First Encounter with Economics
The course Samuelson took to substitute for what he had missed in the first quarter was The Economic Order (Econ 102 and 108), which he described as an old-fashioned course that was being phased out.21 The teacher, Aaron Director, who had been appointed to the Chicago faculty in 1930, was a specialist in labor economics who came from a Russian family that owned a flour mill, but whose members had immigrated to Portland, Oregon, in 1914.
In Oregon they faced overt discrimination, both against Russians (branded Bolsheviks) and against Jews. Director had spells working as a migrant laborer in coal mines and textiles, and had visited England to study the education of adult workers. As a student at Yale, he had, with painter Mark Rothko, edited an iconoclastic weekly paper with socialist and progressive sympathies that sought to challenge the complacency and prejudice they encountered there.22 This educational mission motivated a spell at Portland Labor College, in the two years before he moved to Chicago to work with Paul Douglas, with whom he wrote The Problem of Unemployment (1931).bb. This is the Paul Douglas who was to present Samuelson with the Clark Medal fifteen years later, and whose ideas are discussed in more detail in chapter 5 of this volume.
This book was written as a survey of the unemployment problem that could serve as the foundation for an ongoing research project on a topic that had come to dominate the political agenda. As such most of the book involved analyzing the problem and identifying research that needed to be undertaken, rather than the politically more contentious issue of proposing policies. Its five hundred factually and statistically dense pages, drawing on the experiences of several countries, covered seasonal, technological, and cyclical unemployment, as well as discussing the placement of labor and unemployment insurance.
Yet the book was far from neutral in its tone. At the end of a chapter reviewing the extent of unemployment and its costs, Douglas and Director concluded that the fear created by mass unemployment probably reduced rather than improved efficiency, implying that policies to reduce unemployment would not reduce incentives to work. They proposed no fewer than nineteen ways in which action could be taken to provide a more efficient public employment service, and offered a plan for unemployment insurance, countering the objections raised concerning such schemes. They also expressed the belief that public-works schemes could not only reduce fluctuations in unemployment but could also reduce its average level. Monetary policy could also help, through stabilizing prices. Douglas and Director had no radical new theory to offer, but they were arguing a clear case for government intervention to reduce unemployment.This was the Director who taught Samuelson the economics he had missed through his late start.c The textbook they used was Modern Economic Society, by Sumner Slichter (1931), possibly the most well known economist of the day on account of his lecturing and his writing for Harpers and New Republic. Samuelson remembered Director as using the book but not speaking well of it. This could have been because Slichter was slightly more skeptical about the possibilities for government intervention than Director was at that point, or it could have been that he was impatient with the institutional detail contained in the book's nine hundred pages. Given what Samuelson was learning in his other courses, he should have appreciated Slichter's claim that economic arrangements in different countries had developed so differently that it was no longer possible to have a single theory to fit them all.23
c. Director, of course, dramatically changed his views on the role of the state in economic life. Douglas believed this change began in 1932 as he came under the influence of Frank Knight and Henry Simons (Van Horn 2010a, p.
265). If Douglas was right about the change beginning during 1932, it seems unlikely that his position had changed significantly by January.This was the first economics textbook that Samuelson had to study carefully, and it was one that he remembered for many years.
Like Samuelson’s teachers in the general courses on humanities and social sciences, Slichter began with the industrial revolution. Technological advance had transformed production to an extent unimaginable in 1800, but despite this, economic problems were far from being solved. Indeed, some problems had arisen because of industrialization. The problems of poverty and provision for old age were not solved, and even under normal circumstances, industry failed to work at full capacity. He wrote,
When we observe modern industry failing to give steady employment and to produce to capacity, even when millions of people urgently need more goods; unnecessarily killing and maiming thousands of men each year; wasting irreplaceable natural resources simply because it is more profitable under existing economic arrangements to waste them than to conserve them; employing thousands of experts for the purpose of making men desire certain things, not because they are good for men to use, but because they are profitable for business enterprises to sell; denying to wage earners an opportunity to participate in making the rules under which they work;... [making man] a slave to his creations, dominated by industry instead of making it serve his ends.24
From this, Slichter concluded,
How to make industry more of a tool and less of a tyrant, how to prevent the process of making a living from interfering with the opportunity and the capacity of men to live a good life... these are the supreme economic problems.25
The economic problem was framed, as in his other courses, as that of the social control of industry: industry was failing and needed to be controlled so that it could work in the interests of society.d Many of Slichter’s “constructive suggestions” were directed at remedying defects in the free enterprise system: the provision of better market information, more accurate cost accounting, improving the regulation of public utilities and increasing their number, and reducing the uncertainty facing business. Other suggestions reflected a progressive outlook, such as raising inheritance taxes, redistributing income in response to needs, giving labor and consumers a greater role in directing industry, and greater planning of the economy.
d. This was a common theme in the 1930s. See Backhouse 2015b.
The theoretical content of the book was, by modern standards, minimal. There was a diagrammatic treatment of supply and demand, and numerical examples to illustrate how costs might change with output, but beyond that the argument never strayed far from describing American industry. The interdependence of markets was explained using concrete examples. Director, however, exposed Samuelson to more abstract treatments of economics, one of the more unorthodox readings he assigned being the chapter on “The Arithmetic of Pricing” in Gustav Cassel's The Theory of Social Economy (1923), something mentioned nowhere in Slichter's text.26 Here, in place of the American economy, was a self-contained economy in which production has already taken place, leaving a fixed stock of goods to be exchanged between producers and consumers. For each good, Cassel wrote down demand functions, according to which demand for each good depended on prices of all goods in the system. Assuming demand for each good equaled supply, the result was a set of equations, where the number of equations was equal to the number of goods and hence prices in the system.
Cassel then took account of production, assuming that production of each good required specified amounts of each of the primary factors of production (labor, raw materials, and capital goods already in existence). He obtained an equation linking the price of each good to its cost of production, this depending on the prices of the factors of production. Solving these sets of equations could give the values of all the prices (of goods and factors of production) and the quantities used and produced. Cassel's chapter covered the same problem, of the interdependence between markets, in a far more abstract way than Slichter in his discussion of free enterprise.
In later life, Samuelson attached great importance to Director's having introduced him to Cassel's work, arguing that it was because of this that he first took a serious interest in mathematics.
Director, oddly, recommended to me the brief section in The Theory of Social Economy on mathematical general equilibrium that Cassel had cribbed from Walras. I was amazed and delighted. So I hurriedly took the basic courses in university mathematics. By that time my economics explorations were running ahead of assigned course textbooks in mathematics.27
However, while it is possible that Director may have introduced him to Cassel at this point—it would have fitted as providing a more formal account of the operation of free markets than Slichter provided and it involved no more than simple mathematics—Samuelson's transcript suggests that the decision to study mathematics, and possibly even the decision to major in economics, came much later.e
In the third quarter, Lloyd Mints took over from Director.28 Mints was a specialist in monetary economics who had joined Chicago in 1919, and had taught the course on economic organization until 1927.29 His having taught the course for so long may explain his choice of a long-established textbook, Outline of Economics (1931), the main author of which, Richard T Ely, had been one of the founders of the American Economic Association in 1885. The textbook had been extensively revised and the latest edition contained chapters revised, if not written, by the economist widely considered to be one of America's leading economic theorists: Allyn Young. Mints did not use the whole book—850 pages would have been too much in a quarter—but did use the chapters on money, banking, and the business cycle.30 Given that he later took Mints's course on money and banking, the main significance of this lies in Samuelson's early exposure to one of the economists whom Milton Friedman would cite as responsible for establishing the Chicago tradition in monetary economics, of which Samuelson was to become very critical.f
Samuelson may have taken this more traditional course in economics in place of the material he had missed through his late arrival, but it was not his only exposure to the subject.
Economic ideas were present even in the course on the humanities. There, and in the social science course, economics was presented as dealing with one aspect of the social system, meaning there was no sharp separation between economics and the other social sciences. He was obtaining a broad education in the humanities and the social sciences, as part of which he was forced to think extensively about what it meant to be a scientist, auditing additional courses and attending special lectures at the university. He was on track to become a social scientist and had not yet made the decision to become an economist. At the end of the year he won a prize, not for anything he did in economics but for a political science essay.ge. Equally, it is possible that Samuelson misremembered and that Director had introduced him to Cassel's general equilibrium system in a course on labor problems, discussed in chapter 4 this volume.
f. See chapter 5 this volume.
g. The Civil Government Prize. Samuelson's essay appears not to have been preserved.