The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel 1970

Presentation Speech by Professor Assar Lindbeck, Stockholm School of Economics

Your Majesty, Your Royal Highnesses, Ladies and Gentleman.

One of the salient features of the development of economics during the last decades is the increased degree of formalization of the analytical techniques brought about partly with the aid of mathematical methods. We can perhaps distinguish two different branches of this development.

One branch is econometrics, designed for immediate statistical estimation and empirical application - with pioneers such as Ragnar Frisch and Jan Tinbergen, who, last year, jointly received the first prize in economic science in memory of Alfred Nobel - a prize based on a donation by the Bank of Sweden.

The second branch is orientated more toward basic theoretical research, without any immediate aims of statistical, empirical confrontation. It is in this latter area that Professor Paul Samuelson, Massachusetts Institute of Technology, USA, has made his great contributions, and for which he has now been awarded the prize in economic science.

Generally speaking, Samuelson's contribution has been that, more than any other contemporary economist, he has contributed to raising the general analytical and methodological level in economic science. He has in fact simply rewritten considerable parts of economic theory. He has also shown the fundamental unity of both the problems and analytical techniques in economics, partly by a systematic application of the methodology of maximization for a broad set of problems. This means that Samuelson's contributions range over a large number of different fields. If we are to try to summarize his research achievements and to give a concrete idea of them, it is therefore necessary to limit ourselves to a few examples. We can perhaps divide his contributions into four main areas.

The first area is dynamic theory and stability analysis. The characteristic feature of this field is that the analysis is not, as in static analysis, limited to equilibrium positions. Instead, the emphasis is on the question of how the economic system behaves outside equilibrium, and how the economy develops from period to period in a chain of development phases. What Samuelson has done here is, in particular, to specify the conditions under which an economic system is stable, in the sense that it tends to return by itself to equilibrium after a disturbance. He found that the conditions for stability often coincide with the conditions under which static analysis leads to what are usually regarded as "normal" conclusions, such as the conclusion that an increase in demand results in a rise in the equilibrium price. This is, in fact, an application of Samuelson's famous "correspondence principle", whereby a bridge was built between static and dynamic analysis, which earlier had usually been regarded as two completely different methods of analysis.

Another area where Samuelson has made great contributions is consumption theory and the closely connected theory of index numbers. In older theory in this field, it was usual to start with the assumption that households display well-defined preference patterns for consumer goods, in the sense that they can define how they evaluate alternative baskets of consumer goods. On this basis, theorems about consumer behavior were derived by deductive methods, by analyzing the effects of changes in, for instance, incomes and prices. Samuelson started at the other end, by defined preferences on the basis of observable behavior. The household, so to speak, revealed its preferences by its own behavior. This was the starting point for Samuelson's theory of "revealed preferences", a theory which has provided economists with considerably improved tools for analysis in consumption theory. Empirical studies of observable behaviour became better integrated with our theoretical constructs.

A third area where Samuelson has made great contributions is general equilibrium theory, in which is studied the interaction between a great number of different variables - in principle, all prices and quantities in the economic system. A few examples from international trade theory can be used as illustrations of this.

One example is the question of the gains from international trade. It has long been known that international trade, under certain well-defined conditions, leads to a higher national income for the countries concerned. It is also known that foreign trade may lead to income redistributions within countries, with the result that certain groups are in fact pushed into less-preferred positions. The question then is whether we may say, in a meaningful way, that a country, as a whole, has gained by international trade. What Samuelson did here was to show that those individuals gaining by such trade will be better off even if they have to compensate completely those who tend to lose on international trade. In this sense, free trade is potentially superior to protection. In analyzing the effects of tariffs on the distribution of income, Samuelson also showed, together with Wolfgang Stolper, that a tariff that raises the price of an import commodity results in an increase in the factor rewards for those factors of production which are used relatively intensively in the production of the protected commodity, whereas the factor rewards for other factors will fall.

Samuelson also showed under what conditions international trade results in an equalization of the factor rewards between countries engaged in international trade - the so-called "Factor Price Equalization Theorem". Here Samuelson followed up a line of research started by Eli Heckscher and Bertil Ohlin.

A fourth area, finally, where Samuelson has made outstanding contributions, is in the field of capital theory. One criticism which has long been directed against traditional capital theory is that it is based on the assumption that it is possible to construct a concept of an aggregate stock of capital, that is, a sum in money terms of the value of all capital goods in society. Samuelson now showed, partly in cooperation with Robert Solow, that it is possible to develop a logical capital theory - and to speak about a well-defined price of capital - even without adopting such an aggregate concept of capital.

Another contribution within capital theory was that Samuelson further elaborated the conditions for economic efficiency over time. It is in this context that we should see his famous "turnpike theorem" which defines conditions for maximal growth and shows that it might pay for a country to choose an economic growth path characterized by a maximal growth rate - what he calls a "turnpike" - with proporrtions between the production sectors that are completely different from the proportions we start from, or those we intend to achieve in the final position.

I now turn to you, Professor Samuelson. You have, probably more than anybody else, shown the advantages of strict formalization of economic analysis. Thereby you have, in fact, set the style for several generations of economists during the last decades. In spite of the high level of abstraction of much of your work, you have dealt with important economic and social problems in the real world. The sense of relevance in your production can be found in practically all fields where you have worked: in building your consumption theory on observable behavior, on the basis of your theory of "revealed preferences"; in formulating capital theory in the context of a large number of heterogenous capital goods; in analyzing dynamic processes and stability in situations outside equilibrium situations; in explaining business cycles by a combined multiplier-accelerator model; in studying the place of collective goods in the context of general equilibrium analysis; in analyzing maximum growth; in studying the distribution of consumption between generations by your "consumption loan" model; and in analyzing the gains from trade and the effects of tariffs on the distribution of income.

It is safe to say that, in many of these fields, you have achieved classical, not to say, "definite", formulations in the context of neo-classical or neo-Keynesian economic theory.

It is a great honour to convey to you the congratulations of the Royal Academy of Sciences, and to ask you to accept from the hands of His Majesty, the King, the 1970 Prize in Economic Science dedicated to the memory of Alfred Nobel.

From Nobel Lectures, Economics 1969-1980, Editor Assar Lindbeck, World Scientific Publishing Co., Singapore, 1992

Paul A. Samuelson – Biography

"In this age of specialization, I sometimes think of myself as the last 'generalist' in economics," wrote Paul Anthony Samuelson, Professor of Economics at the Massachusetts Institute of Technology, "with interests that range from mathematical economics down to current financial journalism. My real interests are research and teaching... " His work in economic theory has been in modern welfare economics, linear programming, Keynesian economics, economic dynamics, international trade theory, logic choice and maximization. In terms of economic philosophy, Professor Samuelson calls himself "a 'modern' economist... in the right wing of the Democratic New Deal economists."

He was born in Gary, Indiana, in 1915. He received the degree of Bachelor of Arts from Chicago University in 1935, and the degrees of Master of Arts in 1936, and Doctor of Philosophy in 1941 from Harvard University. He was a Social Science Research Council predoctoral fellow from 1935-1937, a member of the Society of Fellows, Harvard University, 1937-1940, and a Ford Foundation Research Fellow from 1958-1959. He received honorary Doctor of Laws degrees from Chicago University and Oberlin College in 1961, and from Indiana University and East Anglia University (Eng.) in 1966.

He was awarded the David A. Wells Prize in 1941 by Harvard University, and the John Bates Clark Medal by the American Economic Association in 1947, as the living economist under forty "who has made the most distinguished contribution to the main body of economic thought and knowledge."

Even while a graduate student at Harvard, he had already won international renown and had made significant contributions to economic theory. Confronted by contradictions, overlaps, and fallacies in the classical language of economics, he sought unification - and clarification - in mathematics. In hhis first major work, Foundations of Economic Analysis, published in 1947, he demonstrated that this approach worked. He told economists that they had been practicing "mental gymnastics of a peculiarly depraved type," and that they were like "highly-trained athletes who never run a race." He was not claiming mathematics as the cure-all or end-all of economic analysis, but he was insisting that mathematics was essential to an understanding of what economics was all about.

His Economics: An Introductory Analysis, first published in 1948, has become the best selling economics textbook of all time. The textbook has sold more than a million copies and has been translated into French, German, Italian, Hungarian, Polish, Korean, Portuguese, Spanish and Arabic. It is now in its fifth edition. "The book's emphasis on different themes has changed with the changing of the nation's economic problems," wrote Business Week in 1959. "The first edition was dominated by the end-of-the-war worry that widespread unemployment would return... later editions put growing stress on fiscal and monetary controls over inflation. In the later editions Samuelson has worked toward what he calls a 'neoclassical synthesis' of ancient and modern economic findings. Briefly, his synthesis is that nations today can successfully control either depression or inflation by fiscal and monetary policies... Some economists feel that Samuelson's book... is really his greatest contribution. It has gone a long way toward giving the world a common economic language."

He was co-author of Readings in Economics, published in 1955, and has co-authored numerous other works in the field. His latest book is Linear Programming and Economic Analysis, written in collaboration with Robert Dorfman and Robert Solow and sponsored by a grant from the Rand Corporation. Mathematical economics is applied to practical problems in international trade, transportation and marketing, competitive strategy in business and government, industrial production, and defense planning. Such complex problems of choice can now be analysed by the mathematical economics which Professor Samuelson has developed.

He came to M.I.T. in 1940 as an Assistant Professor of Economics and was appointed Associate Professor in 1944. He served as a staff member of the Radiation Laboratory from 1944-1945, was Professor of International Economic Relations (part-time) at the Fletcher School of Law and Diplomacy in 1945. He was appointed Professor at M.I.T. in 1947 and is now an Institute Professor. He was a Guggenheim Fellow from 1948-1949.

Professor Samuelson has served widely as a consultant. He worked for the National Resources Planning Board from 1941-1943 (in charge of war-time planning for continuing full employment); the War Production Board and Office of War Mobilization and Reconstruction in 1945 (economic and general planning program); the United States Treasury, 1945-1952; the Bureau of the Budget in 1952; the Research Advisory Panel to the President's National Goals Commission from 1959-1960; the Research Advisory Board Committee for Economic Development in 1960. He was a member of the National Task Force on Economic Education from 1960-1961 and has been a consultant to the Rand Corporation since 1949. He is an informal consultant for the United States Treasury and the Council of Economic Advisors. He is also a consultant to the Federal Reserve Bank. He was Economic Advisor to Senator, candidate, and President-elect Kennedy and was the author of the January 5, 1961 "Samuelson Report on the State of the American Economy to President-elect Kennedy." His consultation for the government has brought him national recognition as an economic advisor. In 1965 he was elected president of the International Economic Association.

Contributing in 1958 to a symposium sponsored by the Committee for Economic Development on "What is the most important economic problem to be faced by the United States in the next twenty years?" Professor Samuelson answered, "The threat of inflation."

"The history of the twentieth century," he wrote, " - America's century! - has been pretty much a history of rising prices... inflation is itself a problem. But the legitimate and hysterical fears of inflation are - quite aside from the evil of inflation itself - likely, in their own right, to be problems. In short, I fear inflation. And I fear the fear of inflation. Avoiding inflation is not an absolute imperative, but rather is one of a number of conflicting goals that we must pursue and that we may often have to compromise. Even if the military outlook were serene - and it is not - modern democracies must expect in the future to be much of the time at, or near, the point where inflation is a concern. Our greatest economic problem will be to face that concern realistically, to weigh inflation's quantitative evil against the evils of actions taken against it, to develop methods of adjusting to the residue of inflation which attainment of the 'golden mean' might involve. The challenge is great but the prognosis is cheerful."

In an interview in 1960 with U.S. News World Report, Professor Samuelson talked about a new kind of inflation - what he called "cost-push." As contrasted to the familiar kind of inflation - where too much spending power pulls up prices and wages - cost-push inflation is "a force that operates year-in and year-out, whenever we are at high employment, to push up prices. It's a price creep, not a price gallop; but the bad thing about it is that, instead of setting in only after you have reached overfull employment, the suspicion is dawning that it may be a problem that plagues us even when we haven't arrived at a satisfactory level of employment."

In his report to President-elect Kennedy in 1961 on the state of the American economy, he wrote: "Various experts, here and abroad, believe that the immediate postwar inflationary climate has now been converted into an epoch of price stability. One hopes this cheerful diagnosis is correct. However, a careful survey of the behavior of prices and costs shows that our recent stability in the wholesale price index has come in a period of admittedly high unemployment and slackness in our economy. For this reason it is premature to believe that the restoration of high employment will no longer involve problems concerning the stability of prices.

"Economists are not yet agreed how serious this new malady of inflation really is. Many feel that new institutional programs, other than conventional fiscal and monetary policies, must be devised to meet this new challenge. But whatever the merits of the varying views on this subject, it should be made manifest that the goal of high employment and effective real growth cannot be abandoned because of the problematical fear that re-attaining prosperity in America may bring with it some difficulties; if recovery means a reopening of the cost-push problem, then we have no choice but to move closer to the day when that problem has to be successfully grappled with."

In this report to President-elect Kennedy, Professor Samuelson made certain minimal policy recommendations "that need to be pushed hard even if the current recession turns out to be one that can be reversed by next summer at the latest." He urged strong support of pledged expenditure programs, including: increasing defense expenditures and foreign aid on a basis of merit and need, vigorously pushing educational programs, high priority for urban renewal and health and welfare programs, highest priority on improving unemployment compensation, acceleration of useful public works and highway construction programs, help for depressed areas programs, and natural resource development projects.

To stimulate residential housing, he recommended reducing mortgage rates, mortgage discounts, insurance fees, and extension of maximum amortization periods, and a step-up in the Federal National Mortgage Association mortgage purchasing program. In monetary policy he specifically urged more reliance upon short term issues (to nudge a reduction in long term rates), and decisive actions to improve our international balance of payments position.

On the question of unemployment levels, Professor Samuelson made these comments in an interview with U.S. News World Report in December, 1960: "I think, without question, that unemployment of more than 6 per cent is something to be concerned about. You don't push the panic button, but you don't relax and enjoy it either... I myself don't believe in a numbers game in which you give a maximum tolerable percentage, because I think, truly, it does vary with the times... I would hesitate to specify the figure today, but I will say this: it would be, in my mind, less than a 4 per cent figure - that is, for the period ahead. I would not, realistically, think we could hope for a 2 per cent figure in the near future, as certain European countries have been able to do. But I do think that if we are pretty zealous in this matter and insist upon getting low figures - say, 3.5 per cent - then our very success in accomplishing that may lead to a new epoch just beyond when we could hope to go below 3 per cent... "

A further question in the interview asked what degree of responsibility the government has to insure high employment. Replied Professor Samuelson: "I think I would say simply that the American people have expressed the choice that it is their concern to see that large departures from high employment will not be tolerated... I never look upon the government as something in Washington that does something to us or for us. I think of public policy as a way in which we organize our affairs, and so I do think it is part of fiscal responsibility and monetary-policy responsibility to be discontented with the sort of unemployment we had in the prewar decade, and with the sort of exuberant booms leading to crises and panics that we have had throughout the history of our capitalistic system."

Summing up, he made this prediction for the decade: "I think the '60s will give us the potentiality of very good growth. More and more of our social problems of the past are, in fact, being licked. So I would face the '60s not complacently, but optimistically."

Professor Samuelson has been active in a number of honorary and professional organizations. He is a member of the American Academy of Arts and Sciences, a fellow of the American Philosophical Society and the British Academy; he is a member and past President (1961) of the American Economic Association; he is a member of the editorial board and past-President (1951) of the Econometric Society; he is a fellow, council member and past Vice-President of the Economic Society. He is a member of Phi Beta Kappa.

He is the author of hundreds of articles in journals and magazines.

He lives with his wife and six children (including triplet boys) in Belmont, Mass.

From Nobel Lectures, Economics 1969-1980, Editor Assar Lindbeck, World Scientific Publishing Co., Singapore, 1992

This autobiography/biography was written at the time of the award and later published in the book series Les Prix Nobel/Nobel Lectures. The information is sometimes updated with an addendum submitted by the Laureate. To cite this document, always state the source as shown above.

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