From the Samuelson Sampler to Sumner´s Studies

Robert Skidelsky has an interesting essay at Project Syndicate: “The fall of the house of Samuelson“:

To read The Samuelson Sampler in the shadow of the Great Recession is to gain a glimpse into the mindset of a bygone era. The sample is of the late Paul Samuelson’s weekly columns for the magazine Newsweek from 1966-1973.

Samuelson, a Nobel laureate, was the doyen of American economists: his famous textbook, Economics went through 14 editions in its author’s lifetime, introducing future economists worldwide to the rudiments of their craft. If not the sole originator, he was the great popularizer of the “neoclassical synthesis” – the mix of neoclassical and Keynesian economics that defined the mainstream of the field for 50 years.

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Reading The Samuelson Sampler, it is extraordinary to realize just how confident economists of his generation were that the New Economics (as the Keynesian approach was called in America) had solved the problem of depression and mass unemployment. As Samuelson put it in his 1973 introduction, “the specter of a repetition of the depression of the 1930s has been reduced to a negligible probability.”

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Yes, there would still be small fluctuations; but, as he wrote in 1966, “Great Depressions – cumulative slumps that feed on themselves – are indeed extinct.” The reason was that governments now had the tools, especially discretionary fiscal policy, to check any incipient downturn.

[Note: In 1966 Samuelson still believed what he wrote in the first edition of his textbook (1948, pgs 353-4): “Today few economists regard Federal Reserve monetary policy as a panacea for controlling the business cycle. Purely monetary factors are considered to be as much symptoms as causes, albeit symptoms with aggravating effects that should not be completely neglected”]
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But, contrary to what Samuelson believed, governments are haunted by fears of large fiscal deficits. With few exceptions, they have not been prepared to use fiscal policy to jolt their economies out of post-crisis stagnation. Instead, they have relied on monetary expansion, which is politically more acceptable, but also much weaker in its effects, as it is undermined – just as Keynes predicted – by “several slips between the cup and the lip.”

[Note: Two decades later, in his 1985 textbook edition Samuelson had “turned 180 degrees: “Money is the most powerful and useful tool that macroeconomic policymakers  have, and the Fed is the most important factor in making policy.”]

More important, governments have abandoned the goal of full employment; as a result, all of those bits of interventionist policy previously thought necessary to keep economic activity on an even keel have gone by the wayside as well. The New Economics may be temporarily resurrected to deal with extreme situations, but policymakers no longer take precautions to prevent extreme situations from arising. How to do this, while preserving freedom and efficiency, is now the “unsolved frontier in modern economics.”

[Note: To “solve” the problem is the raison d´étre of the new Mercatus Program on Monetary Policy]

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