Paul Samuelson

"Herein lies the secret of the General Theory. It is a badly written book, poorly organized; any layman who, beguiled by the author's previous reputation, bought the book was cheated of his five shillings. It is not well suited for classroom use. It is arrogant, bad-tempered, polemical, and not overly generous in its acknowledgments. It abounds in mares' nests or confusions. In it the Keynesian system stands out indistinctly, as if the author were hardly aware of its existence or cognizant of its properties; and certainly he is at his worst when expounding its relations to its predecessors. Flashes of insight and intuition intersperse tedious algebra. An awkward definition suddenly gives way to an unforgettable cadenza. When finally mastered, its analysis is found to be obvious and at the same time new. In short, it is a work of genius."

"Science is not art. Yet, despite the lack of complete identity between art and science, there is much in common among different creative processes."

"Just as Hegel is said to have understood his philosophy for the first time when he read its French translation, Vilfredo Pareto could have learned what it was he meant exactly to say when he read Bergson's 1938 classic."

"I was lucky to enter economics in 1932. Analytical economics was poised for its take-off. I faced a lovely vacuum that young economists today can hardly imagine. So much remained to be done. Everything was still in an imperfect state. It was like fishing in a virgin lake: a whopper at every cast, but so many lovely new specimens that the palate never cloyed."

"The existence of analogies between central features of various theories implies the existence of a general theory which underlies the particular theories and unifies them with respect to those central features. This fundamental principle of generalization by abstraction was enunicated by the eminent American mathematician E. H. Moore more than thirty years ago. It is the purpose of the pages that follow to work out its implication for theoretical and applied economics."

"The general method involved may be very simply stated. In cases where the equilibrium values of our variables can be regarded as the solutions of an extremum (maximum or minimum) problem, it is often possible regardless of the number of variables involved to determine unambiguously the qualitative behavior of our solution values in respect to changes of parameters."

"In the preface to the reissue of Risk, Uncertainty and Profit, Frank Knight makes the penetrating observation that under the conditions envisaged above the velocity of circulation would become infinite and so would the price level. This is perhaps an over-dramatic way of saying that nobody would hold money, and it would become a free good to go into the category of shell and other things which once served as money. We should expect too that it would not only pass out of circulation, but it would cease to be used as a conventional numeraire in terms of which prices are expressed. Interest bearing money would emerge. Of course, the above does not happen in real life, precisely because uncertainty, contingency needs, non-synchronization of revenues and outlay, transaction frictions, etc., etc., all are with us. But the abstract special case analyzed above should warn us against the facile assumption that the average levels of the structure of interest rates are determined solely or primarily by these differential factors. At times they are primary, and at other times, such as the twenties in this country, they may not be. As a generalization I should hazard the hypothesis that they are likely to be of great importance in an economy in which there is a “quasi-zero" rate of interest. I think by this hypothesis one can explain many of the anomalies of the United States money market in the thirties."

"Figure 12-6 pulls together in a simplified way the main elements of income determination. Without saving and investment, there would be a circular flow of income between business and the public: above, business pays out wages, interest, rents, and profits to the public in return for the services of labor and property; and below, the public pays consumption dollars to business in return for goods and services. Realistically, we must recognize that the public will wish to save some of its income, as shown at the spigot Z. Hence, businesses cannot expect their consumption sales to be as large as the total of wages, interest, rents, and profits."

"I think the acceptance of "mathematical expectation of utility" or its "arithmetic mean" was an unthinking carryover from the mathematical theory of the law of large numbers as applied to asymptotic processes."

"Needless to say, the partial equilibrium assumptions involved in the domestic demand schedules and the neglect of aggregative relations constitute a serious defect of such a model except as a rough first approximation to the answers in especially favorable cases. Good economic theory will recognize these limitations rather than be predisposed to neglect them."

"Dynamic process analysis also liberates economists from the necessity of having separate theories of the “turning-points” in addition to theories of cumulative upward and downward swings. Even a simple theory of inventory cycles, or acceleration-multipliers, can explain all four phases of an idealized cycle. At its best, dynamic analysis can enrich our understanding of possibilities without leading to credulity in new, over-narrow, monistic dogmas concerning the cyclical process."

"Econometrics may be defined as the quantitative analysis of actual economic phenomena based on the concurrent development of theory and observation, related by appropriate methods of inference."

"Marx did do original work in analyzing patterns of circular inter-dependency among industries. Such work gains few converts and is not very helpful in promoting revolution or counterreactions. But like all pioneering effort it deserves the commendation of later craftmen, and it deserves further development. There is half-truth in Schumpeter's adaption of Clemenceau: "Marxian economics is too hard to be left to the Marxians." Only half, because the present paper is seen to involve little worse than school algebra and to be well within the frontier of modern economic theory."

"Remember that our goal is not the abolition of all business cycles--even if that were feasible, it might not be desirable. Instead we aim to wopie out persistent slump or unsought inflation. If only capitalism had succeeded in the past in this more modest goal, how different would have been the course of human history!"

"As old problems are conquered, we expect to turn up new problems. A discipline lives on its unsolvved problems; and so, for better or worse, economics is likely to be a lively subject for as many years ahead as man can see."

"Perhaps all we can expect of a public body, charged with grave responsibilities, is that it should in its public utterances make out cases stronger than it really believes in. Or perhaps, because its opposition deals in overly strong criticisms, it may for political reasons and for understandable psychological reasons provide overly strong rebuttals. Or perhaps it is the case that the authorities believe that there are no sensible reasons to doubt the following view: The way to maximize growth, to maximize the long-run degree of achieved employment, to maximize equity among the various social groups that could be affected by price level changes is, in the absence of important cost pressures and even more in their presence, for the Federal Reserve to insist upon the attainment of essentially stable long-run price levels."

"In the absence of perfect certainty, the futures prices needed for making the requisite wealth-like comparisons are simply unavailable. So it would be difficult to make operational the theorist’s desired measures. But operational practicality aside, if the theorist specifies in detail the dynamic technology of his model, he will meet none of the pitfalls that come from an attempt to summarize his model by various crude aggregations. The contradictions that result from over-crude aggregation should never be confused with the technical relations that hold at the firm and family level or with the market capitalizations which hold in competitive security and asset markets."

"Economic theory is a mistress of even too tempting grace."

"In every actuarial situation of mathematical probability, no matter how large the numbers in the sample, we are left with a finite sample: in the appropriate limit law of probability there will necessarily be left an epsilon of uncertainty even in so-called risk situations."

"I will tell you a secret. Economists are supposed to be dry-as-dust, dismal fellows. This is quite wrong, the reverse of the truth. Scratch a hard-boiled economist of the libertarian persuasion and you find a Don Quixote underneath. No lovesick maiden ever pined for the days of medieval chivalry with such sentimental impracticality as some economists long for the return to a Victorian marketplace that is completely free. Completely free? Well, almost so. There must, of course, be the constable to ensure that voluntary contracts are enforced and to protect the property rights of each molecule which is an island unto itself."

"And make no mistake about it: Smith was right. Most of the interventions into economic life by the State were then harmful both to prosperity and freedom. What Smith said needed to be said. In fact, much of what Smith said still needs to be said: good intentions by government are not enough; acts do have consequences that had better be taken into account if good is to follow."

"Complete freedom is not definable once two wills exist in the same interdependent universe. We can sometimes find two situations in which Choice A is more free than Choice B in apparently every respect and at least as good as B in every other relevant sense. In such singular cases I will certainly throw in my lot with the exponents of individualism. But few situations are really of this simple type; and these few are hardly worth talking about, because they will already have been disposed of so easily. In most actual situations we come to a point at which choices between goals must be made: Do you want this kind of freedom and this kind of hunger, or that kind of freedom and that kind of hunger? I use these terms in a quasi-algebraic sense, but actually what is called "f reedom" is really a vector of almost infinite components rather than a one-dimensional thing that can be given a simple ordering."

"Libertarians fail to realize that the price system is, and ought to be, a method of coercion. Nature is not so bountiful as to give each of us all the goods he desires. We have, by the nature of things, to be coerced out of such an expectation. That is why we have policemen and courts. That is why we charge prices which are high enough relative to limited money, to limit consumption."

"Before Rousseau, people made the mistake of treating children as merely adults shrunk small. The Bible and Freud go farther and tell us that an adult is merely a child grown large. Man is imperfect, and so is woman. And so is We, Incorporated, who paternalistically put restraints upon ourselves. Not even an individual's perfections are his alone; like his imperfections, they are group-made. We entered a world we never made, and leave one we did not unmake."

"Carry the notion of the individual to its limit and you get a monstrosity, just as you do if you carry the notion of a group to its limit."

"The stock market has forecast nine of the last five recessions."

"For better or worse, the picture album whose pages I have been turning is that of the main stream of international economics. Many of its advances lie in what the historian of science Thomas Kuhn would call 'normal' rather than 'revolutionary' science. It is hard to imagine having had too good an education and too good a research environment. And yet as we grapple with the ever-changing problems of the modern world that are arising in the deliberations of this World Congress, we know we must put aside the pictures and souvenirs of the past, and we must turn a youthful eye out to meet the emerging universe."

"The very name of my subject, economics, suggests economizing or maximizing. But Political Economy has gone a long way beyond home economics. Indeed, it is only in the last third of the century, within my own lifetime as a scholar, that economic theory has had many pretensions to being itself useful to the practical businessman or bureaucrat. I seem to recall that a great economist of the last generation, A. C. Pigou of Cambridge University, once asked the rhetorical question, “Who would ever think of employing an economist to run a brewery?” Well, today, under the guise of operational research and managerial economics, the fanciest of our economic tools are being utilized in enterprises both public and private."

"With the assistance of mathematics, I can see a property of the ninety-nine dimensional surfaces hidden from the naked eye. If an increase in the price of fertilizer alone always increases the amount the firm buys of caviar, from that fact alone I can predict the answer to the following experiment which I have never seen performed and upon which I have no observations: an increase in the price of caviar alone will increase the amount the firm buys of fertilizer. In thermodynamics such reciprocity or integrability conditions are known as Maxwell Conditions; in economics they are known as Hotelling conditions in honor of Harold Hotelling’s 1932 work."

"There is really nothing more pathetic than to have an economist or a retired engineer try to force analogies between the concepts of physics and the concepts of economics. How many dreary papers have I had to referee in which the author is looking for something that corresponds to entropy or to one or another form of energy. Nonsensical laws, such as the law of conservation of purchasing power, represent spurious social science imitations of the important physical law of the conservation of energy; and when an economist makes reference to a Heisenberg Principle of indeterminacy in the social world, at best this must be regarded as a figure of speech or a play on words, rather than a valid application of the relations of quantum mechanics."

"An American economist of two generations ago, H. J. Davenport, who was the best friend Thorstein Veblen ever had (Veblen actually lived for a time in Davenport’s coal cellar) once said: “There is no reason why theoretical economics should be a monopoly of the reactionaries.” All my life I have tried to take this warning to heart, and I dare call it to your favorable attention."

"I used to joke to Bob Solow that the distance between me and Joan Robinson is less than the distance between Joan Robinson and me. His reply was, “You’ll never convince her of that.” Still one lives in hope."

"Inside every classical economist is a modem economist trying to get out. In rereading the Wealth of Nation is, it seems to me that with a little midwifery sleight of hand, one can extract from Adam Smith a valuable model that vindicates him from criticisms of Ricardo and Marx and from the general supercilious discounting of Smith as an unoriginal theorist who is logically fuzzy and eclectically empty."

"The small investor can now, for the first time, invest in common stocks and bonds in an efficient and convenient way. I am talking about people who don't have $ 10 million; who don't want to take unnecessary gambles; who operate under no Napoleonic delusions of being able to pick winners that will quadruple their money; who begrudge every minute devoted to keeping tax and personal records, and wish to think about their investments only at New Year's and when preparing their tax returns. Disinterested experts in finance prescribe for such people as follows: 1. Depending on your tolerance for the irreducible risks involved in owning common stocks, decide what portion of your nest egg you wish to keep in common stocks: 0, 100, 30 or 70 per cent. No one can decide this for you. You must decide at what point you'll sleep best at night, and whether eventually stocks will provide a better inflation hedge than they have done these last dozen years. ( Many will settle for 50-50. ) 2. For what common stocks you do decide to own, follow the golden rules of prudence : Diversify broadly, hold down costly turnover, keep all fees (and book- keeping !) minimal. 3. The same rules (diversification, etc.) apply to your holdings of tax-free and ordinary bonds. If you have taxable income of $ 20,000 or more, probably the bulk of your bonds should be " municipals " -i.e., state and local issues that escape all Federal tax because Congress refuses to close this loophole. Less affluent people will probably do as well in local savings accounts as in anything else. Now you know what to do. How do you do it?"

"The recent market run-up that appreciated run-of-the-mill shares also chanced to send up those token gold holdings. Pure luck, undeserved and unlikely to reoccur. Good questions outrank easy answers."

"Mathematics is the handmaiden of the sciences. But mathematics also has a life of her own, gaining as much in her own development and fulfillment from the sciences as she gives to them. To help describe how apples and planets fall, and how ropes hang, Newton and Leibniz developed the calculus. By serendipity, that mode of analysis permitted economists to perfect the theory of general equilibrium two centuries later."

"Yes, Keynes was a genius. Yes, some of his ideas were inchoate and would not have lent themselves usefully to diagramming and symbolic manipulation. Yes, by the time of the Radcliffe committee many of his British admirers were still frozen in the Model T version of his system. And yes, Keynes resented excessive simplifying of his paradigms. Nevertheless, in science it is not the incoherent, inchoate and ineffable that has a cash value. If that were so, Goethe would be a greater scientist than either Einstein or Newton. What matters is the Kuhnian paradigm that people who are not geniuses can use. That which so many scholars independently agreed upon cannot be independent of the text that Keynes wrote down for them to read. What is remarkable is not the cogency of the case that Leijonhufvud manages to muster, which is rather flimsy, but rather how strong was the latent demand in the 1970s for a work to debunk Keynesianism. Harry Johnson put the same point in a different way."

"An optimist who lived at a time when the world economy was running so badly that clever gimmicks could still work wonders, Keynes's object was to save capitalism from itself. In the end, his prescription in its most simple form self-destructed, as the obligation to run a full-employment humanitarian state caused modern economies to succumb to the new disease of stagflation - high inflation along with joblessness and excess capacity. Economists of the most diverse views are constantly asking themselves: What would Keynes advise if he were now alive. And usually - whether the economist is a free-marketeer like Friederick von Hayek or one with strong interventionist leanings like John Kenneth Galbraith - they pay Keynes the supreme compliment of believing that if brought back to earth, Maynard would be favoring just what each of them happens to favor. One also might wonder what Lord Keynes would prescribe for the huge structural deficit of Ronald Reagan, with the crowding out of investment that it implies once the American economy reattains high levels of employment."

"After 1929 it was the sturdy middle classes, and not just the lumpen proletariat, who were down and out. It was not all that unfashionable or disreputable to be bankrupt. By the last Hoover years, the states and localities had run out of money for relief. In middle-class neighborhoods like mine, you constantly had children at the door, asking by mouth or with a note for a dime, a quarter, or a potato: saying, in a believable fashion, we are starving."

"I can claim that in talking about modern economics I am talking about me. My finger has been in every pie. I once claimed to be the last generalist in economics, writing about and teaching such diverse subjects as international trade and econometrics, economic theory and business cycles, demography and labor economics, finance and monopolistic competition, history of doctrines and locational economics."

"I reproach myself for a gross error. But I would reproach myself more if I had persisted in an error after observations revealed it clearly to be that. I made a deal of money in the late 1940s on the bull side, ignoring Satchel Paige’s advice to Lot’s wife, “Never look back.” Rather I would advocate Samuelson’s Law: “Always look back. You may learn something from your residuals. Usually one’s forecasts are not so good as one remembers them; the difference may be instructive.” The dictum “If you must forecast, forecast often,” is neither a joke nor a confession of impotence. It is a recognition of the primacy of brute fact over pretty theory. That part of the future that cannot be related to the present’s past is precisely what science cannot hope to capture. Fortunately, there is plenty of work for science to do, plenty of scientific tasks not yet done."

"My mind is ever toying with economic ideas and relationships. Great novelists and poets have reported occasional abandonment by their muse. The well runs dry, permanently or on occasion. Mine has been a better luck. As I have written elsewhere, there is a vast inventory of topics and problems floating in the back of my mind. More perhaps than I shall ever have occasion to write up for publication. A result that I notice in statistical mechanics may someday help resolve a problem in finance."

"The museums of science are replete with fossils of species that could not last the course. The leading-coinciding-lagging indicators might be buried forever in old footnotes. But occasionally Sleeping Beauty is brought back to life by the kiss of a new Prince Charming."

"What is truly discouraging — or reassuring? — is the considerable evidence that the universe of those who seek to be "timers," and vary the fractional shares of their portfolios committed to common stocks in the hope of enlarging average long-term total return, in fact fail to achieve on the average any plus gain in comparison with simply buying and holding a fixed fraction of common stocks."

"The goals, methods, and strategies of what borders on science is different from the gyration of fashion and the incommensurability of arts and music in different epochs. Because this different process of cumulative science is imperfect, historians and philosophers of science intermittently downplay this difference."

"The moral I take to be this. The virtues of alternative modern paradigms in science have to be evaluated in modern times and with modern methods. Until one schemata comes to dominate the other, Whig Historians will have interest in a diversified portfolio of archeological researches. As one paradigm loses out in the Darwinian jungle of science, what survives competitively in the agenda for dogmengeschicte cannot help but be altered."

"Let us summarise the lessons learned. 1. Though achieving private-property perfect competition will achieve productive efficiency, moving toward it may have made matters worse. And, in the land-enclosure problem, the transition must make things worse before they get better when lands are virtually homogeneous. 2. In the realistic case where lands differ in quality, partial privatisation may also worsen efficiency - even though ultimately efficiency will be enhanced by the deregulation process. 3. However, in the realistic case, an optimal choice of lands to be first privatised could be first to improve the commons. The rule for a 'perfectly-discriminating deregulator' to follow is evidently this: privatise those lands first whose 'imputed labour share'- as measured by the MP/AP fraction- is the lowest. That way, the first bit of deregulation can do more good than harm, as labour is transferred away from low marginal-product locations; that way, if there is inevitable transition harm, it can be kept to a minimum. There would seem to be a presumption that things get worse before they get better in such a programme of moving toward laissez-faire."

"There were many Moliére characters speaking Keynesian prose in the depression years before 1936. What Keynes’s General Theory gave us, which Ohlin’s inspired journalisms could not at all offer, was a new manageable paradigm that we could explicitly express — and test, and criticize, and improve, ... , and be bewitched by. Long before Kuhn, Schumpeter used to insist that old theories are not killed by simple facts: It takes a new theory to kill an old one. The mind cannot operate in terms of a melange of sensations. It needs a road map to perceive patterns of regularity and persistence."

"As a theorist I have great advantages. All I need is a pencil (now a ball pen) and an empty pad of paper. There are analysts who sit and look vacantly out the window, but after the age of 20 I was not one of them. I ought to envy the new generation who have grown up with the computer, but I don’t. None of them known to me sits idly at the console, improvising and experimenting in the way that a composer does at the piano. That ought to become increasingly possible. But up to now, in my observation, the computer is largely a black box into which researchers feed raw input and out of from which they draw various summarizing measures and simulations. Not having access to look around in the box, the investigator has less intuitive familiarity with the data than used to be the case in the bad old days."

"The General Theory caught most economists under the age of 35 with the unexpected virulence of a disease first attacking and decimating an isolated tribe of south sea islanders. Economists beyond 50 turned out to be quite immune to the ailment. With time, most economists in between began to run the fever, often without knowing or admitting their condition."