequately.

These are words that prepare the reader for a head-on assault on real-world problems; for an approach whose purpose is to delve into the workings of capitalism, rather than a journey into some obscure mathematical universe.  Nor did Samuelson change his mind when the Crash of 2008 hit us.  In November 2008, a month after Lehman Brothers collapsed, unleashing the greatest crisis since 1929, Samuelson had this to say: “Deregulated capitalism is a fragile flower bound to commit suicide.”3

So, what caused the Crash of 2008?  Here is Samuelson again:

The whole history of capitalism has had up-bubbles in real estate and down-bubbles after something different.  This time the new fiendish Frankenstein monsters of financial engineering blinded the eyes and the minds of everybody. . . .

And what will it take to get us out of the mess that 2008 created?  Samuelson sensibly replies that:

Rome was not built in one day, and Franklin Roosevelt did not get full employment.  It took about seven years.  Now I don’t say it’ll take seven years this time, but it won’t be done with a balanced budget and it won’t be done with “inflation targeting.”

In comparison to most of the establishment commentariat, the above strikes one as a paragon of common sense and humanism.  So, why am I refuting the view that the trouble with contemporary economics is the loss of public intellectuals like Samuelson?  Because it was precisely public intellectuals like Samuelson who paved the way for the intellectual desert that followed.  Like all tragic figures, Paul Samuelson, inadvertently of course, created the circumstances that led to the demise of some of the virtues he dearly valued.

Samuelson’s method for analyzing each and every economic phenomenon involved three basic steps:

  1. Identify all the endogenous variables connected to the phenomenon at hand.
  2. Minimize the number of exogenous variables that explain the endogenous variables.
  3. Model the determination of the endogenous variables in the context of some constrained optimization problem, which enables the analyst to perform comparative static analysis by means of the calculus of variations (in the manner of 1930s thermodynamics).

In 1982, Samuelson “confessed” that mathematization was “. . . one of the mortal sins for which I shall have to do some explaining when I arrive at the heaven’s pearly gates.”  Personally, I will happily absolve him of this sin.  Working toward a mathematical depiction of reality is a legitimate pursuit.  Without it, our understanding of the natural world would have been stuck in the Middle Ages.  The question is: What hidden sacrifices is one prepared to make in order to claim that one’s mathematical modeling has yielded a useful tool for understanding capitalism and its haphazard ways?  It is in this regard that Samuelson created a theoretical edifice which (in my estimation) humanity would have been better off without.  But let me take things from the beginning.

Samuelson’s research project can be traced all the way back to his doctoral dissertation (published in book form in 1947, a year before the aforementioned textbook’s first edition4).  It is entitled Foundations of Economic Analysis and is nothing less than a masterpiece combining dazzling mathematics and a demonstration of his command over all of economics, from Adam Smith onwards.  He explained what his intellectual project was all about as follows:

We begin by writing down the equations and draw the geometry which define the macro economy.  Then we prove, as theorems, a number of propositions regarding the importance of government intervention in maintaining a certain level of effective or aggregate demand.

At first sight, it seems that Samuelson was simply trying to give Keynes a stronger analytical backbone, turning the art of government intervention, at a time of crisis, into a mathematical science.  What could be wrong with that?  The answer is: Everything!  Keynes’ greatest contribution was to alert us to a disarmingly simple truth: in a complex, financialized capitalist economy, it is impossible (rather than just hard) to derive, by analytical reasoning, the well defined mathematical expectations which one needs to “close” a macroeconomic model.  Drop this insight, and you have lost all that matters in Keynes’ analysis of the Great Depression in particular and, more generally, of capitalism’s tendency to stumble and fall on its face.  By transcribing Keynes’ view of the macro economy into a closed optimization problem, Samuelson effectively poured down the drain everything of importance in Keynes’ General Theory: a striking example of honoring one’s inspiration mostly in the breach rather that in the observance. . . .

A couple of years later, in 1950 to be precise, something unexpected happened to the house of economics.  Following a presentation at the Cowles Commission in Chicago by John F. Nash, Jr., Gerard Debreu and Kenneth Arrow began a collaborative project (eventually turning into the so-called General Equilibrium literature) that altered the surface and substance of economic analysis for ever: economics turned toward pure formalism.

This new economic formalism involved three moves not at all inconsistent with Samuelson’s approach:

  1. Set aside the engineering approach according to which mathematics is used in order to model some actually occurring dynamic.
  2. Focus instead on general theorems that prove the existence of states of rest (or equilibria) on the basis of given axioms.
  3. Treat the proven theorems as the uniquely legitimate source of economic wisdom.

The pioneers of formalism (Nash, Debreu, and Arrow), however, had no great ambition to pass comment on real markets, let alone to offer a comprehensive theory of capitalism.  They never dreamt of becoming President Kennedy’s advisors.  In sharp contrast, Samuelson had precisely that ambition.  And, moreover, he managed to pull it off.

Put differently, formalism would not have made the move from the Cowles Commission and the RAND Corporation to the corridors of power in Washington if it had not been for Samuelson (and other economists of his ilk to a lesser degree).  For he alone was capable of both engaging in the highest forms of formalism and teaching at the level of first-year undergraduates; of mesmerizing formalists like Gerard Debreu and bureaucrats like Dean Acheson with the same aplomb.  Indeed, Samuelson carried formalism’s commandments from the highest peaks to the plains inhabited by fresh(wo)men, converting a sterile method into small appetizing bite-sized chunks of analysis.  He educated politicians to think in terms of some simple diagrams that demonstrated the powers and limits of fiscal and monetary policy.  But, above all else, he gave both relevance and respectability to a new creed which:

  1. echoed the new mantra of seeking truth in mathematics (as opposed to using mathematics as a mere tool);
  2. exuded the confidence that economics is reducible to “closed” mathematical models which leave nothing (except preferences) for history, philosophy, or the rest of social sciences to explain; and
  3. was sufficiently “liberal” to pass for a non-ideological, impartial manual successfully incorporating (something resembling) Keynes’ thought within its mathematics.

In this sense, the greatest publically revered economist of the post-war era built his personal success on a triumphant blending of a distinct Keynesian New Deal disposition and an apocryphal mathematical formalism.  Thus he became the man who brought Keynes to America by subsuming him under a formalist logic which effaced everything that Keynes had actually said.

That this blend did not work out, scientifically, was due to the simple truth that it never could have.  Just as bad money chases out of the marketplace all good money, formalism chases out of economics all useful economic thinking.  Tragically, and surely against his own intentions, Samuelson helped formalism establish a beachhead from which, soon after, the final assault on logical, humanist political economics would be launched with deadly precision.  Let’s see why Samuelson’s intervention could have had no other outcome:

Any formalist makeover of Keynes’ thinking required the conversion of his basic proposition into a provable theorem; an axiomatization of the hypothesis that, at a time of crisis, falling wages and interest rates do not lead to a recovery led by employment and investment upticks.  However, such an axiomatic proof can only result through a Debreu-like General Equilibrium model.  Ironically, the latter comes with a sine qua non hidden axiom: that both investment and employment will rise, ceteris paribus, if wages and interest rates fall.  Which is precisely the opposite of what Keynes said.  So, how does Samuelson reconcile the irreconcilable?  By twisting Keynes beyond recognition, explaining unemployment (under-investment) as a consequence of downwardly sticky wages (interest rates).  Whereas Keynes’ point was that, in a recessionary environment, a fall in the wage (interest rate) will not boost employment (investment), Samuelson said that unemployment (under-investment) is due to wages (interest rates) which stubbornly refuse to fall.

This gross distortion of Keynes’ simple point did not, in the slightest, harm Samuelson’s campaign to pose as a “scientific Keynesian” (nb the fact that his readers almost never read Keynes from the original helped, too).  In fact, this grand distortion helped massively in building up the image of Samuelson as a Keynesian macro engineer.  Alas, as Christopher Marlowe taught us a long time ago, and Goethe confirmed later, in dramatically asymmetrical deals with Mephistopheles it is not the human who has the last word.  In Samuelson’s case, it was formalism who laughed last: the moment the post-war miracle hit a bump (caused by falling profitability and by the USA’s slide into threatening twin deficits, courtesy of the Vietnam War and LBJ’s Great Society), economic formalism shook off all remaining Keynesian relics and fashioned a new neoliberal guise that was more in keeping with the new politics.5

Once formalism found a brave new — and more lucrative — home in neoliberal political economics, the brilliant Samuelson, like a proverbial useful idiot, was cast by the wayside.  The road to the Econobubble was thus paved with the remains of Samuelson’s grand project.  From that moment onwards, economics was dominated by the unbearable lightness of the euphemistically named “rational expectations” hypothesis, the risible “efficient market” hypothesis, and all their derivative drivel.  What was remarkable, and exquisitely saddening, was how quickly Samuelson’s former disciples discarded the great man’s single most searing memory of his youth: that unfettered capitalism produces crises that economists must tame, rather than assume away.

In summary, without Samuelson, formalism would have found it hard to achieve authority during the 1950s and 1960s.  And if formalism had not dominated then, neoliberalism would have had a harder time establishing its dominion in the 1970s and 1980s.  While it is imprudent to put too much faith in the power of ideas, it is impossible not to wonder what 2008 would have been like had neoliberalism not found such a valuable accomplice in Samuelsonian economics.

However, the most fruitful way of looking at the talented Mr. Samuelson and his life’s work is in terms of ancient Greek tragedy.  His genuine intent was to formulate a theory that helps government avert, or at least deal with, crises of low effective demand.  But the gods had another end in store for him: against his powerful will, his efforts played a central role in the triumphant return of the type of mindless economic creed which he had rejected as a student in 1935 and from which he thought he had helped the economics profession escape permanently.

Samuelson once said that economic science progresses from one funeral to the next.  Regrettably there is no such guarantee.  Economics, just like revolutions, has a bad habit of devouring its best and brightest.  Analytical economics could not have wished for a better servant than Paul Samuelson.  That it reserved this hideous fate for him simply proves how harsh, ungrateful, and dangerous economics can be.  And how impossible it is to do good on the basis of any attempt, even in the most accomplished hands, to tease the truth about capitalism from its mathematical depictions.


1  And I would like to include myself in this lot!

2  See Paul Samuelson (1948), Economics: An Introductory Analysis, New York: McGraw-Hill.

3  This and the next quotation are from an interview Paul Samuelson gaveKiyoshi Okonogi in November 2008 at his MIT office, where he was working almost until the end of his life in December 2009. The interview was published in Japanese newspaper Asahi Simbun under the title “Financial Crisis: Work of ‘Fiendish Monsters’.”

4  See Paul Samuelson (1947), Foundations of Economic Analysis, New York: McGraw-Hill.  The thesis was submitted in 1941 and in the same year it won Harvard’s David A. Wells Prize for best publishable thesis.  But publication came six years later.

5  Technically, this was as easy as pie: all that was necessary was to take the so-called Phillips curve, straighten it out, and place it vertically on some point of the GDP axis that corresponds to the economy’s so-called “natural” rate of unemployment.

Yanis Varoufakis is Professor of Economic Theory and Director of the Department of Political Economy in the Faculty of Economic Sciences of the University of Athens. Varoufakis’ books include: The Global Minotaur: The True Origins of the Financial Crisis and the Future of the World Economy (forthcoming); (with S. Hargreaves-Heap) Game Theory: A Critical Text (Routledge, 2004); Foundations of Economics: A Beginner’s Companion (Routledge, 1998); and Rational Conflict (Blackwell Publishers, 1991).

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