More on Samuelson and the damage he has done to economic theory

I received a note from a friend and colleague on the note I did on the most damaging graph in the history of the sciences. He wrote:

Thanks for your blog on Samuelson. Only about twelve months ago did it dawn on me just how much damage Samuelson has done. I was thinking then of the Foundations, but of course you are right: his introductory textbook has been much more influential. Because his first degree was in physics, I don’t suppose he ever encountered a course in the History of Economic Thought in his life.

Samuelson’s first degree was in physics! This was news to me. So I did a bit of hunting, and now I am not sure that my colleague wasn’t right, and that Samuelson’s Foundations may have done as much harm as his introductory text and the Keynesian-cross. None of the standard online biographies mention physics, but there was then this on Paul Samuelson which is an entry in the online Encyclopedia of Human Thermodynamics, a link I shall certainly preserve. This is part of what it says about Samuelson:

In hmolscience, Paul Samuelson (1915-2009) (CR:89|#52) was an American economist noted, in economic thermodynamics, notable for his circa 1940 to 1970s efforts to derive economics via what he refers to a “mathematical isomorphisms” of the thermodynamics of Willard Gibbs, as communicated to him via his mentor Edwin Wilson and the so-called Harvard Pareto circle.

Economic stability | Equation 133
In 1938, Edwin Wilson, amid various letter communicates on his steam engine/physical chemistry based “mathematical economics” course, he was teaching at Harvard, wrote the following to Samuelson with critical comments on a paper by Samuelson:

“Moreover, general as the treatment is I think that there is the possibility that it is not so general in some respects as Willard Gibbs would have desired. [In] discussing equilibrium and displacements from one position of equilibrium to another position [Gibbs] laid great stress on the fact that one had to remain within the limits of stability. Now if one wishes to postulate the derivatives including the second derivatives in an absolutely definite quadratic form one doesn’t need to talk about the limits of stability because the definiteness of the quadratic form means that one has stability. I wonder whether you can’t make it clearer or can’t come nearer following the general line of ideas [that] Gibbs has given in his Equilibrium of Heterogeneous Substances, equation 133.”

The very impressive mention of “equation 133”, from Gibbs’ subsection “Internal Stability of Homogeneous Fluids as indicated by Fundamental Equations”, is the following:

U – TS + PV – M_1 m_1 – M_2 m_2 … – M_n m_n \,

Wilson, in other words, is suggesting, as it seems to be, to Samuelson that he use the Gibbs fundamental equation to formulate a theory of economic stability. Very hilarious indeed. Even the best of the best top dozen of the three dozen or so known human free energy theorists have been barely able to get a handle on this very intricate problem. No wonder Samuelson, into the 1970s, would become so irritated when people queried him about entropy and or sent him entropy-based economic papers to look at.

And where does all this lead:

Samuelson’s general economic model, in particular, was influenced by Gibbsian equilibrium criterion. His 1947 book Foundations of Economic Analysis, from his doctoral dissertation, is based, in theme, on Gibbs’ 1876 On the Equilibrium of Heterogeneous Substances. [1] Samuelson was the sole protegé of the polymath Edwin Wilson, who had himself been the sole protegé of Yale’s great physicist Willard Gibbs. During these formative years, Gibbs’ theories on equilibrium and chemical thermodynamics influenced them both in their ideas on the equilibrium of economic systems. In his seminal Foundations, Samuelson suggested, for example, that variation of the demand for a factor with a change in its price was analytically similar to thermodynamic variation in the pressure, volume, and temperature of an ideal gas. [9] All of this is pure Gibbsian. In fact, one may argue that the terms “foundation” and “variation” were plucked directly from the first page of the abstract to Equilibrium, wherein Gibbs states:

“Little has been done to develop the principle [of entropy] as a foundation for the general theory of thermodynamic equilibrium, which may be reformulated as follows: for the equilibrium of any isolated system it is necessary and sufficient that in all possible variations of the state of the system which do not alter its energy, the variation [δ] of its entropy shall either vanish or be negative.”

In short, Samuelson seemed to have adopted the variational logic of differential equations employed in thermodynamics, where variation goes by the mathematical name of “derivative”, to be applied in economics. Samuelson, however, maintains that his borrowing of thermodynamics to application in theoretical economics is only as “mathematical isomorphisms” between the maximum-minimum structures of thermodynamics and the cost-profit-utility systems of economics.

A very interesting idea in 1947, certainly worth pursuing. That we now can see it is a dead end is neither here nor there to all of world’s economists who have taken the trouble to learn maths rather than looking at the way an economy works.

A disgrace to the economics profession – the single most damaging graph in human history

Which has been the most damaging single diagram in the entire history of the sciences? There is not even a contest? The graph is, without any doubt, the Keynesian-cross diagram invented by Paul Samuelson which has been depriving economists of the ability to make sense of economic events since first published in the first edition of his Economics text in 1948.

keynesian cross

The idea for honouring this diagram has occurred to me with the publication by Mark Steyn of his just published book, “A Disgrace to the Profession” which he describes as “the story of the 21st century’s most famous graph and the damage it has done both to science and public policy”. Ah, but the present century is still young and although the harm the hockey stick has undoubtedly caused may well already be calculated in the billions, the harm Samuelson’s 45-degree diagram has done may be calculated in the trillions, and the damage it is doing is far far from over.

For those unfamiliar with the Keynesian-cross, it shows an upward sloping aggregate demand curve which reaches equilibrium where it crosses the 45-degree line at a level of national income well below the level of production that would employ everyone who wants a job. The answer, therefore, is an increase in public spending which pushes the line upwards and therefore pushes the equilibrium level of production along the horizontal axis to the right which then allows everyone to find a job.

The policy has, of course, never ever worked, but the trillions of dollars of public sector waste have drained our economies of astonishing levels of wealth that have kept our living standards well below their potential now for seventy years.

I have written my own book on the disgrace to the economics profession Free Market Economics which is now in its third edition. It takes apart Samuelson’s piece of beguiling illogic which has mesmerised the profession since it was first published. It is itself the very height of junk science, which has never on a single occasion given advice that has allowed an economy to raise its level of production and return an economy to full employment. It has, instead, led governments to pour their trillions into one wasteful project after another, of which green energy is only the latest, and while wildly expensive is for all that far from the most expensive example.

Economists who use any of these Keynesian diagrams starting with Samuelson’s are throwing sand in their own eyes. Profoundly shallow it is almost impossible to explain to someone who has been taken in by these graphs why they have been so badly misled. But there you are. No stimulus has ever worked but we still teach the diagrams that say public spending will bring our economies out of recession and give us strong and balanced growth. Do you believe that after what has gone on since 2009? Does anyone? A disgrace, but what is even more disgraceful is that the entire profession continues to accept a theory that has never worked. And there is the diagram that has corrupted the understanding of more individuals than any other diagram in human history.