Paul Samuelson Finally Gets It Right - Almost; M. Skousen

Paul Samuelson Finally Gets It Right-Almost "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) M ainstream economists deny that they can be held responsible for today's economic problems because, they say, po litical leaders are ignoring their sound ad vice. 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 "neoclassical" estab lishment. His textbook, Economics, now in its 14th edition, has sold over four million copies and been translated into thirty lan guages. 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 This is the first of Mark Skousen's monthly "Correction, Please!" columns for The Free man. Professor Skousen is editor-in-chief of Forecasts and Strategies, one of the largest investment newsletters in the country, adjunct professor of economics and finance at Rollins College in Winter Park, Florida, and author of 14 books, including Economics on Trial: Lies, Myths and Realities. For information on his newsletter and books, call Phillips Publishing, Inc., at (800) 777-5005 or (301) 340-2100.

by Mark Skousen 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 discov ery. 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 econ omists over the past fifty years. Govern ments around the world have been espe cially enamored with Samuelson's version of Keynesian economics, which gives the oretical 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 postwar period, where high savings and high economic growth went hand in hand. 145 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 I focused on this bizarre concept as the central flaw of Keynesian economics.) Shockingly, Samuelson replaces the' 'para dox 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 Amer ica's economic illsis simple: Save and invest more! Rejecting his theme of the past, he comments, "Our society has been on a consumption binge."

Second, Samuelson finallyadmits 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 moun tains 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 begrudg ingly acknowledges that Soviet-style social ism has failed miserably. In his latest edi tion, 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 repres sion." " 146 THE FREEMAN • MARCH 1994 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 pro gram stimulates economic growth more than a cut in taxes. Since when is it more pro ductive 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 eco nomics 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 profes sor ignores all the evidence supporting the "supply-side" case that lower tax rates have significantly boosted economic activ ity 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 Com munism 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 mis takes 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 Sam uelson'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 signifi cant 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, "Almost Thou Persuadeth Me . ..

PAUL SAMUELSON FINALLY GETS IT RIGHT-ALMOST 147 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. Last year, Samuelson finallyresponded to my expose, Economics on Trial, by writing me a letter: "I am putting your book on a high shelf so that Sadie our retriever will do it no harm." Given the significant changes NOW ON TAPEI made in Samuelson's new edition, I felt that my book had achieved a certain degree of success. However, it would be premature to ., raise the victory flag or for Samuelson to take my book down and let Sadie the dog have at it. There's still a lot of bad econom ics being promoted in the media and a lot of good economics beingoverlooked. I suspect this column, "Correction, Please!" has a long run ahead of it. D Politicized Medicine The right to health care services and benefits, which so many are proclaiming today, is merely the right to seize income and wealth from other individuals through the body politic. Further government intervention into health care will only make matters worse. For the busy physician or commuter, PoliticizedMedicineis now avail able on six audio cassettes professionally prepared for FEE by one of America's leading producers of audio books.

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