Monday, December 17, 2012

Paul Samuelson on Keynes, Rational Expectations and Math in Economics

If you'll indulge a repost from yesterday I promise I won't harp on it for at least a week:
Always remember, economics is not reality and the fact that economists use the tools of scientists (maths) does not make it a science. Or, as George E.P. Box said so much better:
"...All models are wrong, but some are useful"
Point made and, hopefully, point taken.
From The New Yorker:
Postscript: Paul Samuelson
In the fall of 1996, I arranged to interview Paul Samuelson in his office at M.I.T. for an article I was writing on the state of economics, which is available online to subscribers. At the allotted time, 12:00 if I remember rightly, there was no sign of Samuelson, who was then eighty-one. A few minutes went by. Then he bounced in on the soles of his feet, a diminutive man dressed in a light gray suit, a red-and-white-striped shirt, and a snazzy bow tie. He had gray, frizzy hair, shaggy eyebrows, and a wicked smile. His usual parking space had been occupied, he shouted to his secretary, so he had been forced to park in somebody else’s. “I hope it’s Franco’s. He’s out of town.” (Franco was Franco Modigliani, a fellow M.I.T. Nobel Laureate, who died in 2003.)

Befitting a scholar of his stature, Samuelson had a big airy office that overlooked the Charles River. Books and journals lined the walls and floors, but Samuelson’s desk was neat. On the blackboard, there was a note of congratulations from his colleagues for winning the “National Medal of Science,” which he had received at the White House earlier that year. Samuelson joined M.I.T.’s faculty in 1940. He wrote more than four hundred journal articles, numerous monographs and a famous undergraduate textbook, which, he proudly informed me, had sold “three million or four million copies—I can’t remember which.” When he was awarded the Nobel Prize, in 1970, the citation read: “By his contributions, Samuelson has done more than any other contemporary economist to raise the level of scientific analysis in economic theory.” Almost forty years later, few would quibble with that description.

I began by asking Samuelson whether he was still a Keynesian. Early in his career, he helped to formulate the income-expenditure framework that John Maynard Keynes put forward in his 1936 book, “The General Theory of Employment, Interest, and Money,” capturing its essential elements in a simple diagram that is still used in elementary economics classes.

“I call myself a post-Keynesian,” Samuelson replied. “The 1936 Model A Keynesianism is passé. Of course, it doesn’t meant that it wasn’t right for its time.” He recalled attending an event that was held in Cambridge, England, in 1986 to mark the one-hundred-and-fiftieth anniversary of Keynes’s birth. “Everybody was there. And they all stood up and said, ‘I am still a faithful Keynesian. I am still a true believer.’ I was a bit rude. I said, ‘You remind me of a bunch of Nazis saying, I’m still a good Nazi.’ It’s not a theology: it’s a mode of analysis. I think I am a different Keynesian than I was ten years ago.” Samuelson then quoted Keynes himself. “When my information changes, I change my views. Don’t you, Sir?”

Q: At this stage, how would you rank Keynes?
A: “I still think he was the greatest economist of the twentieth century and one of the three greatest of all time.”

Q: “Who are number one and number two?”
A: “Adam Smith and Leon Walras.”
Walras was a nineteenth century French economist who taught at the University of Lausanne. He was the first economist to write down the equations for a ‘general equilibrium’ of the entire economy, incorporating the markets of everything from sugar to iPods. He is widely regarded as the founder of mathematical economics. “We all march in his footsteps,” Samuelson said of Walras....MORE
HT: Economic Policy Journal who excerpts these points among others
Paul Samuelson: “Like herpes, math [in economics] is here to stay.” 
Zero Hedge links to a 1996 interview of Paul Samuelson, published in 2009.

Samuelson never had a sound grounding in economic methodology and was a hardcore econometrician. Nevertheless, all over the place during this interview, it is clear that reality must have smashed Samuelson's models often enough that, although continuing to promote the unsound method of econometrics, he is really taking a very strong anti-econometric and anti-Keynesian position.

It's sort of like the current Chinese paying homage to the "social good and communism " but in actuality moving towards free markets as fast as they can.

Consider these quotes from the Samuelson interview:

Like herpes, math is here to stay...
Math is a problem for everybody in the profession and it has been for years. We all say, math should be used just up to the point that I have used it, and no more...I always say to our graduate students when they are leaving: ‘As a graduate student at a top-notch university, you tend to lose touch with reality. You have been engaged in puzzle solving and learning a new language. When you emerge, you may tend to think you have been asleep for several years.’ ...

March 2012's "Lombard Street On Computer Models Versus Looking At The Facts" has links to some of our model and modeling posts.