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SCI LIBRARY

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, "… that 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 "… creeping inflation is part of the price we must pay to achieve maximum growth."[1] 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.[2]

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.[3] 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.


Erroneous Assertions


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[4] 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.[5] 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 informed?

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." (p.116)

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.[6] 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.


Keynesian "Theory"


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 argument.

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 seems obvious.


FOOTNOTES


  1. Sumner H. Slichter, '"Current. Trends, Problems and Prospects in the American Economy," The Commercial and Financial Chronicle, February 19, 1959, p.3.
  2. See Meichior Palyi, Managed Money at the Crossroads, University of Notre Dame Press, Notre Dame, Indiana, 1958, p.100 et seq.
  3. 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.
  4. Current Economic Trends, Special Bulletin, June 1961, published by American Institute for Economic Research, Great Barrington, Massachusetts, p.11.
  5. Ibid., p.6.
  6. These approximations are derived from Monthly Bulletin of Statistics, United Nations, August 1961, and the latest Statistical Yearbook, United Nations.
  7. E. C. Harwood, Reconstruction of Economics, published by American Institute for Economic Research, Great Barrington, Massachusetts, 1961.