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The Fall of the House of Samuelson by Robert Skidelsky - Project Syndicate

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RobertSkidelsky,ProfessorEmeritusofPoliticalEconomyatWarwickUniversityandafellowofthe
BritishAcademyinhistoryandeconomics,isamemberoftheBritishHouseofLords.Theauthorofa
FocalPoints
three-volumebiographyofJohnMaynardKeynes,hebeganhispoliticalcareerintheLabourparty,
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English

TheFalloftheHouseof
Samuelson
LONDONToreadTheSamuelsonSamplerintheshadowoftheGreatRecessionistogain
aglimpseintothemindsetofabygoneera.ThesampleisofthelatePaulSamuelsons
weeklycolumnsforthemagazineNewsweekfrom1966-1973.
Samuelson,aNobellaureate,wasthedoyenofAmericaneconomists:hisfamous
textbook,Economicswentthrough14editionsinitsauthorslifetime,introducingfuture
economistsworldwidetotherudimentsoftheircraft.Ifnotthesoleoriginator,hewas
thegreatpopularizeroftheneoclassicalsynthesisthemixofneoclassicaland
Keynesianeconomicsthatdefinedthemainstreamofthefieldfor50years.
SamuelsonwasaconvincedKeynesian,thoughinalimitedsense.Hedismissedmostof
Keynessattackontheorthodoxeconomicsofhisdayasunnecessary,writinghad
Keynes[started]withthesimplestatementthathefounditrealistictoassumethatmoney
ADVERTIS

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ADVERTISEMENT

wageswerestickyandresistanttodownward
movements...mostofhisinsightswouldhave
remainedjustasvalid.ForSamuelson,Keyness
realcontributionwasthetoolshegave
governmentstopreventdepressions.
ReadingTheSamuelsonSampler,itisextraordinary
torealizejusthowconfidenteconomistsofhis
generationwerethattheNewEconomics(asthe
KeynesianapproachwascalledinAmerica)had
solvedtheproblemofdepressionandmassunemployment.AsSamuelsonputitinhis
1973introduction,thespecterofarepetitionofthedepressionofthe1930shasbeen
reducedtoanegligibleprobability.
Yes,therewouldstillbesmallfluctuations;but,ashewrotein1966,GreatDepressions
cumulativeslumpsthatfeedonthemselvesareindeedextinct.Thereasonwasthat
governmentsnowhadthetools,especiallydiscretionaryfiscalpolicy,tocheckany
incipientdownturn.Whatisimportantaboutthebudget,hesaidin1970,iswhetherit
isinflationaryordeflationary,notwhether[itis]balancedorunbalanced.Inotherwords,
Adeficitinagoodcauseisgoodbusiness.Howmanyeconomistsorpoliticiansbelieve
thistoday?
Becausegovernmentsknewhowtostopdepressions,voterswouldinsistthattheyuse
thisknowledge.Ifprintingbitsofgreencansavebanksandbusinessfromruin,he
arguedin1966,todayselectoratewillensurethateitherpartyinpowerwill[so]act.
Thiswasirrespective,Samuelsonthought,oftheideologicalpreferencesofthosein
power.TheRepublicanRichardNixonwaselectedUSPresidentin1968onaplatformof
scalingdowntheDemocratsexpensiveGreatSocietyprograms.Iamnotaneconomic
determinist,SamuelsonwroteinNovember1968,ButIcanpredictwithconfidence
thatRichardNixonwillbeusingtheNewEconomicsifonlyforthereasonthatnewtimes
makeitinescapable.
Andsoitturnedout.Ratherthandeflatingtheeconomy,NixontookAmericaoffthegold
standardin1971andimposedwage,price,andimportcontrols,proclaimingbluntly,I
amnowaKeynesianineconomics.
ButthatwasthelastofSamuelsonssuccessfulpredictions.Lessthanadecadeafterhis
Newsweekcolumnsended,theNewEconomics,whichhehadextolledasapermanent
additiontoknowledge,wasinflightfromtheideologicalassaultsofRonaldReaganand
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The Fall of the House of Samuelson by Robert Skidelsky - Project Syndicate

MargaretThatcher.Despitehisfaiththatvoterswouldnotallowareturntodepression,
Thatchersthirdelectionvictory,in1987,camejustafterunemploymentintheUnited
Kingdomhadpeakedatthreemillion,thehighestlevelsincethe1930s.
Sowhatwentwrong?Stilltobearguedoutwithintheguild[ofeconomists],Samuelson
wrotein1969,istheproperquantitativepotencyofmonetaryversusfiscalpolicy.This
questioneventuallywasresolvedinfavorofmonetarypolicy.
Moreimportant,ashepointedoutin1970,wasthatevenKeynescouldnotguarantee
thatmankindwouldlivehappilyeverafter.Heleftuswithanunsolvedproblem.Howcan
wehavefullemploymentandalsopricestability?Reluctantly,Samuelsonconcludedthat
thereneededtobepermanentcontrolsoverpricesandwagestostopcost-pushinflation.
Ourmixedeconomy,hewrotein1970,doesnotknowhowtohaveasatisfactory
incomespolicythatwillbackupmonetaryandfiscalpolicy....Herethenliestheunsolved
frontierinmoderneconomics.
ItwasthesamefrontierthatFriedrichvonHayekfirstsurveyedinTheRoadtoSerfdomin
1944.Hayekfearedthatdeliberatepoliciestomaintainfullemploymentwouldleadto
increasingstateencroachmentonthefreemarketandpoliticalliberty.Itwasthisfearthat
led,fromthe1980sonwards,tothepiecemealabandonmentofthepolicysystemofthe
mixedeconomyindeed,tothedismantlingofthemixedeconomyitself.
Samuelsonwashalfright:GovernmentsdoknowhowtostopaslideintoanotherGreat
Depression.Theyusedthisknowledgeintheautumnof2008and2009,whichiswhywe
hadonlyaGreatRecession.
But,contrarytowhatSamuelsonbelieved,governmentsarehauntedbyfearsoflarge
fiscaldeficits.Withfewexceptions,theyhavenotbeenpreparedtousefiscalpolicytojolt
theireconomiesoutofpost-crisisstagnation.Instead,theyhavereliedonmonetary
expansion,whichispoliticallymoreacceptable,butalsomuchweakerinitseffects,asitis
underminedjustasKeynespredictedbyseveralslipsbetweenthecupandthelip.
Moreimportant,governmentshaveabandonedthegoaloffullemployment;asaresult,
allofthosebitsofinterventionistpolicypreviouslythoughtnecessarytokeepeconomic
activityonanevenkeelhavegonebythewaysideaswell.TheNewEconomicsmaybe
temporarilyresurrectedtodealwithextremesituations,butpolicymakersnolongertake
precautionstopreventextremesituationsfromarising.Howtodothis,whilepreserving
freedomandefficiency,isnowtheunsolvedfrontierinmoderneconomics.

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