by Linda Yueh
In addition, Paul Samuelson’s seminal work furthered David Ricardo’s model and has become the standard set of theories for analysing the impact of international trade on the economies of trading nations. Samuelson’s research explained how trade boosted growth, but at the same time unevenly affected workers. His work can help us think about the ‘losers’ from international trade. So, the ideas of this great economist can point to how to address the backlash against globalization.
Paul Samuelson, ‘the last of the great general economists’
Paul Samuelson was born in 1915 and came of age in the 1930s, when the rise of protectionism worsened the US economy. Samuelson was the leading Keynesian in America after the Second World War, although he described himself as a ‘cafeteria Keynesian’ as he merely selected the parts that he liked.3 He adopted Keynesianism after being taught by top neoclassical economists at the University of Chicago, where he enrolled at the age of sixteen, after which he obtained his PhD at Harvard University and joined MIT in 1940.
Regarding his approach to economics, Samuelson remarked: ‘I did not throw out my education lightly, but what I was being taught was of no use in explaining what I saw around me. It was the Great Depression … Keynesianism really fitted what was going on pretty well.’4
But he changed his mind after 1967: ‘I had distrust … of American Keynesianism. For better or worse, US Keynesianism was so far ahead of where it started.’5
Samuelson had by then joined together neoclassical economic thought with John Maynard Keynes’s approach, a consensus view that had starting emerging in the post-war period, into a framework known as ‘neoclassical synthesis’. Samuelson’s textbook Economics helped to popularize this approach. It has been in continuous print since 1948. Later editions were revised by Yale economist William Nordhaus; the nineteenth edition was published in 2009, the year of his death. Economics was the best-selling economics textbook for decades; millions of copies were sold worldwide. Samuelson was quoted as saying: ‘Let those who will, write the nation’s laws if I can write its textbooks.’6 As a sign of his stature, he was awarded the Nobel Prize in 1970, the first American to be recognized, in the second year of the annual award.
So, this great economist’s work, including his ideas on trade, embodies the legacy of the dominant mainstream strands of economics that we have covered in this book. When he passed away at age ninety-four, The Economist described him as the ‘last of the great general economists’.7 Samuelson was a generalist who worked on a wide range of issues concerning the economy, such as trade and public finance. He didn’t specialize in any one area, as later economists tended to do.
It’s fitting that this final chapter includes what this ‘last of the great general economists’ would have made of the backlash against globalization. Paul Samuelson just missed the recovery from the global financial crisis that has heightened the debate over the impact of globalization. His work on the welfare effects of trade, building on the Ricardian model, can help assess how globalization policies can be reshaped, given the political discontent revealed by Brexit and Trumpism.
His research has helped to explain how people’s livelihoods are affected by trade; specifically, he has shown how trade affects wages and incomes within a country. His factor price equalization theorem says that, when nations trade, prices of traded goods will converge, and so would the wages of those producing those products. That means that wages in America will decline and move towards those of its trading partner, for example China, over time in the traded sectors. It helps to explain the stagnant median wages of particularly blue-collar workers, especially in manufacturing.
Trade, therefore, has a direct impact on incomes and standards of living. Having helped to identify this effect, Samuelson, whose approximate lineage is Keynesian, would be likely to have looked to domestic fiscal policy to help the ‘losers’ from globalization. Based on his work on social welfare or welfare for a society, he would have recommended that all such redistributive policies be judged through the lens of an ethical observer to decide which policy was better than another. The challenging practicalities of implementing such an approach also helps explain why good policies are not always adopted.
But leaving the distributional consequences of globalization unaddressed would allow the negative attitudes against globalization to continue and doubts could even be raised over whether it is beneficial to trade. That is worrying for the future of global economic growth itself. The challenge would be getting leaders to act. An adviser to US presidents, Paul Samuelson once remarked: ‘I can’t think of a President who has been overburdened by a knowledge of economics.’8
At least the right questions are now being asked, even though the solutions are not straightforward. Samuelson would have approved. He once quipped: ‘Good questions outrank easy answers.’9
The way forward
Brexit and Trumpism are among the most prominent political expressions of discontent with the status quo. Globalization’s unequal impact, creating winners and losers, is part of that status quo. But there are other factors, such as robotics and automation, at play too. Still, it can be easier to be unhappy with globalization because it is more discernible than the impact of encroaching technological change. If trade did not improve welfare and benefit a nation, then Samuelson believed that countries wouldn’t engage in it and would revert to a state of ‘autarky’ in which there was no international trade.10 Yet there has been trade among nations for centuries; it is a question of addressing where and why trade doesn’t work for everyone.
That would be precisely the sort of challenge that the Great Economists would relish. For them, the chance to redefine how globalization is managed so that the benefits can be spread more widely would be viewed as an opportunity to rethink some fundamental concepts. They would surely embrace as intellectually stimulating the challenge of re-examining how to raise the quality of economic growth and not just its speed. Explaining how the economy optimally operates, and analysing what hasn’t worked and how that can be improved, is how they made their collective mark on the world.
The Great Economists in this book set the foundations of economics and crafted the models that underpin the field to this day. They formulated the general models to explain how the economy works. From Adam Smith’s ‘invisible hand’ to the Solow model of economic growth, we have, respectively, the general model of how an efficient market operates and what generates prosperity. The Great Economists also shared a propensity to push the boundaries of economics to come up with models that better explained the real world; for example Joan Robinson was not content with the assumption that markets operated perfectly all the time so she developed a theory of imperfect competition.
And the Great Economists were all drawn to the most pressing economic issues of the day, for which they offered analyses and ways forward. Recall that David Ricardo’s theory of international trade contributed to the repeal of the protectionist Corn Laws, while John Maynard Keynes played a part in the recovery after the 1930s Great Depression. Milton Friedman tackled the cause of that depression, which helped the central bankers in charge of the 2009 Great Recession to avoid repeating the mistakes of the last systemic banking crisis. Thus, the insights of the Great Economists, which have been gleaned from over two centuries of studying the world’s economic problems, can help us shape the future of globalization and confront today’s challenges.
Although they were very different characters, and sometimes disagreed fiercely about how the economy works, the Great Economists were similar in a number of respects. The key one is that they formulated general models to tackle the biggest economic challenges. That is why their thinking remains relevant today. The legacy of their lives and work demonstrates that ideas have always had a lasting impact on society – both then and now.
Notes
Introduction: Great Economists on Our Economic Challenges
1. Adam Smith, 1979 [1776], An Inquiry into the Nature and Causes of the Wealth of Natio
ns, eds. R. H. Campbell, A. S. Skinner and W. B. Todd, Oxford: Clarendon Press, bk II, ch. 3, para 2.
2. Alvin H. Hansen, 1939, ‘Economic Progress and Declining Population Growth’, American Economic Review, 29(1), pt I, pp. 1–15.
Chapter 1 – Adam Smith: Should the Government Rebalance the Economy?
1. Adam Smith, 1979 [1776], An Inquiry into the Nature and Causes of the Wealth of Nations, ed. R. H. Campbell, A. S. Skinner and W. B. Todd, Oxford: Clarendon Press, bk IV, ch. 2, para. 10.
2. Ibid., bk V, ch. 2, pt II, appendix to arts. I & II, para. 12.
3. Ibid., bk V, ch. 1, pt III, art. II, para. 15.
4. Ibid., bk V, ch. 1, pt III, art. II, para. 8.
5. Dugald Stewart, 1793, ‘Account of the Life and Writings of Adam Smith, LL. D.’, read to the Royal Society of Edinburgh and published in Adam Smith’s posthumous Essays on Philosophical Subjects of 1795, London and Edinburgh: T. Cadell Jun and W. Davies, pp. lxxx, lxxxi.
6. Ian Simpson Ross, 2010, The Life of Adam Smith, 2nd edn, Oxford: Oxford University Press, p. xxxi.
7. Smith, Wealth of Nations, bk V, ch. 3, para. 92.
8. Ross, Life of Adam Smith, p. xxxi.
9. Brian R. Mitchell, 1988, Abstract of British Historical Statistics, Cambridge: Cambridge University Press, pp. 869–73.
10. Stephanie H. McCulla, Alyssa E. Holdren and Shelly Smith, 2013, ‘Improved Estimates of the National Income and Product Accounts: Results of the 2013 Comprehensive Revision’, US Bureau of Economic Analysis, Washington, DC
11. OECD, 2013, ‘New Sources of Growth: Intangible Assets’, Paris: OECD; www.oecd.org/sti/inno/46349020.pdf
12. Adam Smith, 1978 [1763], Lectures on Jurisprudence (alternative title for the Lectures on Justice, Police, Revenue and Arms), ed. Ronald E. Meek, David D. Raphael and Peter G. Stein, Oxford: Clarendon Press, p. 499.
13. Smith, Wealth of Nations, bk I, ch. 2, para. 12.
14. Adam Smith, 1759, The Theory of Moral Sentiments, London: A. Millar; Edinburgh: A. Kincaid and J. Bell, pt IV, s. 1, para. 10.
15. Ibid.
16. Smith, Wealth of Nations, bk IV, ch. 2, para. 9.
17. Ibid., bk II, ch. 2, para. 106.
18. Ibid., bk II, ch. 4, paras. 14–15.
19. Ibid., bk I, ch. 11, pt 1, para. 5.
20. Ibid., bk V, ch. 1, pt 3, art. II, para. 50.
21. Ibid., bk V, ch. 1, pt 3, art. III, para. 14.
22. Ibid., bk IV, ch. 7, pt 2, para. 44.
23. Smith, Lectures on Jurisprudence, p. 514.
24. Ibid., bk V, ch. 3, para. 92.; Ross, Life of Adam Smith, p. 315.
25. Ross, Life of Adam Smith, p. 302.
26. Smith, Wealth of Nations, bk IV, ch. 5, Digression concerning the Corn Trade and Corn Laws, para. 43.
Chapter 2 – David Ricardo: Do Trade Deficits Matter?
1. John E. King, 2013, David Ricardo, Basingstoke: Macmillan, p. 5.
2. Ibid., pp. 15–16.
3. Thomas Piketty, 2014, Capital in the Twenty-First Century, Cambridge, MA: Harvard University Press, pp. 314–15.
4. Nicholas Crafts, 2005, ‘The First Industrial Revolution: Resolving the Slow Growth/Rapid Industrialization Paradox’, Journal of the European Economic Association, 3(2/3), pp. 525–34.
5. David Ricardo, 2011 [1817], The Works and Correspondence of David Ricardo, vol. IV, ed. Piero Sraffa, Cambridge: Cambridge University Press, p. 21.
6. Murray Milgate and Shannon Stimson, 1991, Ricardian Politics, Princeton: Princeton University Press, p. 144.
7. King, David Ricardo, p. 36.
8. Mark Blaug, 1956, ‘The Empirical Content of Ricardian Economics’, Journal of Political Economy, 64(1), pp. 41–58.
9. Walter Bagehot, 1895, ‘Ricardo’, in Walter Bagehot, Economic Studies, ed. Richard Holt Hutton, London: Longman, Green & Co., pp. 197–208.
10. Mark Blaug, 1985, Economic Theory in Retrospect, Cambridge: Cambridge University Press, p. 136.
11. Joseph Schumpeter, 1997 [1954], History of Economic Analysis, London: Routledge, pp. 472–3.
12. Adam Smith, 1979 [1776], An Inquiry into the Nature and Causes of the Wealth of Nations, eds. R. H. Campbell, A. S. Skinner and W. B. Todd, Oxford: Clarendon Press, bk IV, ch. 2, para 12.
13. Ricardo, Works and Correspondence, IV, p. 23.
14. Ibid., p. 21.
15. King, David Ricardo, p. 88.
16. Ricardo, Works and Correspondence, IV, pp. 28, 32.
17. Ibid., p. 35.
18. Ibid., p. 33.
19. Ibid., p. 41.
20. Ricardo Hausmann and Federico Sturzenegger, 2007, ‘The Missing Dark Matter in the Wealth of Nations and Its Implications for Global Imbalances’, Economic Policy, 22(51), pp. 470–518.
21. Mark Muro, Jonathan Rothwell, Scott Andes, Kenan Fikri and Siddharth Kulkarni, 2015, ‘America’s Advanced Industries’, Brookings Institution, Washington, DC; www.brookings.edu/wp-content/uploads/2015/02/AdvancedIndustry_FinalFeb2lores-1.pdf
22. Paul A. Samuelson, 1969, ‘The Way of an Economist’, in International Economic Relations, ed. Paul A. Samuelson, International Economic Association Series, London: Macmillan, pp. 1–11, at p. 9.
23. Joan Robinson, 1974, Reflections on the Theory of International Trade: Lectures Given in the University of Manchester, Manchester: Manchester University Press, p. 1.
24. Ibid., pp. 1, 6.
25. Mark Skousen, 2001, The Making of Modern Economics, Armonk, NY and London: M. E. Sharpe, p. 18.
26. Smith, Wealth of Nations, bk IV, ch. 2, para 43.
27. Skousen, The Making of Modern Economics, p. 103.
Chapter 3 – Karl Marx: Can China Become Rich?
1. Karl Marx and Friedrich Engels, 2015 [1848], The Communist Manifesto, London: Penguin Classics, p. 9.
2. Todd Buchholz, 2007, New Ideas from Dead Economists: An Introduction to Modern Economic Thought, New York: Penguin, p. 129.
3. Ibid., p. 116.
4. Jonathan Sperber, 2013, Karl Marx: A Nineteenth-Century Life, New York: Liveright, p. 4.
5. Ibid., p. 5.
6. Ibid., p. 24.
7. Ibid., p. 72.
8. Ibid., p. 99.
9. Marx and Engels, Communist Manifesto, p. 39.
10. Ibid.
11. Sperber, Karl Marx, p. 255.
12. Karl Marx, 2008 [1852], The Eighteenth Brumaire of Louis Bonaparte, Rockville, MD: Wildside Press, p. 1.
13. Karl Marx, 1978 [1853], ‘The Future Results of British Rule in India’, New York Daily Tribune, 8 August 1853, in Robert Tucker, ed., 1978, The Marx-Engels Reader, 2nd revised edn, New York: W. W. Norton, p. 662.
14. Sperber, Karl Marx, p. 450.
15. Ibid., p. 431.
16. Linda Yueh, 2013, China’s Growth: The Making of an Economic Superpower, Oxford: Oxford University Press, chapter 5.
17. World Bank and Development Research Center of the State Council of China, 2013, ‘China 2030: Building a Modern, Harmonious, and Creative Society’, Washington, DC; http://documents.worldbank.org/curated/en/781101468239669951/China-2030-building-a-modern-harmonious-and-creative-society
18. Karl Marx, 1991 [1883], Capital: Volume III, ed. Frederick Engels, trans. David Fernbach, London: Penguin Classics, p. 678.
19. Marx and Engels, Communist Manifesto, p. 27.
20. Robert G. Sutter, 2013, Foreign Relations of the PRC: The Legacies and Constraints of China’s International Politics Since 1949, Lanham, MD: Rowman & Littlefield, p. 23.
21. Linda Yueh, 2010, The Economy of China, Cheltenham: Edward Elgar, chapter 4.
22. Buchholz, New Ideas from Dead Economists, p. 136.
23. Ronald W. Dworkin, 2015, How Karl Marx Can Save American Capitalism, Lanham, MD: Lexington Books, p. 72.
24. Ibid.
25. Sperber, Karl Marx, p. 65.
Chapter 4 – Alfred Marshall: Is Inequality Inevitable?
1. Joseph Stiglitz, 2012, The Price of Inequality: How Today’s Divided Society Endangers Our Future, New York: W. W. Norto
n.
2. Peter Groenewegen, 1995, A Soaring Eagle: Alfred Marshall 1842–1924, Aldershot: Edward Elgar, p. 227.
3. Ibid., p. 294.
4. Michael J. Turner, 1994, ‘Before the Manchester School: Economic Theory in Early Nineteenth-Century Manchester’, History, 79(256), pp. 216–41.
5. John Maynard Keynes, 1924, ‘Alfred Marshall, 1842–1924’, Economic Journal, 34(135), pp. 311–72.
6. Gerald F. Shove, 1942, ‘The Place of Marshall’s Principles in the Development of Economic Theory’, Economic Journal, 52(208), pp. 294–329.
7. A. C. Pigou, ed., 1925, Memorials of Alfred Marshall, London: Macmillan, p. 334.
8. Alfred Marshall, 1961, Principles of Economics, vol. II, London: Macmillan for the Royal Economic Society, pp. 598–614.
9. J. H. Burns and H. L. A. Hart, eds., 1977, A Comment on the Commentaries and A Fragment on Government, The Collected Works of Jeremy Bentham, Oxford: Clarendon Press, p. 393.
10. John Cunningham Wood, ed., 1993, Alfred Marshall: Critical Assessments, Volume IV, London: Routledge, p. 290.
11. Branko Milanovic, 2016, Global Inequality: A New Approach for the Age of Globalization, Cambridge, MA: Harvard University Press, p. 166.
12. Pew Research Center, 2015, ‘The American Middle Class is Losing Ground: No Longer the Majority and Falling Behind Financially’, 9 December; www.pewsocialtrends.org/2015/12/09/the-american-middle-class-is-losing-ground/