Tuesday, December 15, 2009

Paul Samuelson developed Frankenstein

Economist Paul Samuelson has just died (age 94) so there was some coverage about him on the PBS NewsHour (my favourite news source) tonight.

As part of my economic study I am currently acquiring an overview of the mainstream neo-classical schools (they argue amongst each other). I'm impressed by the History of Economic Thought website. They have a summary of the various schools of thought which is more coherent than wikipedia. Wikipedia is not bad but tends to be more muddled and padded than the HET site.

Anyway, according to the NewsHour interview with David Warsh, Paul Samuelson was one of the four most influential economists of the 20th Century, the others being John Maynard Keynes, Milton Friedman and Kenneth Arrow. (Late Economist Samuelson Bridged Math, Money). From what I've read Samuelson was very good at developing mathematical arguments to update and refine Keynesian type government interventions into the economy.

Given his importance what he said about the current crisis, at the start of it, is interesting:
PAUL SAMUELSON: I'm really very realistic about the mess that we are in. People compare it with the Great Depression. But the Wall Street shenanigans this time are much worse. And people like me, who lived through the Great Depression, as a young, budding, kind of bright economist, are in great demand because the other people don't have a clue as -- as to what this kind of situation is.

PAUL SOLMAN: Well, what did Wall Street do this time that it didn't do last time?

PAUL SAMUELSON: This is the first time ever that this happened after the -- and I have to use my words very carefully -- fiendish, Frankenstein monsters of financial engineering had been created, a lot of them at MIT, some of them by people like me.

And these are marvelous things which can be used to spread risks rationally, and, in that sense, reduce riskiness. But the Frankenstein part of the story is that they also are marvelous things, Samson-like, to blind you. You don't know what you're doing. All transparency disappears. What's happened this last eight years is an absolutely unnecessary thing.


Tom Hoffman said...

I think the key word there is "like," "by people like me."

Bill Kerr said...

Yes Tom, my headline was overly attention seeking, although I wouldn't discount the significance of the frankenstein metaphor in the overall scheme of things.

In a longer version of the video interview here Samuelson describes himself as a centrist who supports a considerably degree of regulation, that markets left to themselves will eventually self destruct, that the people he trained at MIT subsequently moved to the right and that the path has been bad since 1980 due to the ascendancy of free market fundamentalism

Samuelson: "There is no CEO who understands at all, a derivative"