Sunday, December 20, 2009

On Samuelson's death notice

I studied economics from Paul Samuelson's textbook many years ago. It was clear and effective, but deeply flawed.

This editorial ( mentions the debate between Samuelson and Milton Friedman. But both held the same theory about how the economy worked. They only really disagreed on how much the government could do.

Samuelson like Keynes said that government can and should intervene in the economy and regulate it to stabilize it, to ease the pain to ordinary people when jobs or whole industries are lost, and to stop the growth of monopolies.

Friedman, whose theories guided the "Reagan Revolution", said that anything the government did only made things worse.

There are much deeper problems with both of their theories.

1. Both said that the value of a thing is nothing more or less than what you can get for it on the market - which is no theory at all! So a million-dollar bet on the future value of a fund capitalized by bets on whether homeowners will be able to pay back their predatory loans is "worth" as much as a million-dollar machine, as long as someone will buy it.

We see where this kind of thinking has led us!

2. Their view that we have something close to a free-market economy in American now is not supported by the facts. Whether you are trying to start a grocery store or a factory there is no level playing field - except for a little while with a new technology. The big boys and the insiders have a huge advantage.

3. Their view that labor is just another "input" and that employees can bargain over the fair price for their work on the "labor market" is just wrong, as anyone who has tried to bargain with their boss one-on-one has found out the hard way.

4. At an even deeper level, both believed that every owner trying to maximize their own profits will somehow work out for the best for everyone - the "Invisible Hand" of Adam Smith. This is nothing but a false god, a "religion of greed", masquerading as a science.
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