New Samuelson Biography: The Usual Progressive Self-Delusion

May 29, 2017 by

The “Review” section of the Wall Street Journal last weekend had a review (by a guy named Eric Maskin) of a new biography of Paul Samuelson (behind pay wall).  The title of the book is “Founder of Modern Economics: Paul A. Samuelson,” and the author is Roger E. Backhouse.  Backhouse is an economic historian who teaches at the University of Birmingham in England.  Actually, the book that has come out is only Volume 1 (subtitle: “Becoming Samuelson”) of what looks to be at least a three-volume magnum opus, and covers only the first 34 years of Samuelson’s life, to 1948.  If you are into economics, you may recognize 1948 as the year that Samuelson first issued the basic economics textbook that millions of students have been assigned to read ever since, thus arguably launching his career into a new phase.  Although it only covers the formative years of Samuelson’s career, this book is some 736 pages long, so it is nothing if not comprehensive.  That is, except for anything that might actually be important.

You can get a good idea of the gist of the book from the title (“The Founder of Modern Economics”).  Backhouse clearly has a deep, deep admiration for his subject.  A particular focus of the book is Samuelson’s introduction into economics, in many dozens of published papers, of complicated and sophisticated mathematical techniques.  Samuelson, according to Backhouse, is the guy, more than any other, who took economics from a field that had little use for mathematics to a field where advanced math skills were an absolute requirement to get that Ph.D.  The book goes in detail into many of Samuelson’s early “insights” and “discoveries,” including many of the equations, formulas and theorems now associated with the Samuelson name.  If you know anything about Samuelson, you will be aware that his pieces, generally after a tour through some math that few can understand, always seem to lead to the conclusion that more government spending and bigger government are a good thing.

When I read Maskin’s review, the thing that immediately struck me was that Maskin did not mention how this new biography deals with the one subject about Samuelson that has long seemed to me to be the most important thing in his career.  That subject, of course, is that in the middle of World War II Samuelson made what is without doubt the single most disastrously wrong economic prediction of all time — the prediction that, if the federal government greatly reduced spending when it demobilized the military after winning the war, that that would lead to “the greatest period of unemployment and industrial dislocation which any economy has ever faced.”  This prediction appeared in a chapter written by Samuelson, titled “Full Employment After The War,” that appeared in a 1943 book edited by S.E. Harris titled “Postwar Economic Problems.”  Here is a longer quote from Samuelson’s chapter to give some context:

“When this war comes to an end, more than one out of every two workers will depend directly or indirectly upon military orders. We shall have some 10 million service men to throw on the labor market.  We shall have to face a difficult reconversion period during which current goods cannot be produced and layoffs may be great. Nor will the technical necessity for reconversion necessarily generate much investment outlay in the critical period under discussion whatever its later potentialities. The final conclusion to be drawn from our experience at the end of the last war is inescapable–were the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties–then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced.” [italics in original]

Hat tip David Henderson at Econlog.  Note that I have departed from my usual style of putting the whole quote in italics in order to show you that this disastrously wrong prediction was thought by Samuelson to be so important that he put it in italics in his original.  And how did the prediction work out?  As Henderson points out, “pretty much everything . . . that [Samuelson] speculated about policywise happened: the huge drop in the deficit, the end of price controls, and the demobilization.”  Government spending fell 61% from FY 1945 to FY 1947, and went from 41.9% to 14.7% of GDP.  And the economy took off, ushering in a great post-war boom that we still look back on with nostalgia.

When Maskin’s review of Backhouse’s book omitted any discussion of this subject, I decided that I would just have to go out and get the book to see how Backhouse dealt with it.  I mean, it would not really be possible to write 736 pages about Samuelson’s early career, going into excruciating detail on literally every paper the guy wrote, and somehow just not mention this topic?  But yes, that is what I found.

Actually, it’s even worse than that.  Backhouse’s book does not omit discussion of Samuelson’s “Full Employment After The War” piece, and actually has a long discussion of it, going on for several pages.  But if you read Backhouse’s treatment, you will never find out about the disastrous prediction, and instead you will be told that the important thing about Samuelson’s piece was its insights into economic theory, and most particularly the “discovery” of something called the “full employment multiplier” — one of Samuelson’s many thinly-veiled rationalizations for more and yet more government spending.

Backhouse’s treatment is found in Chapter 20 of his book, beginning at page 414.  The chapter is titled “Developing the New Economics, II: Policy, 1942-1943.”  Here is the beginning:

At some point between March and June 1942, Samuelson wrote a chapter, “Full Employment After the War,” for a volume that Seymour Harris was editing on Postwar Economic Problems.  Whereas elsewhere Samuelson’s concern was the need to take action, in this chapter he focused on economic theory.  Sensitive to the political implications, Samuelson emphasized repeatedly that he was talking about a technique of analysis that was “neutral on policy questions” . . . .    

Sure, Roger.  Like the New York Times is “neutral on policy questions.”  Back to Backhouse’s discussion of Samuelson’s piece:

Reviewing the “offsets” to saving that might contribute to full employment, Samuelson covered various possibilities, including business investment, government spending to redistribute income, foreign investment, the development of new wants to stimulate consumption, deficit-financed government spending, and “government spending matched by equivalent taxes.”  The last was a recent discovery . . . [that] came to be known as the “balanced-budget multiplier,” the idea that an increase in government spending matched by an equivalent rise in taxation is expansionary.  The political significance of this is hard to exaggerate . . . . 

You have to love the use of the word “discovery” as the label for Samuelson’s assertion that “an increase in government spending matched by an equivalent rise in taxation is expansionary.”  Hey, we know that more government spending and bigger government is always a good thing because it’s backed up by a bunch of exceedingly opaque mathematical mumbo jumbo that nobody can understand!  It must be right!  But what about the empirical proof — or in this case, the dramatic empirical disproof that followed within a few years?  Well, we’ll just omit any discussion of the empirical prediction or of its disastrous failure.  And we’ll attach the word “discovery” to the disproved hypothesis in the hope that no one will call us on our failure.

In short, Backhouse’s treatment of Samuelson’s 1943 piece and its disastrous prediction can only be characterized as deceptive.  After coming to this conclusion, you will not be surprised to find that I declined to read the rest of the book.  I did skim enough to realize that the gist of most of the rest is “Oh, wow, this guy is really, really smart” — again in complex mathematically-dense pieces the bottom line of which always seems to be that the government should spend more money.

Unproven hypotheses rationalize massive increase in size and power of government.  Purveyor of the hypotheses becomes hero of the left and of academia.  Hypotheses disastrously fail empirical testing.  Left proceeds as if nothing has gone wrong.  If you notice any parallels to the global warming scam, it’s not my fault.

Source: New Samuelson Biography: The Usual Progressive Self-Delusion — Manhattan Contrarian

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