Presentation Speech by Professor Assar Lindbeck, Stockholm School of Economics
Your Majesty, Your Royal Highnesses, Ladies
and Gentleman.
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