Thursday, December 17, 2009

Paul Samuelson RIP

Paul Krugman's description of the man who wrote the nation's (and even the entire profession's) "economics textbooks" is most appropriate, especially now

"He never forgot that markets can malfunction terribly... good macro policies come first. Monetary and fiscal policy had to be employed to assure more or less full employment. Exchange rates had to be adjusted to assure competitiveness. Only then could the virtues of markets come into play. It was a lesson that too many economists forgot, as they immersed themselves in the lovely math of perfect markets. But Samuelson’s realism – his understanding that markets are great things but need to be supported by government activism — has never seemed more relevant than it does now."

See also this and this (from Paul Krugman), on his prescience about the ineffectiveness of monetary policy in deep slumps and how monetary expansion just piles up in bank reserves, extremely relevant now...

"Even if the authorities should succeed in forcing down short-term interest rates, they may find it impossible to convince investors that long-term rates will stay low. If by superhuman efforts, they do get interest rates down on high-grade gilt-edged government and private securities, the interest rates charged on more risky new investments financed by mortgage or commercial loans or stock-market flotations may remain sticky. In other words, an expansionary monetary policy may not lower effective interest rates very much but may simply spend itself in making everybody more liquid...

In terms of the quantity theory of money, we may say that the velocity of circulation of money does not remain constant. 'You can lead a horse to water, but you can’t make him drink'. You can force money on the system in exchange for government bonds, its close money substitute; but you can’t make the money circulate against new goods and new jobs. You can get some interest rates down, but not all to the same degree. You can tempt businessmen with cheap rates of borrowing, but you can’t make them borrow and spend on new investment goods."

See this and this from MR, this from Mark Thoma, this from TCA Srinivasa Raghavan, and this superb homage from Ed Glaeser ("Samuelson gave economists our toolbox"). Mostly Economics has this linkfest. See also Avinash Dixit here.

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