Readers & Thinkers: The 1970 Nobel Dies

Dear All-

On December 13, 2009, Paul Samuelson died in Massachusetts. Paul was the second Nobel Laureate in economics and a giant in the field. I knew something was not quite right when his secretary told me last week that the interview that we had planned could not be held. This made me sad. I had planned to interview Paul at MIT this semester, but I waited too long.

I wanted to ask Paul so many things. For one, I wanted to ask him what he thought of the new developments in economics, and in particular, what he thought was missing from a field that he cared so much for. Unfortunately, I should have been using his discount factor, not mine, when making my decision when to fly to Boston. Now, I will just have to wonder.

Since many of you already know Paul’s accomplishments, I will focus on my own recollections of this great man. I first met Paul at MIT when I was a graduate student. By this time, he was already an emeritus professor and so I never took a class with him. However, I occasionally stopped in his office to chat about economics.

I admired Paul’s humility. He never pretended that he was a big shot. Once, while I was talking to a friend, Paul walked by. He wore a simple suit with a bowtie and had a spry step that made him seem much younger than he was. “Who’s that?” my friend asked, “The accountant for the economics department?” I replied, “No, that’s Samuelson.”

My next recollection of Paul Samuelson is from when I was working in the private sector. I was trying to analyze a common claim: there was no risk to investing in stocks in the long run. I started by going through prior research. Many of the pieces explaining to people that this claim was not true were written by Paul. My favorite example is how he used to put yearly US stock returns into a hat and randomly draw them in his class and show that, in fact, our history of capitalism is just that – a history – but there could have been many other histories with much different outcomes

I sent some of my work to Paul, expecting to be ignored. Instead, he wrote me several letters pinpointing me in the right direction including specific articles that had just been published. I was astonished. Here was an 84-year-old man who still was on top of the latest developments in a narrow field of economics. Moreover, one of the most distinguished economist in the world was willing to spend some of his precious time and offer me advice. I was grateful. I wish I had completed the paper.

A year or so later, I had begun circulating a newsletter on the financial markets. In this newsletter, I had a section for guest essays where other economists could write about a particular topic that would be of interest to others. I started soliciting contributions from several young economists that had achieved some success. Most of them declined to write. I then asked Paul. He agreed. And so he wrote the first guest essay for the newsletter. I asked him if I should pay him for his work and he said something like, “No, I never accept money for my writing, because it would compromise the integrity of my work.” I was inspired by his words. How many economists today behave according to this high standard?

Paul demonstrated that an economist has to be able to explain economics in a simple fashion and focus on important issues. I remember when outsourcing became a hot topic several years ago. The debate in political circles was muddled. From reading the literature at the time, I didn’t get the sense that economists were spending any time to help clarify the issues to the public or to the politicians. So even though Paul was in retirement, he addressed the issue because it was important. In 2004, he published “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization.”

Paul Samuelson created modern economics. He never stopped thinking and he never stopped trying to solve problems. He inspired and educated an army of great economists. They really don’t make them like Paul Samuelson anymore. He will be missed. I leave you with the guest essay he wrote for the newsletter near the peak of the Internet bubble.



December 13, 2009


Yes, Bonds Do Have a Merited Investment Role.

Professor Paul Samuelson

Massachusetts Institute of Technology

1970 Nobel Laureate

Once upon a time fixed-principal bonds were the staple for life-cycle savings. Common stocks were the exception. Now the tables have turned. Increasingly the dogma of the day is that equities, for all their uncertainties, dominate over bonds for the long-term rational investor.

This transition of thought is more advanced in North America than in Europe and Asia. But some trend toward convergence is perhaps observable. While there are still some folks in the process of being converted to the new faith, it becomes something of a self-fulfilling prophecy. New people begin to expect better total return from stocks; they begin to hold more of those good things; and that itself adds to the momentum of a long-term bull market in shares.

When and if investor opinion arrives at some kind of a steady-state equilibrium, so that price/earnings ratios settle down relative to interest rate spreads, should there still remain a definite and dominating edge in favor of stocks relative to fixed-principle indebtedness? This is a sober analytical question that deserves theoretical examination and historical testing.

I have heard from sophisticated money managers the following view:

Twenty-first century market economies will normally be progressively growing societies as a result both of positive net capital formation and of advances in technical, managerial, and human-capital knowledge. Bonds, by their definition and written contract, will deliver to their holders only the unchanging par of 100 (after ups and downs of luck have been cancelling out). By contrast the upside gains of the common-stock owners of enterprise are unbounded; and it is to them that the residual benefits of progress tend to accrue–alongside, of course, of the benefit in the form of higher real wages that a competitive labor market will impute to workers.

Ergo, by virtual dominance, common stocks must tend to displace bond assets in increasing degree.

Such a declaration is not gibberish. But I believe, as stated, that it is an incorrect version of how a modern mixed economy works and will work in the future.

In a nutshell, long-run equilibrium leaves a role for coexistence of both riskier equities and of more-certain coupon payments and principal payments. Ultimate investors, depending on their positions in the life cycle and the wealth pyramid, will differ in their tolerances and preferences among the spectrum of assets with different risk profiles. (Institutional and theoretical availabilities of new options and derivatives will widen this effective menu choice.)

A forward looking market of investors can be expected to impute into the bond contracts market-clearing items that reflect the importance of rentier capital as such, in comparison with more ventursome risk capital. Thus, when innovation shifts viably toward the more capital needing directions, real interest rates will share in the resulting producer-and consumer-surpluses–along with wages sharing and with common stocks sharing. That same 100 of par that I receive at a bond’s expiration and that I pay at its issue will be bridged in the bond’s intervening years by higher real interest rates; this can be expected to coexist with the higher total returns that stocks will tend to earn in such a specified period.

In summing up, I warn that there will be no easy predicting in advance whether the fruits to capital of progress will be 90-10 between stockowners and bondholders, or 10-90, or 60-40. My point is that the assertion of 100-0 is unjustified either by basic finance theory or the case studies of economic history.

Paul Samuelson

April 4, 1999.