Tuesday, October 11, 2016

Paul Samuelson: Worst Economic Theorist

Comment on: Nobel Prize 2016 Part I: Bengt Holmstrom by Kevin Bryan


Samuelson was not the greatest economic theorist of all time.  My friend Michelle teaches a 4th grade public school class of 30 students.  She recently applied two of my economic theories to her class...

1. voting is replaced with spending
2. kids can choose where their taxes go

The first theory is largely based on Coase while the second is largely based on Smith and Buchanan.

Today the kids are using their own real money (pennies) to choose the class insect.  The kids who are compensated for their preferred insect not being chosen will have to eventually pay a tax on their compensation/income.  But they will be able to choose which class/school goods they spend their taxes on.

Can you make a solid prediction about the outcome?  Chances are extremely good that you'll be unable to.  Why?  Largely because you don't realize just how terrible an economist Samuelson was.  He was wonderful at math but terrible at economics.  Economics is all about trade.  Being terrible at economics means failing to truly understand the benefit and point of trade.  When you fail to truly understand the benefit and point of trade... then you fail to see all the places where trade isn't... but should be.

"the Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive."  - Samuelson


Here are some trades that have occurred in Michelle's class...

1. Deciding which book to read (29 Sept 2016)...

2. Deciding who should be in charge of their IRS (7 Oct 2016)...

3. Deciding what the class insect should be (11 Oct 2016)...

The most valuable option was chosen.  The students who did not get their preferred option did not have to spend their money.  Instead, they received all the money spent on the most valuable option.  The amount of money a student received was in proportion to their WTP.  

Did all these trades occur because of Samuelson?  Nope.  They occurred despite him.  He was an obstacle to trade.  He was a barrier to trade.  Samuelson was an anti-economist.  The true purpose of economics is to facilitate trade.

We must always remember that Samuelson was the great anti-Misesian of 20th century economics, and in my book that translates into a force for anti-economics despite all the scientific accolades, awards, honorary degrees, and reverence by his peers he was granted in his lifetime. - Peter Boettke, Paul Samuelson

Blocking trade is the same as blocking the flow of information...

We know what this huge volume of trading is about. It’s about information, not preference shocks. Information seems to need trades to percolate into prices. We just don’t understand why. - John H. Cochrane, Volume and Information

We don't understand why?  Really?  Maybe he should find a class of 4th graders.

The main point about which there can be little doubt is that Smith’s chief concern was not so much with what man might occasionally achieve when he was at his best but that he should have as little opportunity as possible to do harm when he was at his worst. It would scarcely be too much to claim that the main merit of the individualism which he and his contemporaries advocated is that it is a system under which bad men can do least harm. It is a social system which does not depend for its functioning on our finding good men for running it, or on all men becoming better than they now are, but which makes use of men in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent and more often stupid. - Friedrich Hayek, Individualism and Economic Order

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