Growing Fast and Getting Nowhere

by Don Boudreaux on May 1, 2006

in History, Myths and Fallacies, Standard of Living

My colleague David Levy, along with his co-author Sandy
Peart
, have discovered a rather amazing error extending over various editions of Paul
Samuelson
’s famous textbook, Economics (now in its 18th edition).  The following is reported in their paper "The Fragility of a Discipline When a Model has Monopoly Status," in the Review of Austrian Economics, 2006, pp. 125-136.

In the 1961 edition, Samuelson offers a graph showing the
projected growth rates, from the year 1960 to 2000, of the economies of both the United States and the U.S.S.R.  The U.S. economy
starts off, in 1960, with (according to Samuelson) real GNP twice that of the U.S.S.R. But the U.S.’s projected rate of economic
growth over the next forty years was depicted as lower than that of the
U.S.S.R.

Indeed, a range of growth rates for both countries was
shown. But even the most pessimistic growth-rate
projection for the U.S.S.R. was higher than the most optimistic growth-rate
projection for the U.S.  If you were Premier Krushchev looking at this
graph in 1961, you would have been pleased to see that the most famous economist
in the English-speaking world predicted that Soviet real GNP would start to
surpass America’s real GNP as early as 1984 – or, if things went as well as possible for both the Americans and the Soviets, no later than 1997.

That is, Samuelson predicted in 1961 that if the Soviets
achieved their maximum possible economic growth over the next four decades, they
would have to wait no more than 36 years for their output to surpass that of America’s. 

In the 1970 edition of the textbook a similar graph is
displayed, this time showing projected rates of growth for the two countries
from 1970 to 2010.  As with the graph in
the 1961 edition, projected Soviet economic growth is substantially higher than
projected U.S. growth. And as with the 1961 graph, U.S. real GNP starts off as twice that of the Soviet Union – but this time, remember, the starting year
is 1970, rather than 1960.

The 1970 graph shows that if the Soviets achieved their
maximum possible economic growth over the next four decades, they would have to
wait no more than 35 years – to 2005 – for their output to surpass that of America’s.

In short: Samuelson’s readers were told in 1961 (and shown in
a graph) that the economy of the Soviet Union was growing, and would continue to grow, significantly faster than the American
economy.  Nine years later, readers were
told the very same thing – even though, according to Samuelson’s own 1970 graph,
the ratio of Soviet GNP to U.S. GNP in 1970 was the same as it was in 1961.

A Soviet miracle: its real GNP grew faster than America’s real GNP without ever getting closer
to America’s real GNP.

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{ 15 comments }

Jaroslav Borovicka May 1, 2006 at 11:45 am

Well, Samuelson simply uncritically took over data which were cooked up by the Soviet statistical office (or, better, by the political leadership). This data was of course dreamt up to the extreme, but you see some pressures to "polish" GDP data in the western economies as well – even today.

liberty May 1, 2006 at 12:04 pm

Very good point.

Penn World tables actually has the USSR as only 25% GDP per capita for 1960 and 31.5% in 1970. So it did have some stronger growth than the US (as it should considering how much less developed it started out!)

By 1980, it is 40% and by 1989 43%

Maybe by 2005 it would have been 50%.

Not exactly stellar growth considering where they started. Hong Kong went from 23% in 1960 to 35% in 1970 to 57% in 1980 to 82% in 1990!

In any case, what would have made sense would have been to show the past, present and future of both countries and rather than make wild predictions, show patterns and explain the differences between the two systems. But then it would have been reasonable comparative economics – not typical macro models based on big theory, void of all fact.

Patrick R. Sullivan May 1, 2006 at 12:05 pm

Well, this wasn't just discovered. It's been known for many years that Samuelson was a laughingstock over this.

Gabriel Mihalache May 1, 2006 at 12:05 pm

I don't see the big deal here. So there was a false prediction in economics. You don't say?! :-)

The problem, in this case, is not with his model and methods but rather with the interpretation he would give (asserting far more than he could actually infer from the results) and the way the expectations of the readers would led them to believe more than they were actually told. That, and what Jaroslav noted, that the was no access to credible statistics on the USSR part.

Even contemporary models fail to account for many phenomena. They are simply not complex enough, or smart enough, to allow for credible long-term (multidecade) forecasting.

Samuelson should be chastised for his cavalier attitude towards simple mathematics applied to complex issues, but that's a personal fault, not something required by the methods of mainstream economics–which can be rather modest and prudent–as some Austrians would want to spin it.

Swimmy May 1, 2006 at 12:19 pm

I have a copy of the paper and a picture of the big no-no in a nice table:

http://static.flickr.com/50/138370229_8140cc7bdc.jpg

As Patrick Sullivan mentioned, this isn't exactly fresh news. It's just one of those things people should see as a reminder of how not to use data.

liberty May 1, 2006 at 12:23 pm

>Samuelson should be chastised for his cavalier attitude towards simple mathematics applied to complex issues, but that's a personal fault, not something required by the methods of mainstream economics

You don't think "mainstream economics" methods would require him to note that the prediction failed for the most recent 10 years? A textbook should be allowed to ignore that, ignore facts and data, and just focus on models and theory??

I sure hope you are in a minority in thinking that.

Swimmy May 1, 2006 at 12:28 pm

I forgot to mention what all the columns on the table mean. Sorry.

The "Max-Min Overtaking Time" is the number of years it will take the Soviet Union to outpace the U.S. economy under maximum Soviet growth expectations and minimum U.S. expectations. The "Max-Max Overtaking Time" is the same assuming maximum U.S. growth expectations. "Figure Number" is simply its location in the book; it's the very first table in two editions.

But the relevant column is the Starting Ratio. You would think that the book's editors would have caught on after three or four editions.

Gabriel Mihalache May 1, 2006 at 12:42 pm

Liberty, of course not. Failed hypothesis are just that and we can learn a lot from them. But one falsification is not enough to make most people throw a model away. (Especially in economics :-) )

liberty May 1, 2006 at 12:58 pm

>Failed hypothesis are just that and we can learn a lot from them. But one falsification is not enough to make most people throw a model away. (Especially in economics :-) )

Yeah, well this is my problem with mainstread macro. Micro is based on very clear, defined, simple assumptions about behavior that most (non-Marxist) regular people as well as economists can agree on. It is rational and straightforward. It is therefore able to accurately predict outcomes.

On the other hand, most macro economists don't start from such basic assuptions. They build models out of thin air, assume things that are obviously not true such as a zero-sum economy, a fixed point in time or some other no-growth basis, which pretty much assumes away all consequences of any actions, and then when the model is proven wrong, they try to keep it in the spotlight for another few decades, fill some macro-economics textbooks with it, and act surprised as to why it didn't work. Then the economics world proceeds to learn nothing and begin making new models built on the same false assumptions.

Instead, why doesn't the macro world:

a) Start with what really happened – eg the difference between the Soviet system and the US system, or before and after policy changes, and then ask *why* the discrepancy.

b) Build models without the zero-sum assumptions, based on indivdual agents, for example, that use only the same assumptions used in micro about behavior. Then the consequences of policies might be able to occur in the models and outcomes could be accurately predicted.

The latter may have been harder before the age of computers (though Hayek did it), but the former has always been possible, just unpopular in macro-economics.

johngaltline May 1, 2006 at 3:41 pm

Just out of curiosity, did they have to shoot all the economists in the Soviet Union? Did they simply have none? Or were they considered a cult?

I'm serious — what were they thinking, economics-wise?

liberty May 1, 2006 at 4:11 pm

>Just out of curiosity, did they have to shoot all the economists in the Soviet Union? Did they simply have none? Or were they considered a cult?

No, they just had the same crappy system we have here with macro: people making no-growth assumptions, working within the political system, simply trying to prove what they already know the result has to be to fulfill their ideology.

Most Soviet economists simply worked within the parameters of no-market and party is central command; and worked out how best they could do the accounting – where to spend, what to set prices at, how to work the incentive system. They also were used to try to "prove" that calculation *could* work without markets, essentially without price signals, etc.

There were American and European economists doing the same – like Galbraith or Wootton or lesser known economists of the 30s calculation debate such as Leichter.

Rick Gaber May 2, 2006 at 8:54 am

Does anyone remember THIS Ebenstein skewering of Samuelson (with quotes from Skousen) of a few years ago?:
http://freedomkeys.com/samuelson.htm

Taxpayer May 8, 2006 at 3:02 pm

Other prominent economists made similar statements even later than Sammie Textbook.
JK Galbraith wrote glowingly, circa 1984, about the bustle of traffic in Moscow, and how they are certain to overtake us.
My guess is that the Kennedy historians will do what they can to shred those works.
There is a wealth of material for someone to expose the agenda of the college econ texts and authors vis-a-vis comparisons to the Soviet economy. Similar to what Robert Conquest detailed, how that 'journalist' at the NY Times basically whitewashed Stalin while he starved 20 million people to death.

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