Saifedean Ammous on the failed forecasts of Paul Samuelson's economics textbook

The most popular and influential economics textbook in the post-war period was written by Nobel Laureate Paul Samuelson.  We saw in Chapter 4 how Samuelson predicted that ending World War II would cause the biggest recession in world history, only for one of the biggest booms in U.S. history to ensue.  But it gets even better.  Samuelson wrote the most popular economics textbook of the postwar era, Economics: An Introductory Analysis, which has sold millions of copies over six decades.  Levy and Peart studied the different versions of Samuelson's to find him repeatedly presenting the Soviet economic model as being more conducive to economic growth, predicting in the fourth edition in 1961 that the Soviet Union's economy would overtake that of the United States sometime between 1984 and 1997.  These forecasts for Soviets overtaking the United States continued to be made with increasing confidence through seven editions of the textbook, until the eleventh edition in 1980, with varying estimates for when the overtaking would occur.  In the thirteenth edition, published in 1989, which hit the desks of university students as the Soviet Union was beginning to unravel, Samuelson and this then-co-author William Nordhaus wrote, "The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive."  Nor was this confined to one textbook, as Levy and Peart show that such insights were common in the many editions of what is probably the second most popular economics textbook, McConnell's Economics: Principles, Policies and Problems, as well as several other textbooks.  Any student who learned economics in the postwar period in a university following an American curriculum (the majority of the world's students) learned that the Soviet model is a more efficient way of organizing economic activity.  Even after the collapse and utter failure of the Soviet Union, the same textbooks continued to be taught in the same universities, with the newer editions removing the grandiose proclamations about Soviet success, without questioning the rest of their economic worldview and methodological tools.  How is it that such patently failed textbooks continue to be taught, and how is the Keynesian worldview, so brutally assaulted beyond repair by reality over the past seven decades - from the boom after World War II, to the stagflation of the seventies, to the collapse of the Soviet Union - still taught in universities?  The dean of today's Keynesian economists, Paul Krugman, has even written of how an alien invasion would be great for the economy as it would force government to spend and mobilize resources.

In a free market economic system, no self-respecting university would want to teach its students things that are so patently wrong and absurd, as it strives to arm its students with the most useful knowledge.  But in an academic system completely corrupted by government money, the curriculum is not determined through its accordance with reality, but through its accordance with the political agenda of the governments funding it.  And governments, universally, love Keynesian economics today for the same reason they loved it in the 1930s: it offers them the sophistry and justification for acquiring ever more power and money.

~ Saifedean Ammous, The Bitcoin Standard, pp. 158-160

First Edition, 1948

Larry Summers on the cause and cure of financial crises

The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending.

~ Lawrence H. Summers, "To fix the economy, fix the housing market," Reuters, October 24, 2011

Matthew Lynn on Keynesian stimulus and the U.K. economy

The U.K. has been in Keynes overdrive for the past 18 months. The budget deficit is already more than 12 percent of gross domestic product, on a par with Greece. And while the Greeks are cutting spending, the British deficit is widening. Figures for January showed another fiscal blowout. At the same time, interest rates have been slashed to 0.5 percent. And the pound has slumped in value, which is supposed to boost demand for British goods, and help close the trade gap.

Just about everything possible has been done to encourage consumption. The results have been miserable.

Retail sales excluding gasoline in January fell 1.2 percent from the previous month, twice as much as economists forecast. The number of people receiving unemployment benefits jumped to 1.64 million in January, the highest level since April 1997. The yield on U.K. government debt is now higher than on Spanish or Italian bonds, a sure sign that investors are losing faith in the country’s ability to pay its debts. The inflation rate has also accelerated to 3.5 percent.

In reality, Britain has the worst of all possible worlds: a stagnant economy, a crippling budget deficit and rising prices.

~ Matthew Lynn, "Deathbed of Keynesian Economics Will Be in U.K.," Bloomberg.com, February 23, 2010

William Trufant Foster: "Thrift is wasteful" (1931)

The glow of righteous satisfaction that many have felt in their recent savings should be replaced by the knowledge that thrift under certain conditions is very wasteful.

~ William Trufant Foster, leading pre-Keynesian economist in the “underconsumptionist tradition,” September, 1931

Bruce Bartlett on the New Deal: FDR did not spend enough

One reason why Republicans strenuously oppose the Obama administration's fiscal stimulus plan is because it repeats the errors of Franklin D. Roosevelt. To them, the New Deal was mainly about vastly expanding government spending and deficits, which Republicans believe made the Great Depression worse rather than better. Therefore, doing so again in the present downturn will also lead to failure.

The true New Deal legacy, however, is more complicated. Serious mistakes were indeed made. In particular, the National Industrial Recovery Act was fundamentally ill-conceived and retarded economic recovery. But in terms of fiscal policy, Roosevelt's error wasn't that he spent too much, but that he didn't spend nearly enough.

~ Bruce Bartlett, "The Real Lesson of the New Deal," Forbes.com, February 13, 2009

Noriel Roubini on the need for fiscal stimulus to prevent a financial meltdown

Given the collapse of private aggregate demand, consumption, residential investment and non-residential investment in structures are falling, and capital expenditure by the corporate sector was already falling before the latest financial shock and will now be plunging at an even faster rate. You need to give a boost to aggregate demand to ensure that an unavoidable two-year recession does not become a decadelong stagnation.

Since the private sector is not spending, and since the first fiscal stimulus plan (tax rebates for households and tax incentives to firms) failed miserably as households and firms are saving rather than spending and investing, it is necessary now to boost public consumption of goods and services via a massive spending program (a $300 billion fiscal stimulus).

The U.S. government should have a plan to immediately spend on infrastructure and new green technologies; also unemployment benefits should be sharply increased, together with targeted tax rebates only for lower income households at risk; and federal block grants should be given to state and local government to boost their infrastructure spending (roads, sewer systems, etc.). If the private sector does not or cannot spend, old-fashioned, traditional Keynesian spending by the government is necessary. It is true that the U.S. already has large and growing budget deficits; but $300 billion of public works is more effective and productive than spending $700 billion to buy toxic assets.

… Radical action can – and should – be taken to control the damage and prevent this meltdown from occurring.

~ Nouriel Roubini, "The New New Deal," Forbes.com, October 9, 2008

Paul Samuelson on the shortcomings of fiscal policy

In the early stages of the Keynesian revolution, macroeconomists emphasized fiscal policy as the most powerful and balanced remedy for demand management. Gradually, shortcomings of fiscal policy became apparent. The shortcomings stem from timing, macroeconomic theory, and the deficit itself.

— Paul Samuelson, Economics, 15th edition (1995)

Thomas DiLorenzo: "Mises was right and Samuelson was wrong" about central planning

Consider how [Ludwig von] Mises conducted himself compared to "mainstream" economists. I once read through all the back editions of Paul Samuelson's economics textbook for an aticle I wrote for Policy Review in 1987 ("Invasion of the Free Market Textbooks"). Samuelson preached to generations of students that central planning was inevitable, the wave of the future, so that there was no use opposing it. Instead, he advised Americans especially to read his book so that we Americans can become better central planners than the Russians. It all sounded very practical to most people at the time. Just call it "Keyensian fine-tuning" and no one will notice that it is half-assed central planning.

Mises, of course, never budged from his position that rational economic calculation under socialism was an impossibility, and that middle-of-the-road policies would also inevitably lead to socialism. He was right and Samuelson was wrong, even though as late as the 1980s "everyone knew" the opposite was supposedly true.

~ Thomas DiLorenzo, "'Pragmatic' vs. Principled Libertarians," November 12, 2003