A Much-Deserved Triumph in Supply-Side Economics

Economics on Trial
IDEAS ON LIBERTY
February 2000

by Mark Skousen

“After occupying center stage during the 1980s, the supply-side approach to economics disappeared when Ronald Reagan left office.” – Paul Samuelson (1)

Until Robert Mundell won the Nobel Prize in 1999, supply-side economics had been a school without honor among professional economists. Established textbook writers such as Paul Samuelson (MIT), Greg Mankiw (Harvard), and Alan Blinder (Princeton) frequently condemned the supply-side idea that marginal tax cuts increase labor productivity, or that tax cuts stimulate the economy sufficiently to increase government revenues.

The Laffer Curve — the theory that when taxes are too high, reducing them would actually raise tax revenue — is dismissed. “When Reagan cut taxes after he was elected, the result was less revenue, not more,” reports Mankiw in his popular textbook.(2) Never mind that tax revenues actually rose significantly every year of the Reagan administration; the perception is that supply-side economics has been discredited. Arthur Laffer isn’t even listed in the 1999 edition of Who’s Who in Economics, although the Laffer Curve is frequently discussed in college textbooks.(3)

Now that is all about to change with Columbia University economist Robert A. Mundell’s Nobel Prize in economics. According to Jude Wanniski, Mundell, 67, is the theoretical founder of the Laffer Curve.(4) In the early 1970s he told Wanniski, “The level of U.S. taxes has become a drag on economic growth in the United States. The national economy is being choked by taxes–asphyxiated.”(5)

Mundell offered a creative solution to stagflation (inflationary recession) of the 1970s: impose a tight-money, high-interest rate policy to curb inflation and strengthen the dollar, and slash marginal tax rates to fight recession. Mundell’s prescription was adopted by Reagan and Fed chairman Paul Volcker in the early 1980s. “There’s been no downside to tax cuts,” he told reporters recently.

Yet, oddly enough, Mundell isn’t accorded much attention compared to supply-siders Laffer, Paul Craig Roberts, and Martin Anderson. In their histories of Reaganomics, Roberts and Anderson mention Mundell only once.(6) Two major studies of supply-side economics in 1982 don’t cite his works at all. Nevertheless, Mundell has accomplished a great deal worth lauding. In fact, he is considered the most professional scholar of the supply-siders.

Robert Mundell has had an amazing professional career. A Canadian by birth, he has attended, taught, or worked at over a dozen universities and organizations, including MIT, University of Washington, Chicago, Stanford, Johns Hopkins, the Brookings Institution, Graduate Institute of International Studies in Geneva, Remnin University of China (Beijing), and the IMF. Before going to Columbia in 1974, he was a professor at the University of Chicago and editor of The Journal of Political Economy. Thus the Chicago school can once again claim a Nobel, although Mundell differs markedly from the monetarist school.

Monetary vs. Fiscal Policy

Famed monetarist Milton Friedman says, “I have never believed that fiscal policy, given monetary policy, is an important influence on the ups and downs of the economy.”(7) Supply-siders strongly disagree. Cutting marginal tax rates and slowing government spending can reduce the deficit, lower interest rates, and stimulate long-term economic growth.

Mundell counters, “Monetary policy cannot be the engine of higher noninflationary growth. But fiscal policy-both levers of it can be. . . . The U.S. tax-and-spend system reduces potential growth because it penalizes success and rewards failure.”

Mundell favors spending on education, research and development, and infrastructure rather than government welfare programs. He advocates reducing top marginal income tax rates, slashing the capital gains tax, and cutting the corporate income tax. Such policies would sharply raise saving rates and economic growth-“an increase in the rate of saving by 5% of income (GDP), say from 10% of income to 15%, would increase the rate of [economic] growth by 50%, i.e., from 2.5% to 3.75%.”(8)

Mundell as Gold Bug

Supply-siders also take a different approach to monetary policy. They go beyond the monetarist policy of controlling the growth of the money supply. Unlike the monetarists, supply-siders like Mundell resolutely favor increasing the role of gold in international monetary affairs. “Gold provides a stabilizing effect in a world of entirely flexible currencies,” he told a group of reporters in New York in November 1999. According to Mundell, gold plays an essential role as a hedge against a return of inflation. He predicted that the price of gold could skyrocket in the next decade, to as high as $6,000 an ounce, if G7 central banks continue to expand the money supply at 6 percent a year. “I do not think this an outlandish figure. Gold is a good investment for central bankers.” He did not foresee central banks selling any more gold. “Gold will stay at center stage in the world’s central banking system,” he said.

In awarding Mundell the prize, the Bank of Sweden recognized him as the chief intellectual proponent of the euro, the new currency of the European Community. He considers the euro a super-currency of continental dimensions that will challenge the dollar as the dominant currency. The benefits of a single currency include lower transaction costs, greater monetary stability, and a common monetary policy. Mundell advocates an open global economy, expanded foreign trade, and fewer national currencies. Ultimately, he envisions a universal currency backed by gold as the ideal world monetary system. Under a strict gold standard, “real liquidity balances are generated during recessions and constrained during inflations.”(9)

Mundell is an optimist as we enter a new century. He’s bullish on the global stock markets, the gold standard, globalization, and downsized government. He’s my kind of economist.

1. Paul Samuelson and William D. Nordhaus, Economics, 16th ed. (Boston: Irwin/McGraw-Hill. 1998) p. 640.
2. N. Gregory Mankiw, Principles of Economics (Fort Worth, Tex. Harcourt/Dryden Press, 1998), p. 166.
3. Mark Blaug, compiler of Who’s Who in Economics (Northampton, Mass. Edward Elgar, 1999), determines the top 1,000 names in the book based on frequency of citation in scholarly journals. Among the famous economists missing the cut are Arthur Laffer, Paul Craig Roberts, and Murray N. Rothbard.
4. Jude Wanniski, The Way the World Works, rev. and updated (New York: Simon and Schuster, 1983), p. x.
5. Wanniski, “It’s Time to Cut Taxes,” Wall Street Journal, December 11, 1974.
6. Paul Craig Roberts, The Supply-Side Revolution (Cambridge, Mass.: Harvard University Press, 1984) and Martin Anderson, Revolution (Stanford, Calif.: Hoover Institution Press, 1990).
7. Milton Friedman, “Supply-Side Policies: Where Do We Go from Here?” Supply-Side Economics in the 1980s Conference Proceedings (Federal Reserve Bank of Atlanta, 1982), p. 53.
8. Robert A. Mundell, “A Progrowth Fiscal System,” The Rising Tide, ed. Jerry J. Jasinowski (New York: Wiley, 1998), pp. 198, 203-204.
9. Mundell, The New International Monetary System (New York: Columbia University Press, 1977), p. 242.

Economics for the 21st Century

Economics on Trial
IDEAS ON LIBERTY
January 2000

Economics for the 21st Century
by Mark Skousen

“Nature has set no limit to the realization of our hopes.” — Marquis De Condorcet

Recently I came across the extraordinary writings of the Marquis de Condorcet (1743-94), a mathematician with an amazing gift of prophecy in l`age des lumieres. Robert Malthus (1766-1834) ridiculed Condorcet’s optimism in his famous Essay on Population (1798). Today Malthus is well known and Condorcet is forgotten. Yet it is Condorcet who has proven to be far more prescient.

In an essay written over 200 years ago, translated as “The Future Progress of the Mind,” Condorcet foresaw the agricultural revolution, gigantic leaps in labor productivity, a reduced work week, the consumer society, a dramatic rise in the average life span, medical breakthroughs, cures for common diseases, and an explosion in the world’s population.

Condorcet concluded his essay with a statement that accurately describes the two major forces of the twentieth century — the destructive force of war and crimes against humanity, and the creative force of global free-market capitalism. He wrote eloquently of “the errors, the crimes, the injustices which still pollute the earth,” while at the same time celebrating our being “emancipated from its shackles, released from the empire of fate and from that of the enemies of its progress, advancing with a firm and sure step along the path of truth, virtue and happiness!”(1)

As we enter the year 2000, the public has focused on the history of the twentieth century. Condorcet’s essay reflects two characteristics of this incredible period. First, the misery and vicious injustices of the past hundred years, and second, the incredible economic and technological advances during the same time.

The Crimes of the Twentieth Century

Paul Johnson’s Modern Times, by far the best twentieth-century history of the world, demonstrates powerfully that this century has been the bloodiest of all world history.* Here is a breakdown of the carnage:

Civilians Killed by Governments (in millions) Years
Soviet Union 62 (1917-91)
China (communist) 35 (1949- )
Germany 21 (1933-45)
China (Kuomintang) 10 (1928-49)
Japan 6 (1936-45)
Other 36 (1900- )
Total 170 million
Deaths in War (in millions)
International wars 30
Civil wars 7
Total 37 million

Economists use a statistic to measure what national output could exist under conditions of full employment, called Potential GDP Imagine the Potential GDP if the communists, Nazis, and other despots hadn’t used government power to commit those hateful crimes against humanity.

Another great French writer, Frederic Bastiat (1801-50), wrote an essay in 1850 on “What Is Seen and What Is Not Seen.”(3) We do not see the art, literature, inventions, music, books, charity, and good works of the millions who lost their lives in the Soviet gulags, Nazi concentration camps, and Pol Pot’s killing fields.

The Economic Miracle of the Twentieth Century

Yet the twentieth century was also the best of times, for those who survived the wars and repression. Millions of Americans, Europeans, and Asians were emancipated from the drudgery of all-day work by miraculous technological advances in telecommunications, agriculture, transportation, energy, and medicine. The best book describing this economic miracle is Stanley Lebergott’s Pursuing Happiness: American Consumers in the Twentieth Century (Princeton University Press, 1993). Focusing on trends in food, tobacco and alcohol, clothing, housing, fuel, housework, health, transportation, recreation, and religion, he demonstrates powerfully how “consumers have sought to make an uncertain and often cruel world into a pleasanter and more convenient place.” As a result, Americans have increased their standard of living at least tenfold in the past 100 years.

What should be the goal of the economist in the new millennium? Certainly not to repeat the blunders of the past. In the halls of Congress, the White House, and academia, we need to reject the brutality of Marxism, the weight of Keynesian big government, and the debauchery of sound currency by interventionist central banks. Most important, ivory-tower economists need to concentrate more on applied economics (like the work of Lebergott) instead of high mathematical modeling.

As far as a positive program is concerned, the right direction can be found in an essay on the “next economics” written by the great Austrian-born management guru Peter F. Drucker almost 20 years ago: “Capital is the future . . . the Next Economics will have to be again micro-economic and centered on supply.” Drucker demanded an economic theory aiming at “optimizing productivity” that would benefit all workers and consumers.(4) Interestingly, Drucker cited approvingly from the work of Robert Mundell, the newest Nobel Prize winner in economics, who is famed for his advocacy of supply-side economics and a gold-backed international currency.

Beware the Enemy

Market forces are on the march. The collapse of Soviet communism has, in the words of Milton Friedman, turned “creeping socialism” into “crumbling socialism.” But let us not be deluded. Bad policies, socialistic thinking, and class hatred die slowly. Unless we are vigilant, natural liberty and universal prosperity will be on the defensive once again.

We need to deregulate, privatize, cut taxes, open borders, stop inflating, balance the budget, and limit government to its proper constitutional authority. We need to teach, write, and speak out for economic liberalization as never before. Let our goal for the coming era be: freedom in our time for all peoples!

1. Marquis de Condorcet, “The Future Progress of the Human Mind,” The Portable Enlightenment Reader, ed. Isaac Kramnick (Penguin Books, 1995), p. 38. Several of Condorcet’s writings can be found in this excellent anthology.
2. Paul Johnson, Modern Times: The World from the Twenties to the Nineties, rev. ed. (New York: Harper, 1992). The best survey of the horrors of communism is The Black Book of Communism: Crimes, Terror, Repression (Cambridge, Mass.: Harvard University Press, 1999), written by six French scholars, some of whom are former communists.
3. Frederic Bastiat, Selected Essays on Political Economy (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1995 [1964]).
4. Peter F. Drucker, Toward the Next Economics, and Other Essays (New York: Harper & Rowe, 1981), pp. 1-21.

The Perseverance of Paul Samuelson’s “Economics”

Journal of Economic Perspectives

By Mark Skousen

Paul Samuelson’s Economics ranks with the most successful textbooks ever published in the field, including the works of Adam Smith, David Ricardo, John Stuart Mill and Alfred Marshall. His 15 editions have sold over four million copies and have been translated into 41 languages (see Table 1). My own Econ 101 class at Brigham Young University used the 1967 (7th) edition, which turned out to be near the high water mark in annual sales (Elzinga, 1992, p. 874). Since its first edition in 1948, Samuelson’s Economics has stood the test of time. It has survived nearly half a century of dramatic changes in the world economy and the economics profession: peace and war, boom and bust, inflation and deflation, Republicans and Democrats, and an array of new economic theories. The fiftieth anniversary edition is expected to be published in 1998.

His textbook has so dominated the college classrooms for two generations that when publishers look for new authors for a principles of economics text, they say that they are searching for the “next Samuelson” (Nasar, 1995). Its legacy goes beyond sales figures; in fact, the textbook may no longer be in the top 10 sellers in the U.S. market. However, most of the existing popular textbooks borrow heavily from Samuelson’s pedagogy, both in matters of tone and in the use and exposition of diagrams, like supply and demand, cost curves, the multiplier and the Keynesian cross.

This article does not attempt an encyclopedic review of the 15 editions of Samuelson’s text. Instead, it uses the succeeding generations of Samuelson’s text as a basis for reflecting on what lessons have been emphasized in introductory economics courses over the last 50 years. In doing so, it draws upon a notion suggested by Samuelson in his introduction to the fourteenth edition (p. xi): “A historian of mainstream-economic doctrines, like a paleontologist who studies the bones and fossils in different layers of earth, could date the ebb and flow of ideas by analyzing how Edition I was revised to Edition 2 and, eventually, to Edition 14.” The discussion here will spend little time on pure microeconomics and will focus instead on macroeconomics and policy advice. The reason for de-emphasizing basic microeconomics is that this is the area where the victory of Samuelson’s early pedagogy has been most complete and where the beliefs of economists have changed least. All references to Samuelson’s 15 editions of Economics, including the 12th and subsequent editions co-authored by William D. Nordhaus, are listed according to edition followed by page number.

Table I
The Publishing History of Paul A. Samuelson’s Economics

Edition Year Author(s) Sales
1 1948 Samuelson 121,453
2 1951 Samuelson 137,256
3 1955 Samuelson 191,706
4 1958 Samuelson 273,036
5 1961 Samuelson 331,163
6 1964 Samuelson 441,941
7 1967 Samuelson 389,678
8 1970 Samuelson 328,123
9 1973 Samuelson 303,705
10 1976 Samuelson 317,188
11 1980 Samuelson 196,185
12 1985 Samuelson & Nordhaus N/A
13 1989 Samuelson & Nordhaus N/A
14 1992 Samuelson & Nordhaus N/A
15 1995 Samuelson & Nordhaus N/A

Source: Elzinga (1992, p. 874)
N/A–Not available

For members of the economics profession, looking back at Samuelson’s text is like looking into a mirror that reflects many of our past beliefs. If we are uncomfortable with some of what we see in that mirror, then we must also feel uncomfortable with the version of economics that was taught, and perhaps also uncomfortable with the impact that the teaching of economics may have had on the economy.

The Keynesian Motif

In the introduction to an early edition, Samuelson denied that his primary purpose in writing Economics was to convey any “single Great Message” (3:v). But it is clear that Samuelson intended to introduce the “New Economics” of Keynes to students. The multiplier, the propensity to consume, the paradox of thrift, countercyclical fiscal policy, and C + I + G were all incorporated into the language of Econ 101. The now-familiar Keynesian cross income-expenditure diagram was printed on the cover of the first three editions. Macro preceded micro sections of the book, a novel approach at the lime. Moreover, only John Maynard Keynes was honored with a biographical sketch in early editions, and only Keynes, not Adam Smith nor Karl Marx, was labeled “a many-sided genius” (1:253n).

In the first edition, Samuelson claimed that the Keynesian “theory of income determination” was “increasingly accepted by economists of all schools of thought,” and that its policy implications were “neutral” (1:253). For example, “it can be used as well to defend private enterprise as to limit it, as well to attack as to defend government fiscal interventions.” However, his explanation of the model emphasized that “private enterprise” is afflicted with periodic “acute and chronic cycles” in unemployment, output and prices, which government had a responsibility to “alleviate” (1:41). “The private economy is not unlike a machine without an effective steering wheel or governor,” Samuelson wrote. “Compensatory fiscal policy tries to introduce such a governor or thermostatic control device” (1:412).

In the editions that followed, Samuelson’s rhetorical strategy seemed designed to give students the impression that the economics profession had achieved a monolithic belief structure. By the fourth edition (1958), he declared that “90 percent of American economists have stopped being ‘Keynesian economists’ or- ‘anti-Keynesian economists.’ Instead they have worked toward a synthesis of whatever is valuable in older economics and in modern theories of income determination.” He labeled this new economics a “neo-classical synthesis” (4:209-10), although “demand management” model might be more accurate.

By the seventh edition, although Samuelson was no longer using the “machine minus the steering wheel” metaphor, he continued to emphasize that “a laissez faire economy cannot guarantee that there will be exactly the required amount of investment to ensure full employment.” If full employment did occur, it would be: pure “luck” (7:197-8). He argued that “neo-classical synthesis” was “accepted in its broad outlines by all but a few extreme left-wing and right-wing writers” (7.197-8), a claim that appeared in similar language in all editions until the twelfth (1985), the first co-authored by Nordhaus. When the aggregate supply and aggregate demand framework was introduced in the twelfth (1985) and subsequent editions, they also were shown intersecting at less-than-fu11-ernployment equilibrium (12:91, 186). To the question, “Is there any automatic mechanism that guarantees that saving and investment balance at full employment?” Samuelson and Nordhaus answered “No” (12:139).

In reading Samuelson’s earlier editions, a student might reasonably conclude that there are no other schools of thought, at least in the mainstream. In fact, cf course, Keynesian thought was the subject of furious debate in economics departments across the country through the 1940s and into the 1950s, as young economists steeped in Keynesian thinking entered professorial jobs and collided with the old guard. In the late 1950s and 1960s, as economists explored how certain modeling structures could express either Keynesian or monetarist insights, it was fair to claim broad acceptance of the “neo-classical synthesis” as a modeling strategy. But Samuelson often seemed to imply that widespread acceptance of the formal models also implied an equally widespread belief that there was no mechanism to lead the macro-economy toward full employment, that consumption was too low and saving too high, that macroeconomic stability should be emphasized more than economic growth, and that government intervention was the only hope, points on which the degree of consensus was markedly lower.

This slide from Keynesian theory to particular policies was well illustrated in his seventh edition (1967),when Samuelson cited a statement by Milton Friedman, “We are all Keynesians now.” However, at the end of chapter 11, Samuelson (7:210) then referenced the full quotation from a 1966 interview of Friedman in Time magazine: “As best I can recall it, the context was: ‘In one sense, we are all Keynesians now; in another nobody is any longer a Keynesian.'” Friedman (1968, p. 15) would later put it this way: “We all use the Keynesian language and apparatus, none of us any longer accepts the initial Keynesian conclusions.”

Anti-saving Views

One way to see how nonpartisan Keynesian modeling shaded into explicit policy conclusions is to follow the anti-saving bias that appeared until the: most recent editions of Samuelson’s text. At less than full employment, there existed a “paradox of thrift,” when “everything goes into reverse” (1:271). In this case, a higher savings rate shrinks the economy, and one is left with the paradoxical result that a higher savings rate may not even increase the quantity of savings. Thus, Samuelson expressed the fear that an increased propensity to save may cause money to “leak” out of the system and “become a social vice” (1:253). To be sure, Samuelson would be pro saving when the economy was at full employment. “But full employment and inflationary conditions have occurred only occasionally in our recent history,” he wrote. “Much of the time there is some wastage of resources, some unemployment, some insufficiency of demand, investment, and purchasing power” (1:271). This paragraph remained virtually the same throughout the first eleven editions (for example, 11:226).1

These anti-thrift leanings extended to Samuelson’s discussion of progressive taxation and the “balanced-budget multiplier.” One “favorable” effect of progressive taxation was: “To the extent that dollars are taken from frugal wealthy people rather than from poor ready spenders, progressive taxes tend to keep purchasing power and jobs at a high level–perhaps at too high a level if inflation is threatening” (1:174; 7:162; 11:161). In his discussion of the “balanced-budget multiplier,” Samuelson stated, “Hence, dollars of tax reduction are-almost as powerful a weapon against mass unemployment as are increases in dollars of government expenditure” (7:234; 11:232). Why “almost”? Because only a portion of the tax cut would be “spent” (the rest would be saved) by the public, wherein all of government expenditures would be spent. In both cases, the implication is that greater consumption, not saving, is the key to prosperity.

Samuelson’s views on saving evolved over the years, with the major changes appearing in the thirteenth edition (1989). In this edition, the diagram showing savings leaking out of the economic system disappeared. The “paradox of thrift” doctrine, which had been a principal feature in all the editions until then, was made optional in the thirteenth edition (13:183-5) and removed in the fourteenth. However, it returned in 1995 in the fifteenth edition (15:455-7). Samuelson wrote:, “Disappearing to zero was, in my reconsidered judgment, an overshoot.” He argued that Japan in 1992-94 could be viewed as a modern-day example of the paradox of thrift. Nordhaus has pointed to Europe in the early 1990s and America in the early 1980s as other potential examples of the perversity of saving.2 Then, in the thirteenth edition, the authors added a major section bemoaning the gradual decline in the U.S. savings rate (13:142-4). Samuelson and Nordhaus list several potential causes of low savings: federal budget deficits, Social Security high inflation and high taxes. They also assert a strong correlation between the race of savings and economic growth: “[V]irtually all [macroeconomists] believe: that the savings rate is too low to guarantee a vital and healthy rate of investment in the 1990s” (13:144).

Samuelson’s evolving view on saving is also reflected in his discussion of government budget deficits. In the first edition, Samuelson pointed out: “According to the countercyclical view, the government budget need not be in balance in each and every month or year…. Only over the whole business cycle need the budget be in balance” (1:410-1). But remember that Samuelson argued (until the twelfth edition) that unemployed resources almost always existed; thus, this countercyclical view justified very common federal deficits (1:271; 7:228; 11:226), with less guidance as to when or how the offsetting surpluses were likely to occur.

Although Samuelson issued a series of warnings and caveats regarding the burgeoning national debt, the prevailing sense of the first 10 or so editions was that deficit spending was not a significant problem. The first edition favors the “we owe it to ourselves” argument: “The interest on an internal debt is paid by Americans to Americans; there is no direct loss of goods and services” (1:427). In the seventh edition (1967),  after  raising  the  specter  of  “crowding  out”  of private investment, he went on to say: “On the other hand, incurring debt when there is no other feasible way to move the C + I + G equilibrium intersection up toward full employment actually represents a negative burden on the intermediate future to the degree that it induces more current capital formation than would otherwise take place!” (7:346). At the end of an appendix on the national debt, Samuelson compared federal deficit financing to private debt financing, such as AT&T’s “never-ending” growth in debt (7:358; 11:347). By implication, government debt could also grow continually, rather than necessarily being balanced over the business cycle.

In this spirit, Samuelson offered a favorable reaction to the burgeoning deficits in the early 80s: “As federal budget deficits grew sharply over the 1982-1984 period, consumer spending grew rapidly, increasing aggregate demand, raising GNP and leading to a sharp decline in unemployment. The torrential pace of economic activity in 1983-1984 was an expansion, fueled by demand-side growth, in the name of supply-side economics” (12:192). But in that same edition, The AT&T comparison disappeared, the Reagan deficits were labeled as “skyrocketing” (12:349-50), and the crowding out of capital became “the most serious consequence of a large public debt” (12:361). By the fifteenth edition, Samuelson and Nordhaus were declaring “a large public debt can clearly be detrimental to long run economic growth. … Few economists today have words of praise for America’s large and growing debt” (15:638-9).

Evolving: Views on Monetary Policy

Samuelson used to emphasize fiscal policy over monetary policy as a tool for stabilization; now the reverse is true. The transition is unmistakable. In 1955 he wrote, “Today few economists regard federal reserve monetary policy as a panacea for controlling the business cycle” (3:316). In 1975, after labeling monetarism as “an extreme view,” he declared, “both fiscal and monetary policies mactc:r rrlrcc:h” (9:329). In 1995, Samuelson and Nordhaus reversed this traditional view, observing, “Fiscal policy is no longer a major tool of stabilization policy in the United States. Over the foreseeable future, stabilization policy will be performed by Federal Reserve monetary policy” (15:645).

This evolution of the perceived role of monetary policy can also be seen in the treatment of money. Early editions spent considerable space, more than most other textbooks, on the classical gold standard and the origin of money and banking. Samuelson’s preference in the earlier editions seemed to be for a government-managed monetary system, but not one based on gold. While recognizing gold’s role as a rein on monetary authorities’ ability to inflate the money supply, Samuelson was sharply critical of gold as a monetary standard. A strict gold standard was historically deflationary, Samuelson argued, because “The long term supply of gold cannot possibly keep up with the liquidity needs of growing international trade”(8:697). Deflation was dangerous because “falling price levels tend to lead to labor unrest, strikes, unemployment and radical movements generally” (8:629). Gold was an “anachronism” (8:700).

But after the United States officially left the gold standard in August 1971, Samuelson warned that the world was “in uneasy limbo” (9:652). He gradually warmed to the idea of flexible exchange rates, especially as futures markets developed (9:724-5). By 1995, Samuelson and Nordhaus were no longer deeply concerned about an international monetary crisis or breakdown in trade under a pure fiat money system. They declared that international currency management and central bank coordination in the last half-century was “one of unparalleled success” (15:736). Gold’s role had become so moribund that by the fifteenth edition, only two pages were devoted to the yellow metal.

The quantity theory of money was discussed in the first edition, although Irving Fisher, frequently cited as the modern founder of the quantity theory, was not mentioned (1:290-7). (Fisher was cited in earlier editions regarding capital theory, but not for his quantity equation.) No one expected Samuelson to cite Milton Friedman in the early editions–after all, Friedman’s studies in monetary theory and history did not gain wide credence until the early 1960s–but Samuelson soon made up for lost time. Friedman began to be quoted in 1961 (5:315), and Irving Fisher was given some credit by 1970 (8:264).

Defender of an Activist Government

Through 15 editions, Samuelson has appeared to favor a substantial role for the state. In an early edition, he forecast that while the growth in government was not “inevitable,” there was no end in sight (4:112). In a later edition, he observed, “No longer does modern man seem to act as if he believed ‘That government governs best which governs least'” (8:140). In keeping with the Keynesian motif, a large government provided “built-in stabilizers” to the economy, such as taxes, unemployment compensation, farm aid and welfare payments that tend to rise during a recession (8:332-4).

In discussing the overall U.S. tax burden, Samuelson has argued that to a large extent, higher taxes are a byproduct of economic and social development. Several editions displayed a chart showing that “poor, underdeveloped countries show a persistent tendency to tax less, relative to national product, than do more advanced countries” (4:113). In a later edition, Samuelson added, “With affluence come greater interdependence and the desire to meet social needs, along with less need to meet urgent private necessities” (14:300). Samuelson also pointed out with international comparisons that the United States lags behind most Western nations in terms of tax burden. Thus, “our government share is a modest one” (8:140n; 12:698; 15:278).

On the subject of cutting taxes, Samuelson has supported Keynesian oriented tax cuts, though not supply-side tax cuts. In the seventh edition, he argued in terms reminiscent of the Laffer curve thesis that a tax cut may pay for itself in increased government revenues: “To the extent that a tax cut succeeds in stimulating business, our progressive tax system will collect extra revenues out of the higher income levels. Hence a tax cut may in the long run imply little (or even no) loss in federal revenues, and hence no substantial increase in the long run public debt” (7:343). However, after marginal tax rates were reduced in the 1980s during the Reagan administration, Samuelson and Nordhaus wrote: “Laffer-curve prediction that revenues would rise following the tax cuts has proven false” (14:332).

What about the supply-side argument that high tax rates discourage work, saving and risk taking! The answer was “unclear.” Samuelson suggested that progressive taxes might actually make some people “work harder in order to make their million” (10:171). He argued, “Many doctors, scientists, artists, and businessmen, who enjoy their jobs, and the sense of power or accomplishment that they bring, will work as hard for $30,000 as for $100,000″ (10:171), a sentiment repeated in later editions (15:310).

In keeping with this sentiment, Samuelson has been a strong supporter of the welfare state and antipoverty programs as a response to inequality. “Our social conscience and humanitarian standards have completely changed, so that today we insist upon providing certain minimum standards of existence for those who are unable to provide for themselves,” he wrote early on (1:158).  He  denied  that welfare expenditures were “anti-capitalistic” (7:146). Moreover, “Contrary to the ‘law’ enunciated by Australia’s Colin Clark–that taking more than 25 per cent of GNP is a guarantee of quick disaster–the modern welfare state has been both humane and solvent” (8:140). Although welfare assistance was “indeed costly” and “often inefficient” (11:761), there was little choice, since private charity has always been inadequate” (11:760). His discussion of welfare reform focused on an endorsement of Milton Friedman’s proposed “negative income tax” (11:761 -3). But by the 1995 edition, Samuelson and Nordhaus seem less certain and are asking: “Have antipoverty programs helped…[or] produced counterproductive responses?” (15:372).

For society’s retirement programs, Samuelson has been a strong supporter of a pay-as-you-go Social Security system. Earlier editions contained a chapter on “Personal Finance and Social Security,” which called the pay-as-you-go system “a cheap, and sensible way” to provide retirement benefits to individuals.” Samuelson argued “It is one of the great advantages of a pay-as-you-go social security system that it rests on the general tax capacity of the nation; if hyperinflation wiped out all private: insurance and savings, social security could nonetheless start all over again, little the poorer” (4:179). But this statement–along with the chapter on personal finance and Social Security–was dropped after the fifth edition. His recommendation to buy U.S. savings bonds earning 3 percent, which were “a very great bargain,” was removed after the third edition.’

Samuelson has spent little space on Social Security since then, other than reporting higher payroll taxes with each edition. For example, in the 1985, edition, Samuelson and Nordhaus noted, “The payroll tax has been the fastest growing part of federal revenues, rising from nothing in 1929, to 18 percent of` revenues in 1960, to 36 percent in 1985″ (12:732). The 1995 edition mentions in one paragraph that Social Security taxes may contribute to a decline in thrift (15:432-5). There are several reasons why Social Security may deserve more attention. More than half of American workers pay more in payroll taxes than in income taxes. Social Security is in the center of an argument about intergenerational equity. And there are a number of interesting proposals revising the system, including privatization.

The role of government extends into a debate between market anti-government failure. Mainstream economic wisdom, as embodied by the Samuelson text, has tended to emphasize numerous examples of “market failure” (15:30-5, 164-l77, 272-3, 280-2, 291-2, 329, 347-52), including imperfect competition, externalities, inequities, monopoly power and public goods. Samuelson pointed out that the government could take of “an almost infinite variety of roles in response to the flaws in the market mechanism” (15:30-1). At one level, this is all fair enough. But for several decades, there has also been a line of thought, perhaps best embodied in the work of Ronald Cease, that points out that actors in markets may be quite creative in finding ways to address market failures.

Consider the example of lighthouses as a public good. Since 1961, Samuelson has used the lighthouse as an example of a public good, one that private enterprise could not run profitably because of the non-excludable, non-depletable nature of the service. But Cease (1974) wrote an article pointing out that numerous lighthouses in England were built and owned by private individuals and companies prior to the nineteenth century, who earned profits by charging tolls on ships docking at nearby ports.5 To be sure, some of these lighthouse organizations had more the flavor of private voluntary organizations than of perfectly competitive markets; nonetheless, an introductory economics class might well be interested in the fact that free economic actors can work out practical ways of building and paying for certain public goods without explicit government provision.

Explanations of market failure often deserve a counterbalancing discussion of government failure, lest the unwary student assume that economists believe in imperfect markets but perfect government. Various editions of the text do argue that governments should follow market-oriented policies when addressing a market failure. In the most recent edition, for example, the U.S. health-care debate was analyzed in terms of a list of “market failures” in the health-care industry, together with a market-oriented criticism of Clinton’s proposed price controls and nationalized health services in foreign countries (15:289-96). Similarly, market failures and market-oriented solutions also are stressed in the environmental arena (15:351-3).

The argument that certain types of government action are preferable to others would seem to open the door to a discussion of whether government can be counted on to enact appropriate policies. Some textbooks now have substantial sections on “government failure,” but the broad possibility of such failures has been downplayed in the Samuelson texts. In the 1955 edition, he cited a Herbert Hoover study indicating “very little” waste in federal spending, only $3 billion (3:119). Since the twelfth edition, the subject index has numerous listings under “market failure,” but none under “government failure.” Surely Samuelson’s criticism of price controls would fall under this category (1:463-6; 8:370-3; 15:66-71). Apart from price fixing, Samuelson and Nordhaus offered only two brief mentions of government failure in the fifteenth (1995) edition, a question at the end of chapter 2 on “Markets and Government in a Modern Economy” (15:37) and a mention in their discussion of “public choice theory,” which claims that “harmful” government policies are “probably rare” (15:285).

The Family Tree of Economics: The Mainstream and Marxism

Samuelson’s desire to homogenize mainstream economics into one grand “neo-classical synthesis” is evident in his “family tree of economics.” Beginning with the fourth edition (1958, flap), the author created a genealogical diagram of economic thought from the Greeks to the present. By the time the twentieth century was reached, only two schools of thought remained-followers of Marxist-Leninist socialism and those of the Marshall-Keynes “neo-classical synthesis.” In this chart, Adam Smith and the classical school were claimed as ancestors of the neoclassical synthesis by way of Alfred Marshall. The Chicago monetarists and the Austrians do not appear on the chart until the twelfth edition (1985), when “Chicago Libertarianism” and “Rational-Expectations Macroeconomics” surface alongside “Modern Mainstream Economics.” Samuelson and Nordhaus include the Austrians, Friedrich Hayek and Ludwig von Mises, in the “Chicago Libertarianism” category (13:828). This categorization is questionable. The Austrians, with their emphasis on subjectivism and microeconomics, consider themselves neither followers of the Chicago school nor philosophical descendants of Walras and Marshall. Then, in the fourteenth and fifteenth editions, the other schools again disappear from the family tree, apparently subsumed by the single category of “Modern Mainstream Economics.”

Over the years, Samuelson has gradually given more space in his textbook to non-Keynesian schools. By the eighth edition (1970), Milton Friedman was cited a half dozen times. In the ninth edition (1973), he recommended Friedman’s Capitalism and Freedom as a “rigorously logical, careful, often persuasive elucidation of an important point of view” (9:848). The ninth edition also adds a significant chapter, “Winds of Change: Evolution of Economic Doctrines,” which summarizes the spectrum of warring schools, including institutionalists (Veblen and Galbraith), the New Left and radical economics.

References to Marx and international socialism are scarce and random in the early editions. In the first edition, Marx was declared “quite wrong” in his prediction that the “poor are becoming poorer” (1:67). Samuelson expressed suspicion of Soviet central planning, and he considered the U.S. brand of “mixed-enterprise superior (1:603). Attacks on Marxism expanded with each edition. Marx’s prediction of falling real wages had been proven “dead wrong” (4:757). Lenin had been wrong in his charge that Western nations practiced imperialism for economic gain (4:756-7). The profit rate had “stubbornly refused to follow” the Marxist law of decline (7:707).

But starting with the ninth edition, references to the ideas and followers of Karl Marx and Friedrich Engels expanded dramatically, including a biography of Marx and a nine-page appendix on Marxian economics. In the preface to that edition, Samuelson wrote: “It is a scandal that, until recently, even majors in economics were taught nothing of Karl Marx except he was an unsound fellow” (9:ix). Samuelson added in the tenth edition that “at least a tenth of U. S. economists” fell into the “radical” category (10:849). However, this expanded coverage did not mute his criticism of Marxist beliefs. With the fall of the Soviet Union, the discussion of Marx shrank from 12 pages in the fourteenth edition to three pages in the fifteenth (1995) edition, including a two-paragraph biography of Marx, and no appendix on Marxian economics.” Typical of the tone: “Marx was wrong about many things–notably the superiority of socialism as an economic system–but that does not diminish his stature as an important economist” (15:7)

Central Planning and Soviet Growth

In very early editions, Samuelson expressed skepticism of socialist entral planning: “Our mixed free enterprise system … with all its faults, has given the world a century of progress such as an actual socialized order–might find it impossible to equal” (1:604; 4:782). But with the fifth edition (1961), although expressing some skepticism statistics, he stated that economists “seem to agree that her recent growth rates have been considerably greater than ours as a percentage per year,” though less than West Germany, Japan, Italy and France. (5:829). The fifth through eleventh editions showed a graph indicating the gap between the United States and the USSR narrowing and possibly even disappearing (for example, 5:830). The twelfth edition replaced the graph with a table declaring that between 1928 and 1983, the Soviet Union had grown at a remarkable 4.9 percent annual growth rate, higher than did the United States, the United Kingdom, or even Germany and Japan (12:776). By the thirteenth edition (1989), Samuelson and Nordhaus declared, “the Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive” (13:837). Samuelson and Nordhaus were riot alone in their optimistic: views about Soviet central planning; other popular textbooks were also generous in their descriptions of economic life under communism prior to the collapse of the Soviet Union.7

By the next edition, the fourteenth, published during the demise of the Soviet Union, Samuelson and Nordhaus dropped the word “thrive” and placed question marks next to the Soviet statistics, adding “the Soviet data are questioned by many experts” (14:389). The fifteenth edition (1995) has no chart at all, declaring Soviet Communism “the failed model” (15:714-8). To their credit, Samuelson and Nordhaus (15:737) were willing to admit that they and other textbook writers failed to anticipate the collapse of communism: “In the 1980s and 1990s, country after country threw off the shackles of communism and stifling central planning–not because the textbooks convinced them to do so but because they used their own eyes and saw how the market-oriented countries of the West prospered while the command economies of the East collapsed.”

Where are the Economic Success Stories?

While Samuelson overplayed the economy of the Soviet Union, he underplayed the successful postwar economies of Germany and Japan, and the newly developing countries in Europe, Asia and Latin America. From the second to the fourteenth edition, Samuelson briefly mentioned the dramatic story of West Germany’s post war recovery to elucidate the benefits of currency reform and price freedom (2:36; 14:36). Various editions also discuss Germany’s bout with hyperinflation in the early 1920s. But his one-paragraph account offers little space to convey the magnitude of the subsequent German economic recovery from a devastating world war. The same could be said of Japan’s postwar economic miracle. In 1945, Japan was desperate, starving, shattered; half a century later, it was an economic superpower. Yet Samuelson barely mentioned Japan. In 1970, he offered a sentence in his chapter on economic growth, with no further comment: “Japan’s recent sprint has been astounding” (8:796). In the 1980s and 1990s, even as many textbooks offered a more global approach, Samuelson and Nordhaus still practically ignored Japan. In the twelfth edition, they asked, “For example, many people have wondered why countries like Japan or the Soviet Union have grown so much more rapidly than the United States over recent decades” (12:798). They spent many pages discussing the Soviet Union, but except for a brief reference to “rapid technical change,” they were silent on Japan. The same pattern holds for the fifteenth (1995) edition.

What about the other high-performing economies in East Asia? They were not mentioned until the thirteenth edition (1089), at which point Samuelson and Nordhaus devoted two paragraphs to Hong Kong and other East Asian miracles (13:832, 886). In the fifteenth edition, they touched briefly on the causes of East Asian development, including the newly industrialized countries of Korea, Singapore, Taiwan, Indonesia, Malaysia and Thailand (15:712-3).The economic success stories of Latin America (Chile, Mexico, and so on) receive no mention at ail. Privatization, a rapidly growing phenomenon around the world, is virtually ignored in Samuelson’s and most other American textbooks.

Why such a dearth of economic success stories? Space limitations must have played a role. Another reason is that Samuelson’s rhetorical approach, like that of many textbooks, is to paint with a broad brush, to discuss concepts and problems in general, but seldom to focus on specific examples. Free-market economists might point out that some policies adopted by many of these high-growth countries–high savings rates, a general reliance on free markets, relatively low government spending and budgets often in surplus, little or no taxation on savings and investment–do not mix well with Keynesian biases. On the other hand, other policies–public education, land reform, import protection and export promotion, targeted government investment subsidies and close government/industry ties–favor Samuelson’s approach.

The Impact of Samuelson’s Textbook

It is hard to gauge the influence of Samuelson’s textbook, or in general the impact of introductory courses in economics, on U.S. policymakers or corporate executives. Samuelson has been willing to claim, with tongue only slightly in check, a considerable impact. He has made a well-known comment: “I don’t care who writes a nation’s laws–or crafts its advanced treaties–if I can write its economics textbooks” (Nasar, 199,5, C1). He has also expressed hope that his textbook would be a reference guide for former students. “Where the election of 1984 rolls around,” he wrote in 1967,”all the hours that the artists and editors and I have spent in making the pages as informative and authentic as possible will seem to me well spent if somewhere a voter turns to the old book from which he learned economics for a rereasoning of the economic principle involved” (7:vii).

The hope is worth raising not only for Samuelson’s text, but for all those students who once took an introductory economics course. To the extent that Samuelson’s text has been a much-imitated leader among all principles textbooks, it is reasonable to ask how helpful these texts would have been in thinking about the issues of public debt, inflation, foreign competition, recession, unemployment and taxes that have challenged the public over the past 50 years.

On the positive side, Samuelson must be congratulated for his optimism about the future of the American economy. Although he anticipated a deep recession following World War II (Sobel, 1980, pp. 101-2), he did not succumb to the lure of fellow Keynesian Alvin Hansen’s stagnation thesis (1:418-23). He wisely rejected the doomsayers’ frequent calls for another Great Depression or imminent bankruptcy due to an excessive national debt. “Our mixed economy–wars aside–has a great future before it” (6:809), he wrote. To his credit, Samuelson has been willing to update his textbook in keeping with new events and new theories. The virtues of monetary policy, savings and markets have received more emphasis in recent issues.

Samuelson offered a balanced brand of economics that found mainstream support. While Samuelson (especially in the earlier editions) favored heavy involvement in “stabilizing” the economy as a whole, he appeared relatively laissez faire in the micro sphere, defending free trade, competition and free markets in agriculture. He was critical of Marx, weighed the burdens of the national debt, denied that war and price controls were good for the economy, wrote eloquently on the virtues of a “mixed” free-enterprise economy, suggested that big business may sometimes be benevolent (1:132; 15:172-4) and questioned whether labor unions could raise wages (2:606; 1.5:238). This advice could often be summarized as an injunction to rely broadly on markets, hut also to be aware that markets might fail in many cases, thus creating a situation where government intervention could be justified.

Samuelson was unable to foresee many of the major economic events and crises, but this is surely no criticism. After all, most mainstream economists failed to foresee the stagflations and dollar devaluations of the 1970s or the S&L crisis and trade deficits of the 1980s. To some extent, introductory textbooks will always play catch-up to events. For example, in writing about the effects of federal deposit insurance and central bank authority, Samuelson confidently predicted in 1980:

“In the 1980s, the only banks to fail will be those involving fraud or gross negligence” (11:282). By the 1992 edition, after the collapse of hundreds of saving and loans, Samuelson and Nordhaus wrote, “Many economists believe that the deposit insurance system must be drastically overhauled if this sad episode is not to be repeated in the future” (14:535).

But although it would be unfair to criticize anyone for not being clairvoyant about events, it is surely fair criticism of a principles of economics course to point out that some of its advice seems questionable in light of current knowledge. Indeed, Samuelson has hinted in later editions that he would no longer agree with some of his analysis in earlier editions. Today, he probably would be comfortable saying, as he did in the preface of the eighth edition, that his textbook contained “nothing essential being omitted” or “nothing that later will have to be unlearned as wrong.” By the fourteenth edition, he confessed, “What was great in Edition 1 is old hat by Edition 3; and maybe has ceased to be true: by Edition 14″ (14:xiv).

When faced with such rueful comments by an author of Samuelson’s stature, a certain degree of modesty seems warranted for the rest of the economics profession. The successive editions of Samuelson’s textbook illustrate that the profession’s view of both principles and facts can shift substantially with recent experience, whether the point is the Keynesian lessons that came out of the Great Depression or the speed of Soviet economic growth. An introductory course requires some natural simplification, but it should aim to avoid false certainty.

Samuelson’s textbook has delivered a great deal of economic wisdom. For many economists, the positive side of the balance sheet has outweighed the negative. Indeed, his defenders might ask: Might the United States and the West have suffered another Great Depression if Samuelson had not emphasized the need for “automatic stabilizers”? Did not Samuelson’s heralding of the “mixed” economy curb the appetite of third world countries for national socialism?

We will never know, of course, but it is humbling to speculate on whether alterations in principles textbooks might have led to a different U.S. economy. Might the United States have experienced higher rates of saving, investment and growth if Samuelson had moderated his anti-thrift tone sooner? Would the U.S. economy and financial system have been less volatile if textbook writers had given earlier credence to monetarism? Would the United States and developing countries be growing more rapidly if textbook writers had emphasized long-term growth (as characterized by West Germany, Japan and the East Asian economic miracles) over macroeconomic stabilization policies (inflation-unemployment tradeoffs)? Would attitudes toward the Soviet Union and markets have been different if principles texts had been more critical of central planning and Soviet growth statistics? In my judgment, it is difficult to sidestep the conclusion that as the teaching of introductory economics has followed in Samuelson’s footsteps, its advice has contributed to certain of the economic problems that the United States faces today.

Thanks to Paul Samuelson, William Nordhaus, Milton Friedman, Roger Garrison, Kenna C. Taylor, Larry Wimmer, Michael Betterman and Jo Ann Skousen for comments and background materials. Special appreciation to Paul Samuelson and Ken Elzinga for locating hard-to-find early editions of Economics. I would also like to thank the editors, Alan H. Krueger, J. Bradford De Long and especially Timothy Taylor, for their many helpful changes and suggestions.

References

Cease, R. H.,”The Lighthouse in Economics.” In The Firm, the Market, and the Law. Chicago: University of Chicago Press, 1988, pp. 3R7-215; originally published in Journal of Law and Economics, October 1974, 17:2, 35776.

Elzinga, Kenneth G., “The Eleven Principles of Economics,” Southern Economic Journal, April 1992, 58:4, 861-79.

Friedman, Milton, “Why Economists Disagree.” In Dollars and Deficits: Living with America’s Economic Problems. Englewood Cliffs, N.J.: Prentice-Hall, 1968, pp. 1-16.

Lipsey, Richard G., Peter O. Steiner, and Douglas D. Purvis, Economics. 8th ed., New York: Harper & Row, 1987.

Nasar, Silvia, “Hard Act to Follow?,” New York Times, March 14, l995, C1, C8.

Samuelson, Paul A., Economics. New York: McGraw-Hill, 1948 and various years.

Skousen, Mark, Economics on Trial. Homewood, Ill.. Irwin, 1991.

Sobel, Robert, The Worldly Economists New York: Free Press, 1980.

Footnotes

1 Here is all area in which contemporary Keynesians (Heller, Solow, Okun, Ackley, et al.) might not be so anti-saving as was Samuelson. The 1962 Economic Report to the President, issued at the high tide of  orthodox Keynesianism, reflected an implicit faith that the economy would always be running near full employment. The business cycle had been tamed and any downturns would he quickly countered. Such a belief meant that savings could then play a positive role. Apparently, Samuelson was not as optimistic about the government’s ability to maintain full employment equilibrium.

2 The Samuelson quotation is taken from personal correspondence dated January 20, 1995. The Nordhaus sentiment was also expresed in private correspondence, February 4, 1995.

3 Samuelson was prescient in his first edition about the prospects for programs along the lines of Medicare and Medicaid: “It is not unlikely that in the next generation payments for sickness and disability, and a comprehensive public health and hospital program, will have been introduced” (1:222).

4 Based on his Keynesian philosophy, Samuelson also tended to argue that people should avoid saving in difficult economic times.  “Never again can people be urged in times of depression to tighten their belts, to save more in order to restore prosperity. The result will be just the reverse–a worsening of the vicious deflationary spiral” (1:272; 6:238-9; 10:239). In the third edition, Samuelson denounced families who “hysterically cut down on consumption when economic clouds arise” (3:339) He echoed the advice of Harvard economist Frank W. Taussig, who during the Great Depression went on the radio “urge everyone to save less, to spend more on consumption” (7:226) Whatever the merits of this advice as macroeconomic wisdom, it would surely increase the financial risk for the individuals involved. ‘I wrote to Samuelson about this issue. His response was: “If you read carefully the Coase article on lighthouses, you will see that the historical examples he described are not about the ‘free rider’ problem. When scrambling devices become available to meet the problem, there still remains the deadweight inefficiency intrinsic to positive pricing for the marginal use of something that involves only zero or derisory marginal cost” (personal correspondence, August 9, 1995). Without disputing these points, one can continue to hold the conclusion expressed in the text, that rather than implying that governments are the only agencies that can provide lighthouses, it would be interesting to discuss the method of lighthouse provision that actually occurred.

6 The reduction in space allocated to Marxist economics has been accompanied by less discussion about the Austrian economists Ludwig von Mises and Friedrich Hayek, who warned earlier that soviet central planning could not work and could not calculate prices and costs accurately. Samuelson and Nordhaus mention the role of Mises and Hayek in the socialist calculation debate from editions nine through 12 (9:620; 12:693), but have dropped them from the most recent editions.

7 For example, in their eighth edition, Lipsey, Steiner and Purvis (1987, pp.885-6) claimed, “The Soviet citizen’s standard of living is so much higher than it was even a decade ago, and is rising so rapidly, that it probably seems comfortable to them (cf. Skousen, 1991, pp.213-15).

Getting Published–An “Austrian” Triumph

Economics on Trial — THE FREEMAN

By Mark Skousen


“[Austrian economists] feel they’ve been frozen out of mainstream economics and seldom get even a footnote in standard textbooks.”
-Todd G. Buchholz
1

Austrian economist makes good! I just got published in the Journal of Economic Perspectives, the most widely read economics journal in the country.

The article, “The Perseverance of Paul Samuelson’s Economics,” is a damning review of the 15 editions of Samuelson’s famous textbook2 I am still in shock a year after getting an email from the JEP saying they had accepted my paper. Undoubtedly it is a watershed event when the No. 1-read economics journal in the country is willing to publish an article critical of the top Keynesian economist in the world and first American to win the Nobel Prize in economics. One of the co-editors, Brad de Long, said that my study is “one of the best and most exciting papers we published in the second half of the 1990s.” Tim Taylor, the managing editor, said that ten years ago they would not have published it.

Dethroning the King of Keynes

There are two major stories that come out of my study.

First, Samuelson’s Economics–the most popular textbook ever published, with over four million sold and translated into 41 languages–taught students a lot of bad economics. Until recently, the MIT professor taught students that high saving rates were bad for the country, federal deficits and progressive tax rates were beneficial, and Soviet central planning could work. In my review of his 15 editions, which covers the entire postwar period, I point out that Professor Samuelson spent whole chapters discussing the failed 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. He had numerous sections in his textbook on “market failure” while offering very little on “government failure.” He constantly highlighted the economics of Keynes, but downplayed the economics of Friedman, Hayek, and other free-market economists.

Samuelson’s Economics: From Keynes to Adam Smith

Not everything was negative in my review of Samuelson’s textbook. On the positive side: Samuelson frequently declared his optimism about the future of capitalism and rejected doomsayers’ predictions of another Great Depression or national bankruptcy. He regularly defended free trade and free markets in agriculture. And he was highly critical of Karl Marx and Marxian economics.

The most amazing discovery I made in my study is that Samuelson, under the influence of co-author William D. Nordhaus (Yale) and recent events, has had a change of heart and is gradually shifting back to classical economics. In more recent editions, he has reversed his position on a number of important issues. In the most recent edition, for example, Samuelson states that Soviet central planning was a “failed” model, that national savings is too low and needs to increase, and that the national debt is excessive.

The JEP also published a rejoinder by Samuelson, which was surprisingly reserved and anemic in response to my blistering critique. “I am pleading no alibi nor extenuations,” he wrote. “My present-day eyes do discern regrettable lags in sloughing off earlier skins.”3 He only denied that he was anti-saving, one thing he is famous for.

My study of Samuelson’s Economics points to the real need for a college-level textbook on sound economics. That is my primary goal right now. My forthcoming textbook is called Economic Logic and I hope to finish it next year. I’11 keep you posted.

Past Prejudices Against Austrians

Austrian economists have had a long struggle in getting recognized by the profession. The mainstream has shown little interest if not disdain for a school that is laissez faire in government policy and critical of mathematical modeling and empirical econometrics.

Following the postwar Keynesian revolution, the economics establishment was unreceptive to the works of Ludwig von Mises and Friedrich Hayek. In the 1960s, Austrian economists depended on the conservative publisher Regnery and the engineering publisher D. Van Nostrand & Co. to get published.

Future Is Brighter

Gratefully that’s all changing. Today Austrians hold a small but growing number of positions at major universities (George Mason, Auburn, NYU, University of Georgia, California State at Hayward, etc.), get published by major university and academic presses (Cambridge, Chicago, Oxford, NYU, Kluwer, Routledge, and Edward Elgar, among others), and are getting accepted in major journals (Journal of Economic Literature, History of Political Economy, Journal of Macroeconomics, and Economic Inquiry).

Still, other “free-market” schools (the monetarists and the new classicists) have advanced much further because of their mathematical and empirical approach. The Austrian school still largely remains a “book culture,” as Peter Boettke puts it, and needs to devote more efforts to “strategic” publishing in the journals rather than preaching to the choir if it wants to have an impact.4 Happily, things are looking up.

Notes:
1. Todd G. Buchholz, From Here to Economy: A Shortcut to Economic Literacy (Dutton, 1995), p. 238. Buchholz’s popular history, New Ideas from Dead Economists (Plume, 1990), completely ignores the Austrians because Hayek and Mises weren’t discussed at Harvard.

2. Mark Skousen, “The Perseverance of Paul Samuelson’s Economics,” Journal of Economic Perspectives, vol. 11, no. 2 (Spring 1997), pp. 137-152.

3. Paul A. Samuelson, “Credo of a Lucky Textbook Author, Journal of Economic Perspectives, vol. 11, no. 2 (Spring 1997), p. 155.

4. Peter J. Boettke, “Alternative Paths Forward for Austrian Economics,” The Elgar Companion to Austrian Economics (Edward Elgar, 1994), pp. 601-15.

Best Textbooks for a Free-Market University

Economics on Trial
THE FREEMAN

By Mark Skousen

“I don’t care who writes a nation’s laws … if I can write its economics textbooks.” –Paul A. Samuelson

When I majored in economics in the late 1960s and early 1970s, there were precious few textbooks with a strong free market bent. My introductory course required Paul A. Samuelson’s Economics, a strictly Keynesian work favoring heavy state intervention. My class in the history of economic thought relied on The Worldly Philosophers, by Robert Heilbroner, a socialist who said that Karl Marx was a good family man. My economic history book was History of the American Economy, by Ross M. Robertson, who wrote that high federal deficit spending got us out of the Great Depression. And this was at Brigham Young University, a conservative institution.

Fortunately, free-market economists have gradually filled a gap by teaching sound principles at every level of economics. There’s still much more to do, but the direction is clear–more textbook writers are producing books that teach market principles.

Here are my choices for the best textbooks in each category:

Introductory Texts: Significant Progress

There are quite a few introductory texts to choose from. Most of my colleagues select The Economic Way of Thinking, by Paul Heyne (University of Washington), now in its eighth edition (Prentice-Hall, 1997). It focuses primarily on the micro foundations of the economy and avoids defective macro concepts such as aggregate supply (AS) and aggregate demand (AD). Economics: Private and Public Choice, by James D. Gwartney (Florida State) and Richard L. Stroup (Montana State), now in its eighth edition (Dryden Press, 1997), is another favorite. It consistently applies market principles to a host of problems, including the environment, taxes, and government spending. It is the only textbook I know that spends several pages on Social Security privatization.

The only drawback is that it begins its macro section with AS-AD, a fundamentally Keynesian concept (the idea that the economy can be stuck indefinitely at equilibrium at less than full employment). Gwartney and Stroup should take a cue from Greg Mankiw’s popular new textbook, Economics (Dryden Press, 1997), which begins its macro section with the classical model (which he terms “the real economy in the long run”) and relegates the short-term
AS-AD model to the back of the book. AS-AD is introduced in chapter 8 of Gwartney and Stroup but chapter 31 in Mankiw!

Another free-market textbook that puts classical economics ahead of the Keynesian model is Principles of Economics (Addison-Wesley, 1997) by Roy J. Ruffin and Paul R. Gregory, both professors at the University of Houston. They introduce AS-AD in chapter 27. Economic growth (the long-run classical model) is emphasized over the ups and downs of the business cycle (short-run Keynesian model).

Ruffin and Gregory have many other advantages: They are the only major textbook to cite favorably the Austrian economists Ludwig von Mises, Friedrich Hayek, and Joseph Schumpeter throughout the textbook, including the first chapter. Most textbooks quote liberally from John Maynard Keynes, Milton Friedman, and Karl Marx, but Ruffin and Gregory break new ground here. The authors focus on four major historical events (“Defining Moments in Economics”) and their impact on economic thinking: the industrial revolution, the rise and fall of socialism, the Great Depression, and globalization. They also devote major sections on privatization, public choice, the gold standard, and economic success stories in Europe and Asia.

Overall, the works by Ruffin and Gregory, and Gwartney and Stroup, are quickly becoming known as the most innovative textbooks on the market today.

Breakthrough in American Economic History

Now let’s turn to economic history. Gene Smiley (Marquette) has written a first-rate textbook for American economic history classes: The American Economy in the Twentieth Century (South-Western Publishing, 1993). It is the only textbook I know that considers all the major conflicting theories for explaining the major events of the twentieth century. It even includes an Austrian interpretation of the Great Depression and the World War II economy. I just wished Smiley covered events prior to the twentieth century; his book is that good.

History of Economic Thought

Many economics teachers have wisely replaced Heilbroner’s Worldly Philosophers with New Ideas from Dead Economists, by Todd G. Buchholz (Plum, 1990). Among other things, Buchholz is much more critical of Marx and central planning. Unfortunately, Buchholz’s book says almost nothing of the Austrian school. One book that does is A History of Economic Theory and Method, by Robert B. Ekelund, Jr., and Robert F. Hebert (McGraw-Hill, 1990). Murray N. Rothbard originally intended to write a one-volume history of economics, but his work gradually developed into a series of tomes, only two of which were completed before his untimely death: Economic Thought Before Adam Smith and Classical Economics (Edward Elgar, 1995). Both books are more appropriate for advanced courses in economic theory and philosophy.

Other free-market books may be helpful in various courses. For money and banking classes, Murray Rothbard’s The Mystery of Banking (E. P. Dutton, 1983) is useful. Dominick T. Armentano’s Antitrust and Monopoly, second edition (Holmes & Meier, 1990) is an ideal supplement in classes on industrial organization. And, of course, there is a wide variety of books on free-market economics to supplement the textbooks–works by Ludwig von Mises, Friedrich Hayek, Israel Kirzner, Henry Hazlitt, George Reisman, Hans Sennholz, and a host of others.

In short, free-market economics is back in the college classroom.

Economics in One Page

Economics on Trial
THE FREEMAN
JANUARY 1997

Economics in One Page
By Mark Skousen

“What makes it [economics] most fascinating is that its fundamental principles are so simple that they can be written on one page, that anyone can understand them, and yet very few do.”1
–Milton Friedman

The above statement by Friedman got me thinking: Is it possible to summarize the basic principles of economics in a single page? After all, Henry Hazlitt gave us a masterful summary of sound principles in Economics in One Lesson. Could these concepts be reduced to a page?

Friedman himself did not attempt to make a list when he made this statement in a 1986 interview. After completing a preliminary one-page summary of economic principles, I sent him a copy. In his reply, he added a few of his own, but in no way endorses my attempt.

After making this list of basic principles (see the next page), I have to agree with Friedman and Hazlitt. The principles of economics are simple: Supply and demand. Opportunity cost. Comparative advantage. Profit and loss. Competition. Division of labor. And so on.

In fact, one professor even suggested to me that economics can be reduced to one word: “price.” Or maybe, I suggested alternatively, “cost.” Everything has a price; everything has a cost.

Additionally, sound economic policy is straightforward: Let the market, not the state, set wages and prices. Keep government’s hands off monetary policy. Taxes should be minimized. Government should do only those things private citizens can’t do for themselves. Government should live within its means. Rules and regulations should provide a level playing field. Tariffs and other barriers to trade should be eliminated as much as possible. In short, government governs best which governs least.

Unfortunately, economists sometimes forget these basic principles and often get caught up in the details of esoteric model-building, high theory, academic research, and mathematics. The dismal state of the profession was expressed recently by Arjo Klamer and David Colander, who, after reviewing graduate studies at major economics departments around the country, asked, “Why did we have this gut feeling that much of what went on there was a waste?” 2

On the following page is my attempt to summarize the basic principles of economics and sound economic policy. If anyone has any suggested improvements, I look forward to receiving them.

ECONOMICS IN ONE PAGE

1. Self-interest: “The desire of bettering our condition comes with us from the womb and never leaves till we go into the grave” (Adam Smith). No one spends someone else’s money as carefully as he spends his own.

2. Economic growth: The key to a higher standard of living is to expand savings, capital formation, education, and technology.

3. Trade: In all voluntary exchanges, where accurate information is known, both the buyer and seller gain; therefore, an increase in trade between individuals, groups, or nations benefits both parties.

4. Competition: Given the universal existence of limited resources and unlimited wants, competition exists in all societies and cannot be abolished by government edict.

5. Cooperation: Since most individuals are not self-sufficient, and almost all natural resources must be transformed in order to become usable, individuals–laborers, landlords, capitalists, and entrepreneurs–must work together to produce valuable goods and services.

6. Division of labor and comparative advantage: Differences in talents, intelligence, knowledge, and property lead to specialization and comparative advantage by each individual, firm, and nation.

7. Dispersion of knowledge: Information about market behavior is so diverse and ubiquitous that it cannot be captured and calculated by a central authority.

8. Profit and loss: Profit and loss are the market mechanisms that guide what should and should not be produced over the long run.

9. Opportunity cost: Given the limitations of time and resources, there are always trade-offs in life. If you want to do something, you must give up other things you may wish to do. The price you pay to engage in one activity is equal to the cost of other activities you have forgone.

10. Price theory: Prices are determined by the subjective valuations of buyers (demand) and sellers (supply), not by any objective cost of production; the higher the price, the smaller the quantity purchasers will be willing to buy and the larger the quantity sellers will be willing to offer for sale.

11. Causality: For every cause there is an effect. Actions taken by individuals, firms, and governments have an impact on other actors in the economy that may be predictable, although the level of predictability depends on the complexity of the actions involved.

12. Uncertainty: There is always a degree of risk and uncertainty about the future because people are often reevaluating, learning from their mistakes, and changing their minds, thus making it difficult to predict their behavior in the future.

13. Labor economics: Higher wages can only be achieved in the long run by greater productivity, i.e., applying more capital investment per worker; chronic unemployment is caused by government fixing wage rates above equilibrium market levels.

14. Government controls: Price-rent-wage controls may benefit some individuals and groups, but not society as a whole; ultimately, they create shortages, black markets, and a deterioration of quality and services. There is no such thing as a free lunch.

15. Money: Deliberate attempts to depreciate the nation’s currency, artificially lower interest rates, and engage in “easy money” policies inevitably lead to inflation, boom-bust cycles, and economic crisis. The market, not the state, should determine money and credit.

16. Public finance: In all public enterprises, in order to maintain a high degree of efficiency and good management, market principles should be adopted whenever possible: (1) Government should try to do only what private enterprise cannot do; government should not engage in businesses that private enterprise can do better; (2) government should live within its means; (3) cost-benefit analysis: marginal benefits should exceed marginal costs; and (4) the accountability principle: those who benefit from a service should pay for the service.

Endnotes:
1.
Quoted in interview, Lives of the Laureates, William Breit and Roger W. Spencer, eds. (Cambridge, Mass.: MIT Press, 1986), p.91.
2. Arjo Klamer and David Colander, The Making of an Economist (Boulder, Colo.: Westview Press, 1990), p. xiv. See also David Colander and Reuven Brenner, Educating Economists (Ann Arbor: University of Michigan Press, 1992).

Economics in One Page

Economics on Trial – THE FREEMAN – JANUARY 1997

By Mark Skousen

“What makes it [economics] most fascinating is that its fundamental principles are so simple that they can be written on one page, that anyone can understand them, and yet very few do.”1
–Milton Friedman

The above statement by Friedman got me thinking: Is it possible to summarize the basic principles of economics in a single page? After all, Henry Hazlitt gave us a masterful summary of sound principles in Economics in One Lesson. Could these concepts be reduced to a page?

Friedman himself did not attempt to make a list when he made this statement in a 1986 interview. After completing a preliminary one-page summary of economic principles, I sent him a copy. In his reply, he added a few of his own, but in no way endorses my attempt.

After making this list of basic principles (see the next page), I have to agree with Friedman and Hazlitt. The principles of economics are simple: Supply and demand. Opportunity cost. Comparative advantage. Profit and loss. Competition. Division of labor. And so on.

In fact, one professor even suggested to me that economics can be reduced to one word: “price.” Or maybe, I suggested alternatively, “cost.” Everything has a price; everything has a cost.

Additionally, sound economic policy is straightforward: Let the market, not the state, set wages and prices. Keep government’s hands off monetary policy. Taxes should be minimized. Government should do only those things private citizens can’t do for themselves. Government should live within its means. Rules and regulations should provide a level playing field. Tariffs and other barriers to trade should be eliminated as much as possible. In short, government governs best which governs least.

Unfortunately, economists sometimes forget these basic principles and often get caught up in the details of esoteric model-building, high theory, academic research, and mathematics. The dismal state of the profession was expressed recently by Arjo Klamer and David Colander, who, after reviewing graduate studies at major economics departments around the country, asked, “Why did we have this gut feeling that much of what went on there was a waste?” 2

On the following page is my attempt to summarize the basic principles of economics and sound economic policy. If anyone has any suggested improvements, I look forward to receiving them.

ECONOMICS IN ONE PAGE

1. Self-interest: “The desire of bettering our condition comes with us from the womb and never leaves till we go into the grave” (Adam Smith). No one spends someone else’s money as carefully as he spends his own.

2. Economic growth: The key to a higher standard of living is to expand savings, capital formation, education, and technology.

3. Trade: In all voluntary exchanges, where accurate information is known, both the buyer and seller gain; therefore, an increase in trade between individuals, groups, or nations benefits both parties.

4. Competition: Given the universal existence of limited resources and unlimited wants, competition exists in all societies and cannot be abolished by government edict.

5. Cooperation: Since most individuals are not self-sufficient, and almost all natural resources must be transformed in order to become usable, individuals–laborers, landlords, capitalists, and entrepreneurs–must work together to produce valuable goods and services.

6. Division of labor and comparative advantage: Differences in talents, intelligence, knowledge, and property lead to specialization and comparative advantage by each individual, firm, and nation.

7. Dispersion of knowledge: Information about market behavior is so diverse and ubiquitous that it cannot be captured and calculated by a central authority.

8. Profit and loss: Profit and loss are the market mechanisms that guide what should and should not be produced over the long run.

9. Opportunity cost: Given the limitations of time and resources, there are always trade-offs in life. If you want to do something, you must give up other things you may wish to do. The price you pay to engage in one activity is equal to the cost of other activities you have forgone.

10. Price theory: Prices are determined by the subjective valuations of buyers (demand) and sellers (supply), not by any objective cost of production; the higher the price, the smaller the quantity purchasers will be willing to buy and the larger the quantity sellers will be willing to offer for sale.

11. Causality: For every cause there is an effect. Actions taken by individuals, firms, and governments have an impact on other actors in the economy that may be predictable, although the level of predictability depends on the complexity of the actions involved.

12. Uncertainty: There is always a degree of risk and uncertainty about the future because people are often reevaluating, learning from their mistakes, and changing their minds, thus making it difficult to predict their behavior in the future.

13. Labor economics: Higher wages can only be achieved in the long run by greater productivity, i.e., applying more capital investment per worker; chronic unemployment is caused by government fixing wage rates above equilibrium market levels.

14. Government controls: Price-rent-wage controls may benefit some individuals and groups, but not society as a whole; ultimately, they create shortages, black markets, and a deterioration of quality and services. There is no such thing as a free lunch.

15. Money: Deliberate attempts to depreciate the nation’s currency, artificially lower interest rates, and engage in “easy money” policies inevitably lead to inflation, boom-bust cycles, and economic crisis. The market, not the state, should determine money and credit.

16. Public finance: In all public enterprises, in order to maintain a high degree of efficiency and good management, market principles should be adopted whenever possible: (1) Government should try to do only what private enterprise cannot do; government should not engage in businesses that private enterprise can do better; (2) government should live within its means; (3) cost-benefit analysis: marginal benefits should exceed marginal costs; and (4) the accountability principle: those who benefit from a service should pay for the service.

Endnotes:
1. Quoted in interview, Lives of the Laureates, William Breit and Roger W. Spencer, eds. (Cambridge, Mass.: MIT Press, 1986), p.91.
2. Arjo Klamer and David Colander, The Making of an Economist (Boulder, Colo.: Westview Press, 1990), p. xiv. See also David Colander and Reuven Brenner, Educating Economists (Ann Arbor: University of Michigan Press, 1992).