Paul Samuelson — an economist in ‘the business of dishonesty’

8 Feb, 2019 at 00:00 | Posted in Economics | 7 Comments

I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked, [it] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [and then] in every short period of time. If Prime Minister Gladstone came back to life he would say “oh, oh what you have done” and James Buchanan argues in those terms. I have to say that I see merit in that view.

Paul Samuelson

Samuelson’s statement makes me come to think of the following passage in Keynes’ General Theory:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is com­monly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authori­ty, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.


  1. Sargent said that “the budget constraint will make debt sustainable” when asked about high government debt ratios in industrialised countries. But he does not really explain what this “budget constraint’ actually is. He talks as if the budget constraint in micro is something that actually exists. No doubt he is implicitly referring to perverse incentive effects or inflation a la NAIRU. But really this is just another miserable example of the weak ontology and epistemology that underpins neo-classical theory.

  2. In other words, he admits economists are liars and economics is really a normative religion.

    • That’s not what Samuelson is saying. He is admitting as a Keynesian that while balancing the budget year in and year out would be destabilizing, there is some merit to the view that one should not run government without some attention to the possibility of runaway debt.

  3. Except the economy runs off bank deposits, not fiat, so the banks MUST be taken into account – especially when they are privileged by government.

    • That is not to say that the banks “create” money. They merely use loans to recirculate the existing stock of money at an ever-increasing velocity. The question of whether or not banks “create” money is important for the steps that might be taken by governments to control them. If banks “create” money, this is a stock. If banks re-circulate money, this is a flow. Controlling the stock of money is quite different to controlling the velocity of money. If we confuse the two, as most economists appear to, then government attempts to control money will be chaotic and often counter-productive.

      • That is not to say that the banks “create” money. Ron Saunders

        It is beyond dispute that “Bank loans create bank deposits.”

        As for recirculating money, i.e. fiat, imagine that physical fiat, coins and bills, have been abolished? Then how could banks recirculate fiat, if the non-bank may not even use fiat? Yet abolishing coins and bills is not such a far-fetched idea.

        Instead, bank deposits are liabilities for fiat and due to heavy government privilege for the banks:
        1) The banks may safely create huge amounts of bank deposits.
        2) The non-bank private sector must use bank deposits or be limited to mere physical fiat, coins and bills, since only depository institutions may use fiat in account form via accounts at the Central Bank.

      • Private commercial banks indisputably create money, in fact they create almost all the money we use. Any good accounting textbook that describes banks’ ledger entries can inform your ignorance on this point.

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