Paul Samuelson

more than any other economist, Paul Samuelson raised the level of mathematical analysis in
the profession. until the late 1930s, when Samuelson started his stunning and steady stream of
articles, economics was typically understood in terms of verbal explanations and
diagrammatic models. Samuelson wrote his first published article, “a note on the
measurement of utility,” as a twenty-one-year-old doctoral student at Harvard. he introduced
the concept of “revealed preference” in a 1938 article. his goal was to be able to tell by
observing a consumer’s choices whether he or she was better off after a change in prices, and
indeed, Samuelson determined the circumstances under which one could tell. the consumer
revealed by choices his or her preferences—hence the term “revealed preferences.”

Samuelson’s magnum opus, which did more than any other single book to spread the
mathematical revolution in economics, is foundations of economic analysis. based on his
Harvard Ph.D. dissertation, this book shows how virtually all economic behavior can be
understood as maximizing or minimizing subject to a constraint. JOHN R. HICKS did
something similar in his 1939 book, value and capital. but while hicks relegated the math to
appendixes, “Samuelson,” wrote former Samuelson student Stanley Fischer, “flaunts his in
the text.” SAMUELSON’s mathematical techniques brought a new rigor to economics.

Samuelson is among the last generalists to be incredibly productive in a number of fields in

economics. he has contributed fundamental insights in consumer theory and welfare
economics, INTERNATIONAL TRADE, finance theory, capital theory, dynamics and general
equilibrium, and macro-economics.

Microeconomics

Samuelson developed the concept of revealed preference, which argues that a consumer's
utility function can be deduced from their behavior. his application of the mathematics of
constrained optimization to consumer behavior deals with consumers’ preferences as revealed
by their choices, rather than an assumed utility function. he also made contributions to
welfare theory, including the Lindahl–Bowen–Samuelson criteria for determining whether a
change in the economy will improve welfare. 

International Trade

Swedish economist BERTIL OHLIN had argued that international trade would tend to equalize
the prices of factors of production. trade between India and the united states, for example,
would narrow wage-rate differentials between the two countries. Samuelson, using
mathematical tools, showed the conditions under which the differentials would be driven to
zero. the theorem he proved is called the factor price equalization theorem.

Financial Theory and Public Finance

in finance theory, which he took up at age fifty, Samuelson did some of the initial work that
showed that properly anticipated futures prices should fluctuate randomly. Samuelson also
did path breaking work in capital theory, but his contributions are too complex to describe in
just a few sentences. Samuelson contributed to the development of the efficient market
hypothesis with a mathematical proof that says if markets are efficient, then asset prices will

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follow a random walk, though he also argued that observing a random walk in asset prices
did not prove that financial markets are efficient (and he did believe that they are). in public
finance theory, he developed the theory of public goods and optimal public financing of
public goods in a market economy of private goods markets.

economists had long believed that there are goods that the private sector cannot provide
because of the difficulty of charging those who benefit from them. national DEFENSE is one
of the best examples of such a good. Samuelson, in a 1954 article, was the first to attempt a
rigorous definition of a public good.

Macroeconomics

in macroeconomics Samuelson demonstrated how combining the accelerator theory

of INVESTMENT with the Keynesian income determination model explains the cyclical nature
of BUSINESS CYCLES. he also introduced the concept of the neoclassical synthesis—a
synthesis of the old neoclassical MICROECONOMICS and the new (in the 1950s) Keynesian
macroeconomics. according to Samuelson, government intervention via fiscal and monetary
policies is required to achieve full employment. at full employment the market works well,
except at providing PUBLIC GOODS and handling problems of EXTERNALITIES. JAMES
TOBIN called the neoclassical synthesis one of Samuelson’s greatest contributions to
economics.

in linear programming and economic analysis Samuelson and co-authors Robert Dorfman

and ROBERT SOLOW applied optimization techniques to price theory and growth theory,
thereby integrating these previously segregated fields.

a prolific writer, Samuelson has averaged almost one technical paper a month for more than
fifty years. some 338 of his articles are contained in the five-volume collected scientific
papers (1966–1986). he also has revised his immensely popular textbook, economics, nearly
every three years since 1948; it has been translated into many languages. in 1970 Paul
Samuelson became the first American to receive the Nobel prize in economics. it was
awarded “for the scientific work through which he has developed static and dynamic
economic theory and actively contributed to raising the level of analysis in economic
science.”