The New Economics
Samuelson was, through and through, a mathematical economist, forever turning his mind to developing new theorems; and throughout the 1940s, he published in addition to his two books a stream of articles on mathematical economics and applied mathematics.
For reasons given in the previous section, this work was largely shaped by ideas he learned from Wilson. But beginning in 1937, he began to fall under the spell of Alvin Hansen, the new Littauer Professor of Public Policy, who pulled him in other directions. Hansen was no mathematician, which meant that Samuelson could demonstrate his value to him by working out a model of the business cycle that Hansen could formulate but not analyze. The multiplier-accelerator model, developed by Samuelson as a theoretical exercise, was Hansen's model. However, Samuelson's relationship with Hansen was to involve much more than being the mathematician who solved the technical problems Hansen could not solve. He was drawn into the Fiscal Policy Seminar and at the 1938 American Economic Association meeting, he provided a verbal analysis of alternative forms of fiscal stimulus, very much in the vein of Hansen.Hansen was instrumental in bringing Samuelson to Washington during the war, where at the NRPB he became involved in tackling the problem of what would happen when the war ended. Through Hansen, and regular meetings at the Fed, he developed a wide circle of contacts, augmenting those he already had through Harvard and Chicago. He threw himself into not only his empirical work at the NRPB but also debates over the multiplier and public finance—the main issues facing economists in wartime—with friends and contacts at other agencies. He developed expertise as an applied economist, his contacts being as likely to approach him with a problem relating to the meaning of data as to solve a theoretical problem they could not solve.
Samuelson claimed that for a while he resisted the lure of Keynes's General Theory. Starting in 1939, he began to take up the concept of the multiplier and the idea that the level of aggregate demand determined the level of employment. However, like Hansen, for most of the 1940s he continued to distance himself from Keynes. The two of them accepted the multiplier as a useful, if not invaluable, theoretical tool, but they used it within the intellectual framework, rooted in earlier continental European and American business cycle theory, developed by Hansen. Samuelson's version of “the new economics” or “the modern theory of income determination” became a distinctively American form of Keynesianism, emphasizing the role of innovation and technological change in determining the level of investment.
While working with Hansen, Samuelson was revising his doctoral thesis for publication. In Foundations of Economic Analysis, his analysis of income determination remained separate from his new theory of the consumer because, contrary to the common view in economics today, he did not believe that economy-wide relationships could be grounded in optimizing behavior. Instead, his analysis of the economy as a whole was based on relationships that were determined empirically—the consumption function and the acceleration principle. He provided an account of dynamic modeling that drew on theorems about the stability of systems of differential and difference equations, and was never integrated with his theories of how consumers and companies behaved.
Though the unit to which Samuelson was a consultant had a narrower remit, the NRPB at this time was the source of radical proposals that would have transformed American society. This fed into his unit's forecasts of postwar consumption, based on the assumption that poverty would be eliminated and the distribution of income would be made more equal. But it also implied a strong political stance, for these proposals were anathema to conservatives already incensed about Roosevelt's New Deal.
Samuelson sided strongly with Hansen, the first time a clear political position was evident in his professional work; it is as if Hansen not only persuaded him to work on applied macroeconomic problems but also brought him round to taking a political position. His association with Hansen would have been clear from the pamphlets he was writing at the NRPB, but it became even more explicit when he started producing articles supportive of Hansen's internationalist political positions in The New Republic. In these, unlike in his previous work, he developed a strong political voice—and a taste for journalism that never left him.Samuelson also took a strong political stance in relation to the problem of postwar science policy, an issue in which he had become interested while working in the Radiation Laboratory. When he feared that the Wilson Committee was not going to be sufficiently bold in its recommendations, he tried to persuade both a contact in the National Planning Association and the editor of The New Republic to take action. In early 1945, he had the opportunity to try to shape the views of the Bowman Committee, helping write one of the reports on which Vannevar Bush's Science: Endless Frontier was to be based. Even with the support of that year's Nobel Prize winner, I. I. Rabi, he could not win out over conservatives opposed to planning; but right to the final report, he and his friend Henry Guerlac were trying to get as good an outcome as they could. Samuelson had become a supporter of planned science, such as took place in MIT's large research laboratories, to one of which he and Guerlac were then attached.
Samuelson's support for Hansen hardly took him out of the political mainstream, but going even this far implied a break with the anti-interventionist and anti-Keynesian stance of his Chicago teachers, Director and Knight, and drew him closer to Paul Douglas, whose views on policy he must have rejected while at Chicago, however much he appreciated his introduction to economic theory.
Traces of their teaching can still be found in his work, however. In his textbook, Samuelson framed his conception of the economic process in terms taken from Knight, and he drew upon what Knight had called the “Wheel of Wealth” for one of the key visual aids in his textbook.It is impossible not to see a connection between Samuelson’s lifelong interest in the theory of capital and the debates in which Knight and Schumpeter had engaged. Most strikingly, the stance Samuelson took toward ethics— that welfare economics must of necessity embrace ethics, for without ethical judgments there is no basis for reaching any conclusions about welfare—was one of Knight’s main themes and the subject of numerous articles. Samuelson came to reject much of what Knight wrote—in 1950, Knight even complained to a mutual friend that Samuelson never missed a chance to get slurs against him into print.3 Samuelson later denounced Chicago monetary economics as living in pre-Keynesian darkness, far darker than the most cursory glance at what Chicago economists were saying would indicate. However, for all his vociferous and highly public denunciation of his former teachers, in important respects—Samuelson’s focus on capital theory and his approach to welfare economics were to become very important—his outspoken criticism conceals the fact that he had learned things from Knight that he never abandoned.