Just prior to Hayek's departure from post World War II mainstream economics came what must be hailed as his greatest important contribution to economic science. It can be well understood if I make reference to the famous debate between Lerner–Lange and Ludwig von Mises (1935) over the role of the supply-and-demand mechanism in a socialist state. Lerner (1934), as well as Lange and Taylor (1938) quasi-independently, suggested that playing the game of parametric supply–demand auctioning could optimally organize a socialist society that had evolved beyond historic capitalism.
Arguably this general notion might be traced back to Adam Smith's legendary Invisible Hand, which led society unconsciously to achieve the maximal “general good.” Individual avarice, under market checks and balances, achieved this happy state. A more sophisticated version of the same idea came in the 1890s from Pareto (1896–97) and Barone (1908), long before Arrow-Debreu breakthroughs. Pareto deduced the mathematical theorem that the determinative equations of Walrasian general equilibrium mimicked exactly the maximizing welfare conditions for utopias.
By contrast, Mises in his polemics prior to Lerner–Lange, had contended that only under actual capitalism could one even define a post-Bentham welfare economics. Autobiographically, I can testify that most economists born after 1910 at that time would have voted Lerner and Lange to be the debate winner, with Mises as the prime loser. (Even my Harvard mentor Schumpeter saw some merit in the Lerner–Lange conjectures.1)
In the 1940s Friedrich Hayek in an invited Harvard lecture introduced a new dynamic element into the debate. Call it “information economics.” The broad competitive markets, Hayek proclaimed, were the recipients of heterogeneous idiosyncratic bits of individuals’ information. Playing for matches rather than for real money or blood was as different an economic dynamics as night is from day.
I was not at all the only one to be converted to the view that, as between Abba Lerner, Oskar Lange and Ludwig von mises, Friedrich Hayek was actually the debate's winner. (After the U.S. State Department persuaded Lange to go back to Stalinesque Poland, Lange reportedly lost his lust for auction markets.)
The jury of history judges innovators not by adding linearly their plus and minus contributions. Hayek's 1974 Stockholm Nobel Prize was importantly won for him by his notions about decentralized information economics discussed that day in Cambridge, Massachusetts.
Never mind that Hayek over-praised the optimality of individualistic spontaneity. Charles Darwin's genius long earlier had eclectically enumerated both the plusesand minuses of individualistic natural selection.
I do not know how much George Stigler had ever been influenced by Hayek when later Stigler's work on information economics helped bring him his Nobel medal. Senior Robert K. Merton, as sociologist, historian and philosopher of history of science, taught us again and again that great things come in pairs and triplets. Darwin had his Wallace. Newton had his Leibniz. Leibniz had his Newton. Thomas Kuhn documented the case that the fundamental Law of Conservation of Energy had a dozen different fathers. Although what each had discovered was not precisely the same thing, maybe at most one of the dozen did understand all the nuances.--Paul Samuelson (2009) "A few remembrances of Friedrich von Hayek (1899–1992)," Journal of Economic Behavior & Organization.
Two long-running themes of my blogs on the philosophy and history of twentieth century economics, are (a) that ideas from the philosophy of science played a big role in cutting edge discussions among leading economists, and (b) that some ideas we associate with philosophy of science were developed or articulated within economics. On (b) I have primarily focused on the role of Kuhnian ideas within economics (between 1870-1960) [for an overview see here]. One reason to mention Kuhn is to note the otherwise peculiar fact the leading and influential ,professional economists of the age (Samuelson, Stigler, Buchanan, -- all Nobel laureates --) were serious and leading historians of economics, while simultaneously arguing for and writing textbooks with a conception of a professional economist that left little relatively room for the history of economics inside the discipline.
Because, yesterday, I was asked to comment on a précis of Roger Backhouse's first part of his biography of Paul Samuelson, the aptly titled, Founder of Modern Economics: Paul A. Samuelson, I returned to some of Samuelson's many biographical sketches of others. He excelled in the genre, in which he mixed personal memory, character sketches, and a kind of summing up of theoretical significance. In one of his earliest contributions to genre, his (1946) obituary of Keynes, he pretends as if the significance of a biographical sketch is merely short term: "The personal characteristics of the scientist can only be captured while memories are still fresh; and only then, in all honesty, are they of maximum interest and relevance." Yet, he closes the 1946 obituary with a footnote (#15) in which he writes, " should like at this point to pass a clue on to the future historian of economic
thought." What follows is a rather clever suggestion of the influence by Keynes on Joan Robinson 1933--the effect of which is to diminish the originality of Robinson and, thereby (because Samuelson is a canny operator) to diminish her would be future influence. Because Keynes is dead, he can't set the record straight on her behalf (if he would have been so inclined). So, in stroke he has undercut one of the sharpest operators of his time. Even if you don't agree with my interpretation of the footnote, the wording of the footnote shows that is also playing a long game in the service of posthumous fame and score setting.
Samuelson exhibits here the marks of a Kuhnian legislator, who can operate at multiple dimensions, short term and long term, but also bring together different kinds of concerns (recall this post on Samuelson's biographical sketch of Viner). This ability to play chess on multiple boards at once is characteristic of Samuelson's command of the discipline even at a young age. (He was 31 in 1946.) While Samuelson pioneered many techniques, his greatest skill was, in my opinion, to write the paper that would help the rest of the economics discipline understand what the issues were on any topic. He did this time and again, and his citation score is monstrously large.
As an aside, Samuelson's biography of Keynes is full of gems, but the most revealing about Samuelson is this one: Keynes, who became a celebrity outside academia with the Economic Consequences of the Peace, "met the practical men of affairs on their own ground and won the reputation of being an economist who knew how to make money." Samuelson would become a celebrity and wealthy with his textbook and trading success.
Okay, let me now turn to the final paragraph I quoted above from the Hayek biography. If we ignore the interpretation of Adam Smith (and the amusing and not wholly false proposal that Smith is the founder of Socialist Utopias as opposed to the Stalinist kind),* the comment on the context and significance of Hayek's greatest contribution to economics is judicious. But it is a bit surprising to see Samuelson take yet one more pot-shot at George Stigler (who had died in 1991). Now, you need to know that Samuelson and Stigler knew each other from the The University of Chicago of the mid 1930s, where Samuelson was a precocious undergraduate and Stigler one of the leading graduate students. They were both greatly influenced by Frank Knight and Jacob Viner. But Samuelson developed into the leading 'centrist' (his own words in the biography of Hayek) technocrat, whereas Stigler became one of the leading lights of the Chicago school. (As Samuelson makes clear Hayek pretty much left professional economics after 1945.) I have repeatedly explored their debate that originated in the status of welfare economics (see here, and follow the links back) in 1943.
But Samuelson does not merely suggests that Stigler won the Nobel for not quite original, cutting edge work. He also introduces the great sociologist of science Robert K. Merton to reinforce his point. Now, Merton had been a colleague of Stigler's at Columbia and (together with Talcott Parsons) a great influence on Stigler's conception of science (recall also this post.) Stigler loved to quote Merton in his methodological papers, and there is no doubt that when Stigler wrote Kuhn just after Structure appeared to inform Kuhn that Kuhnian ideas were developed by economists like himself, they had drawn on Mertonian insights. But the plot thickens (as Backhouse gently reminded me yesterday) because Merton was also the father of the economist Robert Merton (and another Nobel laureate which he won for his contribution to the famous option price formula named after Black and Scholes). Merton and Samuelson wrote an important and widely cited text from the "perspective of a model in which agents can revise their decisions continuously in time."
It's quite clear that Stigler, who was something of an attack dog, is being treated as the lesser light and being likened to Wallace (and that Hayek is more akin to Darwin). And then for good measure, the reader is reminded that there are good odds that neither Stigler nor Hayek truly understood what they had contributed: there can be only one who understands all the nuances, and that's Samuelson.
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