Welcome back, Professor

Ideas Matter
FORBES

By Mark Skousen

Millions of college undergraduates, myself included, studied economics using Paul A. Samuelson’s famous textbook. My first economics course, at Brigham Young University, used the 7th edition (1967). Since its first edition in 1948, Economics has sold more than 4 million copies and has been translated into 41 languages. It is the most successful textbook ever written. It has made the MIT economist rich.

What were we taught, even at a conservative institution like Brigham Young? I did a study of 15 editions of Samuelson’s book in the spring 1997 issue of the Journal of Economic Perspectives. What I found was a heavy dose of Keynesian folly. For example, that saving was bad (the so-called paradox of thrift), deficits were beneficial, fiscal policy was all that mattered and Soviet central planning could work.

Samuelson spent whole chapters in serious discussion of the socialist economics of the Soviet Union and China, while writing little or nothing on the success stories of West Germany, Japan, the East Asian Tigers or Chile. As late as the 12th edition, in 1985, Samuelson still believed the Soviet Union had growth rates exceeding the U.S., Japan and Germany. He had numerous sections on “market failure,” while offering little on “government failure.” He criticized laissez-faire, favored progressive taxation and endorsed the pay-as-you-go Social Security program.

Samuelson was no socialist. He frequently declared his optimism about the future of capitalism and rejected doomsday predictions about another Great Depression or national bankruptcy. He regularly defended free trade and was critical of Karl Marx and Marxian economics.

In short, Samuelson was a fairly standard Keynesian liberal. But say this for him: Unlike a lot of his fellow liberals, Samuelson is willing to change his mind when the facts demand it. Under the influence of Yale Professor William D. Nordhaus (co-author since 1985) and recent events, Samuelson is gradually shifting back to classical economics from pure Keynesian economics. In more recent editions of his textbook, he has reversed on a number of important issues. In the 15th edition (1995), for example, Samuelson states that Soviet central planning was a “failed” model, that national savings are too low and that the national debt is excessive.

The accompanying table compares some of the old Samuelson with the new.

Samuelson’s conversion from Keynesian heresy back to Adam Smith is far from complete. While favoring a capital gains tax cut, he recommends higher progressive income taxes to reduce the federal deficit. “America is not   remotely near the limits of taxation,” he told the New York Times (Oct. 31, 1993).

Nevertheless, I say, “Welcome back to classical economics, Professor Samuelson.” There’s only one problem: A lot of policy is still being made and a lot of journalism written by men and women who absorbed an earlier form of the Samuelson gospel.

A return to basics

Topic Old Samuleson New Samuelson*
Savings “The attempt to save only results in the reduction of income.” (8th ed., p.225) “The savings rate is too low to guarantee a vital and healthy rate of investment in the 1990s” (p.654)
Deficit “Incurring debt… induces more current capital formation than would otherwise take place.” (7th ed., p. 346) “A large public debt can clearly be detrimental to long-run economic growth.” (p.638)
Monetary policy “Today few economists regard Federal Reserves monetary policy as a panacea for controlling the business cycle.” (3rd ed., p.316)
reduction of income.”:(8th ed.. p. 225)
“Fiscal policy is no longer a major tool of stabilization in the United States…. Stabilization policy will be performed by Federal Reserve monetary policy.” (p. 645)
Soviet planning “The Soviet economy is proof that…a socialist command economy can function and even thrive.” (13th ed., p. 837) “The failed model: Soviet Communism.” (p. 714)

*15th edition

It took nearly 50 years, but Paul Samuelson is changing for the better.

Forbes · September 22, 1997