Review of the Book
Economics, An Introductory Analysis
by Paul A. Samuelson
Edward C. Harwood
[This review appeared in Economic News, published by
the American Institute for Economic Research, Great Barrington, MA,
Vol.IV, No. 8, October 1961]
An excellent binding and good reproduction of type and charts combine
to give this book the appearance of a scientific treatise.
Unfortunately, readers who therefore assume that it offers the last
word in scientific economic analysis will be seriously disappointed.
Still included in this fifth edition are major flaws that were among
the reasons for my comment on an earlier edition, "
such a book should have the implied stamp of approval of the Nation's
leading scientific institution is a tragedy; in a sense it is a
betrayal of intelligence in the modern world."
Before the reasons for such adverse criticism are described,
Professor Samuelson should be commended for the marked improvements in
this edition. In contrast with the earliest edition we reviewed, this
volume does include some charts that show the long-term economic
growth of the United States. Therefore, student readers at least have
evidence that economic growth proceeded rapidly for decades before the
advocates of creeping inflation developed their modified version of
the Keynesian spend-for-prosperity notions.
That the charts do not include years prior to 1890 is unfortunate.
From 1875 to 1890, gradual deflation of the Civil War and post-Civil
War inflation was reflected in a 40-percent decline of commodity
prices; yet the Nation1s economic growth persisted at' a rate not
subsequently equaled. With that picture in front of them, even
sophomores might question Professor Samuelson's apparent predilection
for creeping inflation.
Professor Samuelson has altered his opinion markedly in recent years.
Earlier he had said, "
such a mild steady inflation in rise
in prices of 5 percent per year need not cause too great concern"
(p.302, second edition). In his fourth edition he suggested that
creeping inflation be ". . . held down to, say, 2 percent per
year, ..."(p.270), and in this fifth edition he says "Price
increases that could be held down below 2 percent per year are
one thing,"(p. 305, italics supplied) as though that would be
negligible. To the casual reader the difference between 5 percent and
2 percent may not seem important, but from the viewpoint of anyone who
would live under those conditions the difference is striking. At 5
percent per year, a dollar's worth of life insurance or funds for a
retirement pension would decrease in 60 years to a little more than 5
cents worth, a loss of nearly 95 percent of one's life insurance and
pension funds; but at 2 percent per year, the loss would be much less,
only about 65 percent.
When one views the matter considering the amount that would be left
after prolonged creeping inflation, the significance of the
Professor's progress is seen to be even more striking. Now that he
approves of somewhat less than 2 percent rather than 5 percent per
year, he is implying, in effect, that the buyer of life insurance
should be permitted to have at least 35 cents left of his dollar
instead of only 5 cents. Surely this sevenfold increase in what is
left for the victim of creeping inflation is a gratifying change.
Professor Samuelson may yet come to believe that life insurance buyers
should not have any of their savings "embezzled" by the
subtle processes of inflation.
Professor Samuelson offers no purportedly scientific or economic
explanation for the change from 5 to less than 2 percent. The reader
of his successive editions can conclude only that Professor Samuelson
has had the benefit of some secular revelation on this matter.
Although I did not find in this volume Professor Samuelson's
justification for any creeping inflation, he perhaps would argue as
did Professor Slichter of Harvard that "
is part of the price we must pay to achieve maximum growth."
American economic developments from 1875 to 1890 suggest that such an
assertion was not true then, and no one has provided scientifically
based proof that it is true today. West Germany's experience since
regaining the prewar level of output in 1950 also casts doubt on the
creeping inflation theory. From 1950 to 1960 industrial production in
West Germany increased 150 percent; but in Sweden the increase was
only 38 percent, although the rate' of creeping inflation there
(measured by the rise in the cost of living) was nearly 6 times that
in West Germany. The latter nation increased its industrial production
2 1/2 times accompanied by a negligible amount of creeping inflation
while Sweden was increasing its industrial production only a little
more than one-third accompanied by creeping inflation at the rate of
57 percent in a decade.
Perhaps the most convincing argument against the creeping inflation
theory of inducing maximum economic growth is found in the fact that
Inflation makes possible an excess of dollars chasing goods, which in
turn provides windfall profits for many businesses including some that
in the absence of inflation would incur losses. When inflation occurs,
businesses that otherwise would fall or at least curtail output and
release factors of production (men, capital, and natural resources)
for transfer to the growing industries are enabled to remain in
business with a resulting delay in the shift of resources to more
rapidly growing industries. Change, not creeping Inflation, is the
price of economic growth; and experience suggests that change is
inhibited and delayed by inflationary prosperity.
Dr. Samuelson's recognition of what he calls the "miracle"
of West German postwar economic developments is encouraging to those
who hope that his progress will continue. He describes the basis for
the "miracle" as "a thoroughgoing currency reform"
(p.39), which seems an inadequate description of reforms that restored
free markets as well as a redeemable currency, and, in effect, tossed
into the discard the depression panacea Professor Samuelson evidently
favors. Would it not be worthwhile in an economics textbook to devote
more than a few lines to the experience of West Germany in recent
years? Surely an economic "miracle" merits more detailed
comment, especially when such consideration would reveal so much about
significant aspects of American economic policies.
Many writers of economics textbooks have given only superficial
consideration to the potential effects of a tax on site values as
differentiated from a tax on the value of improvements. In a brief but
clear discussion of this point (p.597) Professor Samuelson describes
how a tax on site values would fall in its entirety on those
privileged to hold exclusive titles to such sites and would not burden
either those who labor or those who invest in the reproducible capital
of our economy. An obvious conclusion is that shifting of the tax
burden from investors and earners would encourage new investments as
well as production and would inhibit speculative withholding of
valuable sites and resources from production. An equally obvious
conclusion is that the net result could be more rapid economic growth
with output more equitably distributed among those who participate in
the productive processes.
The potentially far-reaching consequences of taking much of site rent
for public uses might well have been discussed in greater detail. The
Institute of Research of Lehigh University, another distinguished
school of engineering, has analyzed and reported on the potential
effects of exempting improvements and taxing only land values in the
city of Bethlehem, Pennsylvania. Here Is substantial evidence that
the slum areas of a city reflect prolonged unwise apportionment of the
tax burden and that the simplest remedy for "sick" urban
areas would be shifting present taxes on improvements to taxes on land
values. Moreover the experience of Sydney, Australia, and several
other cities indicates that even most of the landowners, surprising as
it may seem, would benefit from such a shift of the tax burden. The
experiences of Denmark, of New Zealand, and even of Pittsburgh,
Pennsylvania, with its partial application of the principle, merit
consideration by every student of economics.
So much for the evidence of some progress by Professor Samuelson. In
other respects the lack of progress is evident. He asserts (p.22)
that, during World War II, American "civilian living standards"
were "higher than ever before." Such statements frequently
are made by economists enamored of the spend-for-prosperity notions,
perhaps because their theories suggest that the vast monetization of
Government debt should have had that result or perhaps because they
are so naive as to believe that money incomes correctly reflect the
standard of living. Here are the facts:
a. Production of passenger automobiles for civilian use during World
War II virtually ceased. With reference to the public's huge
investment in passenger automobiles, the standard of living greatly
decreased as a result of wear and tear, depreciation and obsolescence,
lack of replacements for vehicles scrapped, and lack of additional new
vehicles to maintain the per-capita quota.
b. Construction of new residential housing decreased 85 percent and
remained at a low level until after World War II. Inevitably the
standard of living with reference to housing decreased for reasons
similar to those in a, above.
c. A comprehensive index of production of new consumer goods per
capita shows that a 25-percent decrease in the production of all
consumer goods occurred from mid-1941 to 1945.
d. In large part because automobiles, new homes, etc. were not
available, individuals hoarded about $15,000,000,000 of their wartime
wages in the form of currency and many billions more in the form of
idle checking accounts. In addition, many billions of wartime
incomes were invested in U.S. Savings Bonds.
In view of these facts, civilian standards of living could not have
reached unprecedented levels during the war years. To imply otherwise
may suggest to many readers that monetization of deficits, i.e.
inflation, somehow offers an easy route to perpetual prosperity.
Additional erroneous assertions are scattered through this book. For
example, Professor Samuelson asserts (p 286) that the Great Depression
of the 1930's was the longest "sustained" in the Nation's
history. The National Bureau of Economic Research, whose research in
this aspect of economic developments is far more extensive and
detailed than that of any other agency, reports that the duration of
the 1873-82 recession and recovery from peak to peak was 101 months
compared with 93 months for the depression of the early 1930's.
On page 377 Professor Samuelson refers to "classical views that
there can never be unemployment." This representation of the
classical views also is erroneous. The classical economists argued
that unemployment would be extensive if some elements of labor refused
to accept lower wages whenever that was indicated in order that they
might be employed.
Also, on page 406 Professor Samuelson says, "From the early
1870s to the middle 1890s, depressions were deep and prolonged, booms
were short-lived and relatively anemic, the price level was declining."
That the price level was declining is correct, but the National
Bureau's record shows that, from the time the gold standard was
resumed in 1879 until 1895 there were 4 recessions having an average
duration of less than 20 months, almost exactly the average for more
than 100 years. None of the 4 was "deep and prolonged," and
during this period the Nation enjoyed its most rapid and consistent
growth as measured by the expansion of industrial production.
When he attempts to discuss "money," Professor Samuelson
gives his readers inadequate information. F or example, what is meant
by the words on a $10 bill, "The United States of America will
pay to the bearer on demand Ten Dollars"? I could find no
evidence in the Professor's discussion that he knows of this promise
or its significance, in spite of his attributing West Germany's "miracle"
to "currency reforms," a principal feature of which has been
a sound currency now redeemable in gold on demand. Surely,
differentiating between dollars (1/35 of an ounce of gold) and
promises to pay dollars is elementary in any attempt to describe a
money-credit system. The foreign central bankers who have demanded
that such promises be kept in recent years, with a resulting loss to
the United States of more than $5,000,000,000 in gold, have a clear
understanding of the difference between promises to deliver something
and the thing promised. Should not American students be equally well
Apparently in an attempt to justify in-creasing Government debt
Professor Samuelson asserts (p.399), "If there were no public
debt... (1) charitable institutions would have to be supported by
public and private contributions more than by interest on endowments,
(2) social security and annuities would have to take the place of
rentier interest, and (3) service charges by banks would have
to be increasingly relied upon instead of government bond interest,"
Evidently he is not aware that virtually all the private colleges in
the United States, until a few decades ago, depended largely on
endowment funds invested primarily in other than government bonds.
Moreover, in those days, when there were almost no U.S. Government
bonds in existence, most banks not only had no service charges but
also paid interest even on checking account balances in excess of
specified minimum amounts.
Perhaps in an effort to add what he considers to be the weight of
recognized authority to his assertions, Professor Samuelson repeatedly
says that most economists agree with various views he offers (pp. 9,
241, 242, 256, 298, 299, 364, 375, 380, and 829). For example, he
asserts (page 241) that the basic Keynesian analysis is "
increasingly accepted by economists of all schools of thought,"
and on the next page he says of his so-called synthesis of Keynesian
and older economics, "The result might be called 'neoclassical
economics' and is accepted in its broad outlines by all but a few
left-wing and right-wing writers." The Keynesian analysis
assuredly is not accepted by members of the Economists' National
Committee on Monetary Policy. This group of experts in the
money-credit field cannot properly be classified as "left-wing"
or "right-wing" inasmuch as they are primarily economic
scientists. They constitute a substantial number (75) of those who
specialize in this field.
Another Interesting point is the Professor's reference to Sweden.
(Sweden has for some years been regarded by the Keynesian state
planners and government interventionists as a nearly ideal country
because of its, at first, seemingly successful application of
semisocialistic and spend-for-prosperity notions.) The reference is, "A
great economic statistician, Simon Kuznets of Harvard, has recently
shown that the leading Western nations have for decades been averaging
rapid rates of growth of output per head. How rapid a growth? About 10
percent per decade for France and England; about 16 percent for Canada
and United States. And almost 30 percent per decade for Sweden."
Persuading students to believe that Sweden is now exceeding, or
recently has far outpaced, other nations of Europe and the United
States in economic growth seems an inexcusable falsification of the
record to this reviewer. Sweden's economy once was growing at the
rapid rate indicated, but that was before the semi-Socialist planners
and spend-for-prosperity theorists gained a dominating influence in
Sweden's government during the fourth decade of the present century.
In the 7 years ended in 1960, Sweden's industrial production increased
about one-third; during the same period, in the rest of Western Europe
the increase was nearly twice as great and in West Germany about four
times as great. Figures directly comparable with the 30 percent per
decade mentioned by Professor Samuelson are not yet available for all
of the 1950's, but there already is adequate documentation that the
rate of economic growth in Sweden has fallen far behind the comparable
rates in much of Europe, including the nations that suffered extensive
war damage during World War II.
In Part 2, Dr. Samuelson presents the familiar Keynesian notions with
numerous charts and formulas. The subject matter is presented much as
a chemist or a physicist would write about an accepted theory in his
field. There the resemblance ends, however. What Professor Samuelson
offers is not a scientific theory but a set of hypotheses for which
proof has not been provided between the covers of his book or
elsewhere. Unwary students may at first assume that what is called the
"theory" of income determination is like Einstein's theory
of relativity in that adequate testing of the factual implications of
the original hypothesis has elevated it to the rank of a warranted
assertion or accepted theory.
In attempting to convince students that the Keynesian notions are
sound, Professor Samuelson reveals what I assume is his understanding
of modern scientific method. After describing the Keynesian hypothesis
concerning income determination, Professor Samuelson says (p.262), "An
arithmetic example may help verify this important matter." He
then offers a table not of recorded economic changes but of changes
that he has imagined and that merely summarize in figures his earlier
Then, on the next page, he asserts, "Now we can use Fig. 5 to
confirm what has just been shown by the arithmetic of Table I."
Students at an Institution like M.I.T. are accustomed to the idea that
verification involves proof of some kind, that what has "been
shown" has been demonstrated or proved, and that what has been "confirmed"
has been "established firmly" or put 'beyond doubt," to
use phrases from the Oxford dictionary. And that is what Professor
Samuelson seems to believe he has accomplished. Has that been done?
The first statement of the Keynesian notions is in words. The second
summary statement, the table, is in the symbols of mathematics or
shorthand logic. The third, presents the imagined relations in
pictorial form. The Professor, although he seems not to realize it, is
saying something like this: "Here is my story about the Keynesian
revelation; next, I verify it by writing it in shorthand; finally, I
prove it beyond doubt by drawing a picture of it. One wonders how
students at M.I.T. could be induced to regard seriously such
anachronistic nonsense. Aristotle convinced some of his disciples
2,000 years ago that such procedures provided useful knowledge, but
that was long before modern methods of scientific inquiry had exposed
the futility of such dialectical quests for certainty.
The Keynesians generally have followed the outmoded procedure of
judging the usefulness of a theory by its plausibility instead of by
checking its implications against measured economic changes. In the
realm of science, theory is controlled by the facts. When scientists
find facts at variance with theory, that theory is discarded; but many
Keynesian economists do not even bother to seek the measurements of
changes implied by their theory. In this respect, Professor Samuelson
simply is following the too-long established precedent in his field.
The "Neoclassical Synthesis"
Professor Samuelson claims (Preface p. vii, p. 403, and elsewhere)
that he has achieved or is in the process of achieving a "neoclassical
synthesis" that will join in fruitful wedlock classical economics
and that portion of the Keynesian ideas deemed by Samuelson to be
worthy of the union. If what Von Mises or Hayek, as examples of
economists in the classical tradition, have written about the
Keynesian ideas may be taken at face value, either would be decidedly
reluctant to see his brainchild a "groom" at the "wedding"
Professor Samuelson plans.
Moreover, the present writer's position Is that such a "wedding,"
whether of the "shotgun" variety or otherwise, would not be
fruitful for the simple reason that both bride and groom, that is, the
Keynesian notions and much of classical economics, are "dead
ducks." My reasons for so believing have been discussed in detail
elsewhere.7 Here there is room for only a summary explanation.
The methods of conducting inquiries applied by the Keynesians and to
a substantial extent by the classical economists were the older, now
obsolete methods. Briefly, those methods included Aristotelian logic,
introspection, what maybe called secular revelation (a process at
which Lord Keynes was especially adept), and the quest for certainty
so long persisted in also by philosophers. Such methods give great
weight to the internal logical consistency and general plausibility of
an hypothesis but accord little weight to the desirability of testing
its logical implications against measurements of economic changes
before offering the hypothesis as a warranted assertion applicable to
the problems of men.
Anyone who will observe its consequences in several fields can see
that a revolution in methods of inquiry is well underway in the
behavioral sciences, including economics. This revolution is
comparable to the Galilean revolution of three centuries ago in the
physical sciences and to the similar revolution in the physiological
sciences marked by the advent of graduate schools of medicine more
than a hundred years ago.
Evidently Professor Samuelson is determined to continue as one of the
last of the alchemist-economists, using as his model Lord Keynes (whom
Professor Samuelson on page 241 describes as "a many sided genius").
As everyone who recalls the discussions in economic journals during
the 1930's is well aware, Lord Keynes' method of escape from every
blind alley In which his economist critics nearly cornered him was the
simple process of abandoning successive positions and dashing down
other blind alleys. The verbal skill that facilitated his Houdini-like
"escapes" was widely accepted as proof of his "brilliance"
by those to whom the scintillating flash of words seemed more
significant than the humdrum facts preferred by others who have
rejected perpetual-motion theories and alchemists' dreams. However,
following in Lord Keynes' footsteps may not be practicable. Times have
changed the revolution in methods of inquiry proceeds with increasing
speed; and an emulator of Lord Keynes may discover, as the alchemist
professors did long ago; that the market for outmoded textbooks can
rather suddenly disappear.
An alternative would be to learn as rapidly as possible and apply
modern methods of conducting scientific inquiries in the behavioral
field. This choice could in time make Professor Samuelson an eminent
associate for the distinguished scientists on the faculty at M.I.T.
instead of the anachronistic pseudo-scientist that he now seems in the
light of our present under standing of scientific method.
In spite of its flaws, we have reviewed this book because it is
reported to be the most widely used economics textbook today. Many
college students are being indoctrinated with the Keynesian notions
although much evidence indicates that application of these notions has
brought Sweden to the brink of disaster, all but ruined France prior
to the fiscal and other economic reforms effected by De Gaulle, and
has greatly endangered the future of the United States, to mention
only a few of the consequences. Resolute discarding of such notions
has made a vital contribution to the "miracle" of West
German economic growth. In the light of these developments, the
importance of teaching American youth scientifically warranted
assertions instead of the doctrines offered by Professor Samuelson
- Sumner H. Slichter, '"Current.
Trends, Problems and Prospects in the American Economy," The
Commercial and Financial Chronicle, February 19, 1959, p.3.
- See Meichior Palyi, Managed
Money at the Crossroads, University of Notre Dame Press, Notre
Dame, Indiana, 1958, p.100 et seq.
- EIi Schwartz and James E.
Wert, An Analysis 0/ the Potential Effects of a Movement
Toward a Land Value Based Property Tax, a project of the
Institute of Research of Lehigh University, published by Economic
Education League, Albany, N.Y., 1958.
- Current Economic Trends,
Special Bulletin, June 1961, published by American Institute for
Economic Research, Great Barrington, Massachusetts, p.11.
- Ibid., p.6.
- These approximations are
derived from Monthly Bulletin of Statistics, United
Nations, August 1961, and the latest Statistical Yearbook,
- E. C. Harwood, Reconstruction
of Economics, published by American Institute for Economic
Research, Great Barrington, Massachusetts, 1961.