The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1970
Paul A. Samuelson
Presentation Speech by Professor Assar Lindbeck, Stockholm School of Economics
Your Majesty, Your Royal Highnesses, Ladies
One of the salient features of the development of economics during the last decades is the increased degree of formalization of the analytical techniques brought about partly with the aid of mathematical methods. We can perhaps distinguish two different branches of this development.
One branch is econometrics, designed for immediate statistical estimation and empirical application - with pioneers such as Ragnar Frisch and Jan Tinbergen, who, last year, jointly received the first prize in economic science in memory of Alfred Nobel - a prize based on a donation by the Bank of Sweden.
The second branch is orientated more toward basic theoretical research, without any immediate aims of statistical, empirical confrontation. It is in this latter area that Professor Paul Samuelson, Massachusetts Institute of Technology, USA, has made his great contributions, and for which he has now been awarded the prize in economic science.
Generally speaking, Samuelson's contribution has been that, more than any other contemporary economist, he has contributed to raising the general analytical and methodological level in economic science. He has in fact simply rewritten considerable parts of economic theory. He has also shown the fundamental unity of both the problems and analytical techniques in economics, partly by a systematic application of the methodology of maximization for a broad set of problems. This means that Samuelson's contributions range over a large number of different fields. If we are to try to summarize his research achievements and to give a concrete idea of them, it is therefore necessary to limit ourselves to a few examples. We can perhaps divide his contributions into four main areas.
The first area is dynamic theory and stability analysis. The characteristic feature of this field is that the analysis is not, as in static analysis, limited to equilibrium positions. Instead, the emphasis is on the question of how the economic system behaves outside equilibrium, and how the economy develops from period to period in a chain of development phases. What Samuelson has done here is, in particular, to specify the conditions under which an economic system is stable, in the sense that it tends to return by itself to equilibrium after a disturbance. He found that the conditions for stability often coincide with the conditions under which static analysis leads to what are usually regarded as "normal" conclusions, such as the conclusion that an increase in demand results in a rise in the equilibrium price. This is, in fact, an application of Samuelson's famous "correspondence principle", whereby a bridge was built between static and dynamic analysis, which earlier had usually been regarded as two completely different methods of analysis.
Another area where Samuelson has made great contributions is consumption theory and the closely connected theory of index numbers. In older theory in this field, it was usual to start with the assumption that households display well-defined preference patterns for consumer goods, in the sense that they can define how they evaluate alternative baskets of consumer goods. On this basis, theorems about consumer behavior were derived by deductive methods, by analyzing the effects of changes in, for instance, incomes and prices. Samuelson started at the other end, by defined preferences on the basis of observable behavior. The household, so to speak, revealed its preferences by its own behavior. This was the starting point for Samuelson's theory of "revealed preferences", a theory which has provided economists with considerably improved tools for analysis in consumption theory. Empirical studies of observable behaviour became better integrated with our theoretical constructs.
A third area where Samuelson has made great contributions is general equilibrium theory, in which is studied the interaction between a great number of different variables - in principle, all prices and quantities in the economic system. A few examples from international trade theory can be used as illustrations of this.
One example is the question of the gains from international trade. It has long been known that international trade, under certain well-defined conditions, leads to a higher national income for the countries concerned. It is also known that foreign trade may lead to income redistributions within countries, with the result that certain groups are in fact pushed into less-preferred positions. The question then is whether we may say, in a meaningful way, that a country, as a whole, has gained by international trade. What Samuelson did here was to show that those individuals gaining by such trade will be better off even if they have to compensate completely those who tend to lose on international trade. In this sense, free trade is potentially superior to protection. In analyzing the effects of tariffs on the distribution of income, Samuelson also showed, together with Wolfgang Stolper, that a tariff that raises the price of an import commodity results in an increase in the factor rewards for those factors of production which are used relatively intensively in the production of the protected commodity, whereas the factor rewards for other factors will fall.
Samuelson also showed under what conditions international trade results in an equalization of the factor rewards between countries engaged in international trade - the so-called "Factor Price Equalization Theorem". Here Samuelson followed up a line of research started by Eli Heckscher and Bertil Ohlin.
A fourth area, finally, where Samuelson has made outstanding contributions, is in the field of capital theory. One criticism which has long been directed against traditional capital theory is that it is based on the assumption that it is possible to construct a concept of an aggregate stock of capital, that is, a sum in money terms of the value of all capital goods in society. Samuelson now showed, partly in cooperation with Robert Solow, that it is possible to develop a logical capital theory - and to speak about a well-defined price of capital - even without adopting such an aggregate concept of capital.
Another contribution within capital theory was that Samuelson further elaborated the conditions for economic efficiency over time. It is in this context that we should see his famous "turnpike theorem" which defines conditions for maximal growth and shows that it might pay for a country to choose an economic growth path characterized by a maximal growth rate - what he calls a "turnpike" - with proportions between the production sectors that are completely different from the proportions we start from, or those we intend to achieve in the final position.
I now turn to you, Professor Samuelson. You have, probably more than anybody else, shown the advantages of strict formalization of economic analysis. Thereby you have, in fact, set the style for several generations of economists during the last decades. In spite of the high level of abstraction of much of your work, you have dealt with important economic and social problems in the real world. The sense of relevance in your production can be found in practically all fields where you have worked: in building your consumption theory on observable behavior, on the basis of your theory of "revealed preferences"; in formulating capital theory in the context of a large number of heterogenous capital goods; in analyzing dynamic processes and stability in situations outside equilibrium situations; in explaining business cycles by a combined multiplier-accelerator model; in studying the place of collective goods in the context of general equilibrium analysis; in analyzing maximum growth; in studying the distribution of consumption between generations by your "consumption loan" model; and in analyzing the gains from trade and the effects of tariffs on the distribution of income.
It is safe to say that, in many of these fields, you have achieved classical, not to say, "definite", formulations in the context of neo-classical or neo-Keynesian economic theory.
It is a great honour to convey to you the congratulations of the Royal Academy of Sciences, and to ask you to accept from the hands of His Majesty, the King, the 1970 Prize in Economic Science dedicated to the memory of Alfred Nobel.
From Nobel Lectures, Economics 1969-1980, Editor Assar Lindbeck, World Scientific Publishing Co., Singapore, 1992
Copyright © The Nobel Foundation 1970