Paul Samuelson was the greatest economist I ever met. I had the office directly above his in the Sloan Building at MIT. It was somehow comforting that he was down there, working. And it seemed that he was always down there working.
The idea that I could ever help Samuelson is a testament of the extraordinary power of microfounded meaningful wage rigidity (MWR). His contributions to economics are legendary, beginning with his Harvard PhD dissertation that mapped mathematic foundations for contemporary economics. That work became a wellspring for important contributions, each of which would have been the centerpiece of a more ordinary career: revealed preferences, factor-price-equalization theorem, Samuelson-Stolper theorem, the Neoclassical Synthesis, and on and on.
Also notable among his achievements are his famous introductory textbook (1947) that introduced Keynesian concepts to a wide audience. They included the consumption function (primarily influenced by income), the multiplier (vital in the demand-propagation of macro shocks), and the accelerator. Along with Solow, he transformed A.W. Phillips’ curve into an essential analytical tool.
Original Great Idea
One of Samuelson’s many great ideas was the Neoclassical Synthesis, which he introduced in the third edition (1955) of his textbook. Perhaps his most consequential innovation, the NS provided Keynesians with the central framework for stabilization-relevant macroeconomics. The young Paul Samuelson, precocious in his comprehension of deep-structure neoclassical market-centric general-equilibrium modeling, initially resisted The General Theory, worrying about absent microfoundations (especially in its use of wage rigidity). He was eventually won over to the non-microfounded Keynesian surface structure by its much greater descriptive claim on actual economic instability and, therefore, its far superior macro-policy relevancy. From Samuelson (1986, pp.159-161): “The way I finally convinced myself was to just stop worrying about it…. I assumed a disequilibrium system, in which people could not get on the supply-of-labor curve.”
Samuelson’s conversion led him to construct the NS, which he once called “Model-T Keynesianism”. The Synthesis separated short-run nominal wage determination, assumed to be downward-rigid, and long-run labor pricing, demonstrating the two-way flexibility required in neoclassical growth theory. In his textbook, he simply asserted that the vast majority of American economists were committed to a “neoclassical synthesis” that allowed for the time-dependent coexistence of Keynesian macroeconomics and neoclassical microeconomics.
Economic performance and stabilization policymaking benefited from his and other Early Keynesians’ interim decision to stop worrying about deep-structure labor-pricing. They did not expect their incoherent modeling to endure. It was always understood as an interim solution, awaiting the eventual microfounding of MWR. Indeed, the surface-structure nature of the NS ultimately led, in an uglier transition than anticipated, to its demise as an important macroeconomic theory. Here is, of course, where the GEM Project’s microfounded MWR fits, eliminating the need for Samuelson’s convenient, badly incorrect, assumption of time-separated labor pricing.
GEM Helping Hand
The introduction of a second (information-challenged workplace) venue of rational exchange is the most useful helping hand the Project can offer Samuelson and his EK colleagues. That venue requiree the construction of a model, rooted in optimization and equilibrium, of on-the-job behavior. In prospect, its requisite employer/employee objective function, its intra-firm mechanisms of exchange, and unique constraints rooted in costly, asymmetric information made the task appear daunting, perhaps more so than it actually was. But, given the generalized-exchange derivation of rational-behavior MWR, macroeconomics is provided a robust channel through which adverse nominal disturbances induce involuntary job loss. Arguments that fluctuations are predominately supply, not demand, driven become an artifact of neoclassical theory’s arbitrarily restricting rational exchange to the marketplace. The longstanding market-centric, general-equilibrium thesis explaining macro instability is definitively rejected.
The long lag from Samuelson’s stop-gap Neoclassical Synthesis and the Project’s successful microfounding of MWR clearly has had huge costs. Most burdensome has been the long period of compromised stabilization-relevance that has been characteristic of the New Keynesian market-centric dominance of the macro mainstream. The long lag demonstrates the significance of the Helping Great Economists game. Think about how much damage would have been avoided if the GEM Project and its second venue of rational exchange had come along before the macro academy’s commitment to market-centricity had hardened into an assertion of settled theory.
Is the Game Worth the Candle?
Over time, one outcome of the development of macroeconomics stands out. The absence of rational-behavior, evidence-consistent labor pricing has deprived theorists of crucial guidance in their attempts to usefully model cyclical and trend aggregate behavior. Milton Friedman famously rejected a fundamental tenet of the GEM Project. He argued that the factual validity of economic assumptions are not important; only the predictions made by those assumptions mattered. In a famous debate, Samuelson disagreed, arguing that factually inaccurate assumptions cannot be a virtue in useful modeling. By the principles of logic, true premises only produce true conclusions; false premises’ conclusions can be either true or false.
Throughout his extraordinarily productive career, Samuelson attempted to motivate his models with assumptions that were consistent with the evidence. It is unfortunate that NK theorists have chosen to conveniently ignore that practice along with their marginalizing research on MWR microfoundations. Restoration of best-practices macro model-building is well worth whatever metaphorical candles are needed. Cumulative game score: Helpful 6 (Lewis, Solow, Harris-Todaro, Bernanke, Lucas, Samuelson); Unhelpful 0.
Blog Type: New Keynesians Saint Joseph, Michigan