This is the first of Mark Skousen’s monthly “Correction, Please!” columns for The Freeman.
“When he talks, Mr. Samuelson sometimes seems disappointed that the world’s leaders did not learn enough from his textbook.”
—The New York Times, October 31, 1993
Mainstream economists deny that they can be held responsible for today’s economic problems because, they say, political leaders are ignoring their sound advice. If only they had taken Econ 101 from me, proclaims Paul Samuelson.
Au contraire! The world’s leaders have learned economics all too well from Paul Samuelson and the “neo-classical” establishment. His textbook, Economics, now in its 14th edition, has sold over four million copies and been translated into thirty languages. It has been the most influential textbook on economic theory and policy for the past fifty years. I and countless others (including today’s political leaders) used it as undergraduates. And even though it no longer dominates the textbook field, today’s leading college textbook by McConnell and Brue is considered a Samuelson clone.
What has the world been taught by the MIT professor and Nobel Prize-winning economist? In writing my book, Economics on Trial (Irwin Professional Publishing, 1993), I painstakingly reviewed the top-ten textbooks used in colleges today, including Samuelson’s, and made an amazing discovery. Many of the problems we face today, including high deficits, inflation, excessive tax rates, low savings and capital growth, high consumer debt, the welfare state, and a boom-bust business cycle can be traced back directly to fundamental errors taught by Samuelson and other mainstream economists over the past fifty years. Governments around the world have been especially enamored with Samuelson’s version of Keynesian economics, which gives theoretical support for inflation, progressive taxation, deficit financing, and the welfare state.
Bad Economics Taught in the Classroom
Remember, it was Samuelson’s textbook which popularized the “paradox of thrift,” the perverse idea that excessive saving could cause a recession or worse. Tell that to today’s Chinese, who are enjoying the fastest economic growth rate in decades, or to the Japanese and Germans during most of the post-war period, where high savings and high economic growth went hand in hand.
It was Samuelson who convinced the world that big government was a “built-in stabilizer” in the economy. Never mind that it also means built-in bureaucratic waste and inefficiency.
It was Samuelson who introduced the “balanced budget multiplier,” the strange notion that starting a new government program stimulates economic growth more than a cut in taxes. Since when is it more productive to transfer wealth from the private sector to the public sector? Needless to say, no one learns about the excited new trend toward privatization and supply-side economics from Samuelson’s textbook.
It was Samuelson who theorized that high progressive taxation would have little or no effect on business people, entrepreneurs, or high-paying executives. “[They] will work as hard for $150,000 as for $200,000,” he asserted. The Nobel Prize-winning professor ignores all the evidence supporting the “supply-side” case that lower tax rates have significantly boosted economic activity in dozens of nations.
Finally, it was Samuelson who naively claimed as late as 1989, right before the Berlin Wall was torn down and Soviet Communism collapsed, “The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.” (Samuelson, 13th ed., p. 837)
You won’t find these embarrassing mistakes in The New York Times hagiographic review of Samuelson’s career.
Samuelson’s Remarkable About-Face
But the Times also missed out on one of the most important paradigm shifts in Samuelson’s thinking. The leading Keynesian spokesman has had a dramatic change of heart in his latest (14th) edition of his famous textbook. He makes the following significant changes:
First, for the first time in over forty years of publishing, he eliminates his infamous anti-saving doctrine, “the paradox of thrift.” (In chapter 5 of Economics on Trial, I focused on this bizarre concept as the central flaw of Keynesian economics.) Shockingly, Samuelson replaces the “paradox of thrift” with a whole new section on the benefits of saving and investing, and why the saving rate in the United States is too low, a complete reversal of his long-standing belief. Sounding more like Mises or Hayek, Samuelson’s prescription for easing America’s economic ills is simple: Save and invest more! Rejecting his theme of the past, he comments, “Our society has been on a consumption binge.”
Second, Samuelson finally admits that the national debt can be a serious drain on the economy. In the new edition, the leading apologist for deficit spending confesses that “a large public debt can be detrimental to long-run economic growth.” He asserts that “wild” government spending and mountains of debt are eating away at the nation. The huge deficit means overconsumption and underinvestment and hence less growth. The deficit has caused the crowding out of private capital, causing our “living standards [to] decline.”
Third, the 78-year-old professor begrudgingly acknowledges that Soviet-style socialism has failed miserably. In his latest edition, Samuelson places question marks after Soviet “growth” data. The goods that were made under Soviet central command, he now says, were produced at “great human sacrifice, loss of life and political repression.”
“Almost Thou Persuadeth Me . . .”
Paul Samuelson a free-market convert? The next thing you know he’ll be writing articles for The Freeman! It all sounds too good to be true. But, alas, to paraphrase King Agrippa, he is more likely to respond, “Almost thou persuadeth me to be a free marketeer!”
“Almost” is the key word, for Samuelson is still not baptized and cleansed in the pure waters of liberty. While he favors a capital gains tax cut, he recommends still higher progressive income taxes to reduce the federal deficit. “America is not remotely near the limits of taxation, and one more pfennig is not going to break the camel’s back.” The fallacy of progressive taxation will have to wait for another column.