The Crisis Will Return 

They say you started working at the American central bank in 1932.  But you must have only been sixteen then, were you not?

Sixteen or seventeen.  I was lucky enough that I found out early on what I really enjoyed and was interested in.  It takes many even very capable people a long time to find that out.  I always say that I worked less than the standard and was paid more than the standard.  What I am doing is not work for me, it is my hobby.  And I was remunerated for it truly sensationally!

So you were a professional during the Great Depression.

I have twice experienced living in the era of laissez-faire capitalism.  In 1915-1929, that is, from my birth until I was fourteen, America was a purely capitalist country.  And the second time was during the last eight years, during the reign of George W. Bush.  The present crisis confirms what I knew from history, that we cannot rely on the self-regulation of capitalism by the capitalists themselves.  But I am a centrist – neither to the right, nor to the left.  But not because I would not be able to make decisions.

You say that you have never visited Czechoslovakia or the Czech Republic.  Your teacher, however, was Joseph Schumpeter, a native of the Moravian town of Třešť.

Yes, he was a very important teacher.  It is true that he was born in the territory of what is today the Czech Republic, but he never showed any love or respect for Czechoslovakia.  He moved to Vienna and strove to get into the Austrian aristocratic circles.  He was also pro-English and anti-German.  An excellent person.  But that does not mean that he was not wrong.  After the war, he was a relatively successful – and young! – minister of finance of Austria.  In spite of that, I would not entrust him with, for example, my family fortune to take care of.  He didn’t have the nature for that.  I would say that his good ideas were really good, but the bad ones really bad.

An evaluation like this can be presumed, given your centrist perspective.

Yes, you are right.  Not even Franklin Delano Roosevelt, whom I admire, did everything right.  Schumpeter died in 1950.  I never heard of him wanting to go back to Czechoslovakia.  I never heard that he would have wanted to help, for example, in the post-war renewal of the country.  No.  His heart beat for Austria.

Some consider him to be a representative of the Austrian School of economic thought.  But you are not too much in love with it…

But he was a bit of a heretic; economists from the Austrian School never really trusted him.  He was not as radical as Friedrich Hayek or Ludwig von Mises.  But I do not think, however, that he was a good economist for analysing the Great Depression of the 30s.  When the Depression arrived in the US, he had already been working there as a professor.  He was saying that it was a good thing, that it would clean the air, and that it was the creative destruction that capitalism needs.  But it was not good – it is never good when the system is being cleaned.

Today, Schumpeter is considered to be nearly an economic genius.

His reputation is presently much better than when I studied with him.  At that time, he was a rival of John Maynard Keynes and I think – that is my personal opinion – that he was jealous of him.  He was jealous of Keynes’ prestige.  Justifiably so.  Keynes developed a set of tools that made it possible to find a recipe against the Great Depression.  Schumpeter was not capable of that.

Did you ever meet Keynes in person?

No, he was never invited to Harvard to lecture here.  That is a shame – not for Keynes, but for Harvard.

Deirdre McCloskey (a significant methodologist of economics, note by L.K.), calls the economics of the second half of the twentieth century “Samuelson-speak”.  Do you agree with her?

McCloskey?  I know her mother; I used to play tennis with her…  Look, when I joined the economics community in 1932, it was time for the discipline to be far more influenced by mathematics and to be generally reformulated.  I was a very important part of the process.  Many people, the generation of my teachers, claimed that it was a mistake.  But when you want to get among the leaders in the economic profession in any country, you must, above all, master mathematics and mathematical economics.

And what about that “Samuelson-speak”?

Yes, but I would like to emphasise that scientific progress – and it is similar in the case of physics, chemistry, and other natural sciences – is always the result of a group effort.  One of the reasons why I played such an important role was that I was in the right place at the right time.  I studied at the University of Chicago, and then I left for Harvard.  Not because Harvard University would have been that much better, but simply because I got an excellent offer.  All of the professors from Chicago advised me, without exception, that I should be going to New York instead – to Columbia University.  In spite of that, I chose Harvard and I really did choose poorly.  But over time – in part because of the fact that Hitler treated scholars in Europe so bestially – very good professors came there, like Wassily Leontief, my mentor, or Alvin Hansen.

But you ended up at the Massachusetts Institute of Technology (MIT).

I also got a very good offer from there…  I had been eyeing MIT before; it was a very technical school.  I had expected Harvard to match it in that regard, but that didn’t happen.  When I then transferred to MIT, I didn’t even have to move, as it was only another two miles by car.  At that time, MIT was no first-class economic workplace, but I am a lone wolf, and I did not depend on what kind of colleagues I had around myself.  To my surprise, at MIT we ended up building a foundation of ideas for modern economics that was the best in the world.

Paul Anthony Samuelson (94)

Probably no one influenced economic theory in the second half of the twentieth century as significantly and broadly as this Professor Emeritus of the Massachusetts Institute of Technology in Cambridge.  The former Chief Economic Advisor of President Kennedy is the author of the book Economics, the most successful economic textbook of all time.  In 1970, Samuelson got the Nobel Prize, as only the third economist to do so.

As a young person, did you have communist inclinations?  Robert Fogel (the 1993 Nobel Prize Laureate in Economics, note by L.K.) told me recently that that was not uncommon among students in the Thirties.

I never succumbed to the “communisease” as students did after the 1929 stock-market crash, becoming Marxists in response.  I did not succumb because I was not living in New York, where such ideas prevailed.  And then, during my studies at the University of Chicago, I had to commute (Samuelson comes from Gary, Indiana, about 40 km from Chicago, note by L.K.).  I could not therefore participate in those nocturnal debates in the dormitory, during which people dreamed of creating a Utopia by the morning.

By the way, a portrait of Karl Marx is hanging next to the door to your office (the interview took place at the Massachusetts Institute of Technology, note by L.K.).  What do you think about him?

I have read a lot on this topic, and I do not think that Marx was a good economist.  He was not even a good prophet.  He thought the revolution would come in 1849 and that after that, capitalism would simply transform into a socialist society.  And that that society would be perfect and last forever.  On the other hand, a centrist has come to terms with the fact that compromises must always be made.  I therefore also differ greatly from libertarians, such as Friedrich Hayek and Milton Friedman.

As a centrist, how do you come to terms with the eternal debate ‘the market vs. the state’?

It has been shown repeatedly by the example of many countries that bureaucratic management always fails.  The economy can perhaps be managed in a kibbutz in Israel, which has a hundred inhabitants, where children do not even sleep with their parents and where the boss changes every month.  It may work in a group that is this small, although even there it usually ends up in failure.  My life experience leads me to the conclusion that without using a certain type of market mechanism, a high standard of living and technological progress cannot be maintained.  I was therefore not surprised when the Soviet system collapsed.

What do you make of the subsequent period of transformation in the countries of Central and Eastern Europe?

Gorbachev may have made a mistake by introducing a certain freedom of speech before changing the industry and the economy.  The Chinese learned from this and started with reforms of the economic system.  I had expected that as soon as the Soviet iron hammer would disappear from the scene, Eastern Europe would start approximating Western Europe economically.  But I was not a complete optimist.  I remember discussing the topic with a certain German economist after the reunification of his country.  “Germans are Germans: it will not take them too long before they bring the western and eastern standard of living to the same level,” he told me.  “Perhaps they will,” I answered, “but will it not end up being like with the US and Puerto Rico?  We are sending money to Puerto Rico, but they are not sending any to us…”

And now, on top of that, America is in a crisis.

And so are other countries.  We should not be surprised that Latvia was struck by such profound problems.  Or Iceland…  As of Tuesday, it was one of the most prosperous countries in the world, and ten days later, on the following Thursday, it was nearly the worst off.  A similar thing happened to Ireland, too.  By the way, Boston is full of Irishmen – since the time of their potato crop failure and the subsequent famine.  Several years ago, when their island economy was growing rapidly, nearly everyone wanted to go back to Dublin.  And now, they are emigrating to Boston, many for the second time…

What, then, is your diagnosis of the present crisis?

Bubbles have always popped – whether the recent one with real estate, or that somewhat older one, stock.  Perhaps even cave people and their primitive market had its “ups” and “downs”.  But this is the very first time something like this happened through modern financial engineering and its tools.

Which in particular?

Well, all those put options, call options, and swaps.  Those tools were invented here, at this school – the Massachusetts Institute of Technology.  And also at the University of Chicago, at Stanford, and Wharton.  And those were dangerous discoveries, similar to the discovery of gun powder.  Before it was discovered, all you could do was poison a neighbour’s sheep.  Today, you can go on the web and find out within a few minutes how to blow up a thirty-storey building.

Do you, too, feel like a successful scientist whose discoveries nearly ended up destroying the world?

The mathematical models my colleagues and I developed control those risks in principle.  In the reality of crazy Frankenstein-like financial engineering, however, a total lack of transparency occurred, without people realising it.  They plunged into extreme debt.  It is like with a baseball bat.  If there is no wind, I can balance with it.  But if it is as tall as the Empire State Building, nobody can balance it.

So it is due to innovation and debt?

Not just that.  Unregulated financial engineering was encouraged by the government of Republican conservatives.  Their approach, “Do whatever you like”, made markets completely non-transparent.  I have worked in countless non-profit academic financial committees (Samuelson does not accept positions on corporate bodies, note by L.K.), but I have never met a C.E.O. of a company who had even the slightest understanding as to how those put options and call options and similar things operate.  They only know one thing, which someone put into their head, that by this means money will come their way as if on a conveyer belt.  And do you know about that “mortgage securitisation”?

Of course, it is believed to have started all this.

And it means that a good mortgage from one bank is mixed with an average-quality mortgage from another bank and with an absolutely “rotten” mortgage from a third bank.  The banks don’t know much about each other.  Then rating companies come, which are presumed to warn buyers about the risk, and they give the best rating to this whole mixed package – AAA.  No wonder that the entire system got into such a pickle, the worst since the Great Depression.

You remember that first hand, so to speak.  In what way is this crisis comparable to it?

It really does not pay to be too old: I warn you against that.  But if you want to understand this recession, it does come in handy to have been alive in 1929.  Ben Bernanke (the head of the US central bank, note by L.K.), by the way an MIT graduate, and Larry Summers (the head of Obama’s National Economic Council and Samuelson’s nephew, note by L.K.), who also studied here, are from a generation of economists who got their professional education in the Seventies and Eighties.  And they were not sufficiently prepared for this type of crisis.

How come?

In the meantime, problems such as the liquidity trap and the paradox that people are not consuming, but saving, yet their increasing savings lead to fewer investments, have been forgotten since.  That was last an issue in the Thirties.  And then now.

You mean the paradox of thrift?

Yes.  You are familiar with it?  When you look into economics textbooks that were among the most popular before the present collapse, you will not even find those terms in the index!  It is even missing in one of the editions of my textbook, Economics.  When I found out, I immediately called one of my associates, William Nordhaus.  He said they did not want the book to be too thick!  And when they asked teachers who were using it, the consensus was to leave out passages that include the trap and the paradox, because that is pre-history today.  But in economics, as we see today, everything keeps revolving in a circle.

You mentioned Bernanke and Summers.  Is Obama’s administration dealing well with the crisis?

It is a good team, but it has to deal with the terrible legacy that Bush left behind.  Have you seen today’s paper?  One of the headlines reads: “Krugman: Bernanke did a good job, he should be nominated head of the Fed again.”  I agree.  As, after all, with most of what Paul Krugman (last year’s Nobel Prize Laureate in Economics, note by L.K.) has to say.  Without irony.

While we are on the crisis: have we been through the worst of it?

It is true that things are looking a bit better.  But that is not at all because of the system curing itself: it is due to blood transfusions, that is, economic stimuli.

Is therefore more market required, or more state – and therefore, regulation?

I think we will end up with a system that will be even more mixed than the present one.  Many decisions will still be up to economic entities, but under the supervision of regulators.  For example, the Securities and Exchange Commission has not done anything in the last eight years.  We are paying its employees for them to lie to us!  And that is not a good way to manage the system.  I think that regulation will therefore be tougher.  But when you are a centrist, you must always be prepared to make the necessary compromises.  Democracy is very controversial.

Are you not afraid that all those stimuli will in the end lead to significant inflation?

Presently, inflation in most West-European countries, in the US and in Japan, is very slight, because we still have an excess of capacity.  But let us try to forecast not what will happen by the end of this year or the next, but what will come in six or seven years.  China and India have enormous populations that can, in the meantime, adopt advanced management and production methods.  So it is only a question of time before they become economic superpowers.  China is four times as populous as the United States and its economy is growing twice as fast as that of the US or any West-European country.  In 1945, America was producing forty percent of the gross global product; other countries had been destroyed by the war.  Thus far, that percentage has dropped to roughly twenty percent – and not because we would have kicked into reverse.  Countries such as Japan – and the Asian economies in general – are simply going ahead rapaciously.

Will the US recover?

It can be predicted that the adverse state of the US payment balance will not improve within the foreseeable future.  Unfortunately, I believe that one day there will be an uncontrolled run on the US dollar.  And when that day comes, all American hedge funds will join in.  I have no illusions that that situation would not lead to a new global tremor.

Your textbook Economics was first published in 1948 and since then probably every economist in the world has had to deal with it in one way or another.  But nowhere in there did I find out what music you like.

Beethoven.  The Harvard Radio Station broadcast everything that Mozart ever composed.  Sometimes, when I am working, I turn it on.  I quite like him but I have found out that I get tired of him.  Whereas I never get tired of Beethoven.  By the way, do you know how much that composer of yours, Antonín Dvořák, made when he lived in America in the Eighteen-Nineties and composed the New World Symphony?  Nearly a hundred thousand dollars!  That was such a gigantic amount of money for that era that one almost does not want to believe it.

And what about modern music?  You come from Gary, where Michael Jackson was born.

Most of the music I like was composed before I was born.  Sometimes I listen to something newer, too, but it must not be too new.  My passion, however, was tennis.  I used to play it every day – at a covered court, with the same opponent.  At ninety, I decided to stop.  Primarily because in tennis, you fall sooner or later, which at my age naturally means a fracture.  And the consequences may be horrendous.  But I miss tennis.

Nobel Hated Economics

Alfred Nobel: that name still resonates in Stockholm.  Not only can one easily find books with that name in their title in bookshops, but right in the heart of the historical core, in the Gamla Stan quarter, in what is probably the most beautiful little square in the city, stands The Nobel Museum.  Introduced in it are all the laureates; next to Sartre, Seifert, and Einstein, are also Samuelson and other the laureates of the prize for economics.  Historically, however, economic science, does not share the same position as literature, physics, and the other spheres of human action for which the Nobel Prize is awarded.  For several reasons:

First: officially, there is no such thing as the Nobel Prize in Economics; the proper name is the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.  Second: whereas Nobel Prizes have been awarded since 1901 – that is what the inventor of dynamite wished for in his testament – economists only got their turn in 1969.  Third: Nobel was not too fond of economics; allegedly, he wholeheartedly hated it, so this discipline probably did not even occur to him when he was writing his last will.  “The fact that the prize in economics merges with the authentic Nobel Prizes in the eyes of the public is definitely an excellent marketing and media thing for economic science,” according to Deirdre McCloskey of the University of Chicago, a leading world historian and theoretician of economics.

Czech Peripeteia with Economics

It is almost unbelievable that for all of the twentieth century the economic community made do with only two basic, dominating textbooks.  In the first half, it was still The Principles of Economics, written by Alfred Marshall at the end of the 19^th century.  For roughly the second half of the century, school and university libraries were dominated by Paul Samuelson’s Economics, the most successful economics textbook of all time, which has seen nineteen editions since 1948 (most recently in 2009) and was published in 41 languages.  Thus far, it has sold over four million copies.

Václav Klaus, the then-Minister of Finance of the Czechoslovak Federal Republic, forecast in his preface to the first Czech edition, in 1991, that the following editions would most likely come from the pen of William Nordhaus (he celebrated his 68^th birthday this year), rather than the then-nearly eighty-year-old Samuelson.  And although Samuelson is still listed as the key author (it is also an excellent marketing brand), the new editions are indeed primarily the work of Professor William Nordhaus of Yale University.  (Whereas the first Czech edition was the translation of the thirteenth English edition, today, the nineteenth edition is already available in that language).

Klaus was, however, one of the few people who held in their hands the “zeroeth” Czech edition of Economics.  The translation from the Sixties, done by Luďek Urban and Rita Klímová (nee Budínová, the former wife of politician and publicist Zdeněk Mlynář and mother of the journalist and ex-minister Vladimíř Mlynář), circulated as an internal publication in the Economics Institute of the Czechoslovak Academy of Sciences, where Klaus then worked.  “The planned publication in book form was frustrated by 21 August 1968,” says economist and journalist Zdislav Šulc, in recalling the events of that day.  “The textbook then remained for more than twenty years in the form of an institutional publication.”

But there was another Peripeteia concerning Samuelson’s textbook.  When Rita Klímová, after 1989 the Ambassador of Czechoslovakia to the United States (she died in 1993) worked on the original translation, she asked Samuelson not to be so harsh on Soviet economics, that it would be easier to get the Czech version published in book form.  “Samuelson refused that, as he did not want to change the contents of the book due to political reasons,” said Oldřich Kýn, Professor Emeritus of Economics at Boston University (across the river from Samuelson’s Massachusetts Institute of Technology) who emigrated to the US in 1968.  But otherwise, Klímová, who had spent the Second World War on the other side of the ocean with her parents, made a good impression on Samuelson: “She spoke perfect English, with a Brooklyn accent,” he recalls.

Another incident occurred after the Velvet Revolution.  Michal Mejstřík, Director of the Institute of Economic Studies of Charles University and the head of the Supervisory Board of Czech Airlines, and a former member of the National Economic Council of the Government (NERV), visited Boston.  “In think that he was even staying with us,” recalls Kýn.  Mejstřík, who was then newly translating the textbook, was, for a change, asking Samuelson to leave out mentions that were too generous to Soviet economics – that this way, it may sound ridiculous in the post-revolutionary Czechoslovakia.  “Samuelson again refused, because he was fundamentally opposed to changing the contents of his book for political reasons,” says Kýn.  That time, the Czech translation was indeed published in book form.

An abbreviated version of the interview, obtained in Cambridge, was published in Týden No. 39 on 29 September 2009.