Regarding my post from the other day, someone who knows much more about Samuelson than I do provides some helpful background:
It is your emphasis on “realistic” that is wrong. Paul played a significant role in the random walk model for stock prices and knew a huge amount about both theory and practice, as part of the MIT group, including others such as Bob Solow. He had no shades on his eyes – but he knew that the model fit well enough that betting on indexes was for most people as good as any strategy. But how to convey this in an introductory text? Most people would go to simple random walks – coin tossing. But that was far from realistic. Stock prices jumped irregularly and were at that time limited to something like half shares or quarter shares. It is a clever idea to think of a sort of random draw of actual price changes as a device to teach students what was going on. Much more realistic. I cannot believe he ever said this was exactly how it worked. Text books have to have a degree of idealization if they are to make a complex subject understandable. Paul was certainly not a pompous fool. Economics was a no holds barred field in those days and all models were actively criticized from both theoretical and empirical sides. His clever instructional idea was indeed more realistic and effective as well. He did get the Soviet economy wrong, but so dd every other economist.
Regarding that last point, I still maintain that Samuelson’s problem was not getting the Soviet economy wrong, but rather that he didn’t wrestle with his error in later editions of his book; see third and fourth paragraph of this comment. But, sure, that’s just one thing. Overall I get my correspondent’s point, and I no longer think the main substance of my earlier post was correct.
“He did get the Soviet economy wrong, but so did every other economist.”
Not true.
Even though many economists agreed with Samuelson, perhaps it was because they read Samuelson’s textbook as undergraduates and never thought to challenge it?
For those still intereated on the subject Part IV (Investing for the Long Run) of Merton’s essay “Paul Samuelson and Financial Economics” gives an overview of his interest on this subject and his efforts to “convey to both the professional practitioner and the general public those important research findings that have survived the rigors of both careful analytical and empirical examination.”
https://www.researchgate.net/profile/Robert-Merton-2/publication/285669496_Paul_Samuelson_and_Financial_Economics/links/573de4dd08aea45ee842db73/Paul-Samuelson-and-Financial-Economics.pdf
The following paragraph is relevant in the context of the “if it produces 50-year periods different from those we have observerd in the last 100 years it’s not realistic at all” critique:
“Samuelson along with others also highlighted the fallacy in simply taking the realized stock returns in the United States for the last century or more as statistically significant empirical proof of the dominance principle by pointing out that from a statistical perspective that long history is only a single sample. He then goes on constructively to specify the proper representation which uses the historical data in what is formally a “bootstrap” process to generate by Monte Carlo techniques the prospective distributions from the past. These distributions demonstrate that a significant shortfall risk does exist, even with a long horizon. Samuelson and others also noted that the data themselves are subject to selection bias in that the United States stock market performance over the 20th Century may not be an unbiased estimate of the future for it or any other country’s. Had the focus instead been on the investment history over the same period in other countries, Argentina, Russia, and Japan for instances, the “obvious” empirical evidence for nearly sure-thing outperformance of stocks over bonds in the long run would hardly be so obvious.”
Merton also cites a couple of book chapters that Samuelson wrote a few years before the magazine article under discussion:
Long-Run Risk Tolerance When Equity Returns are Mean Regressing: Pseudoparadoxes and Vindication of ‘Businessmen’s Risk’ (in Money, Macroeconomics and Economics Policy; W. C. Brainard, W. D. Nordhaus, H. W. Watts (eds.); 1991)
At Last, a Rational Case for Long-Horizon Risk Tolerance and for Asset Allocation Timing?” (in Active Asset Allocation: State-Of-The-Art Portfolio Policies, Strategies & Tactics; Robert D. Arnott, Frank J. Fabozzi (eds.); 1992)
I can’t find the latter online but there are fragments of the former in google books:
“My three-decade search for confirmation of enhanced risk tolerance among long-horizon inverstors has thus, in a satisfying sense, achieved success. […] A final caveat may be in order against overtouting this deductive qualitative result. Since it takes a long time to duplicate statistical samples of long-term epochs, our confidence in the strength of the rebound deviation from the random walk must be guarded. Moreover the size of the alleged effect, particularly after we discount for the possible one-time nature of the 1920-1945 swings of the Great Depresion and World War II, may not be too great qualitatively. […] For all this reasons a certain caution toward the new results would seem prudent.”
(I think that there is evidence for short-term momentum in equity indices that makes, for example, the one-year variance greater than twelve times the monthly variance and long-term mean reversion that makes the five-year variance lower than five times the annual variance. However, I didn’t find that the simpler model was inadequate in the context of a two-pager in a magazine intended for lay people.)
Thanks for the long comment! As far as forecasting goes, I was taught by people like Phil Tetlock that the purpose of a toy model is not to be right, its to make you ask “is my fancy, hard-to-understand model at least as good as the model I can write on the back of an envelope and explain to a bright 20-year-old?” Surprisingly often the answer is “no.”
I honestly didn’t think the critique of Samuelson on the stock market resampling issue was particularly cogent. To me, there’s a lot more to be said about Samuelson and the entire field of Macro Economics though.
MacroEcon in practice is pretty transparently an area of “regulatory capture” imho. Theories of macroeconomics influence money supply and government policy towards the economy broadly, and that influences the top 0.1% of rich people, so in return the top 0.1% of rich people have made sure that the Fed board and any govt relevant economists say and do what they want. And as a result they have fucked the rest of us with a cactus pretty thoroughly starting around the 1970’s. If it were up to me it’d be the govt adjacent Macroeconomists up against the wall right after the lawyers as Shakespeare said in Henry VI.
The whole pretending they have a fucking clue what the hell is going on, and then just justifying with a fog of math whatever it is that the top 50 businesses in the US want to have done is tantamount to conspiracy.
Also note that everything that’s been done since the 1970’s macro-economically is counter to what the microeconomic-influenced individual utility theory advocated by (of all people) The Congressional Office of Management and Budget would tell you https://doctorow.medium.com/rich-peoples-gain-is-worth-less-than-poor-people-s-pain-6c3631292841
I probably don’t agree with Cory here, he acts as if some of these ideas are ludicrous on the face of it… whereas I think Utility theory makes good sense, and log utility of money is probably a decent first approximation. It’s why the increasing income inequality is way worse than the dollar values would suggest. In fact, it’s probably true that if you taxed 50% of Elon musks’ wealth and just gave that equally to every person in the country the overall welfare of the world would go WAY up. One person loses log(50e9) but 300 million gain log(50e9/300e3)
> -log(50e9) + 300e3*log(50e9/300e3)
[1] 3607101
The net benefit is huge.
I doubt I agree with the solution these people would advocate, but their charts are on-point:
https://wtfhappenedin1971.com/
The control of the money supply in particular has been a tremendous shovel to move money into the wealthy’s hands.
This guy discusses the concept of The Bezzle: the difference between what stuff is worth once all facts are known, and what stuff is worth while people are hiding shit behind the curtain. That’s a huge aspect of the economy over the last 40 years, and MacroEcon has acted like it doesn’t even exist as far as I can tell. In fact, the existence of marketing departments is in large part about the creation of Bezzle by lying about the actual benefits of products.
https://carnegieendowment.org/chinafinancialmarkets/85179
One of the basic problems appears to be the failure to acknowledge the difference between “the money price today” and “the efficient market price under widespread symmetry of information”. Economists seem to think that the price of stuff today **is its value** essentially by definition. But that’s patently absurd. The economic value of stuff should always be defined in terms of the “efficient price” where people KNOW what they’re getting, do in fact get it, the prices aren’t forced by govt policy, and the prices come about in a fully transparent way. If Elisabeth Holmes can sell billions of dollars of stock in her company while convincing everyone it can revolutionize healthcare… she hasn’t created billions of dollars of value, actually she’s created billions of dollars of Bezzle, and DESTROYED the value of the opportunity costs of what that money could have actually really done if it were used for something other than Bezzle creation.
And she’s far from the only one doing this shit. Literally everything that’s happened in my adult life involves some kind of major Bezzle… from DotCom boom to the housing and mortgage market to the tech boom to the pandemic Payroll Protection Program, Sam Bankman-Fried and other Crypto Currency embezzlers, Silicon Valley Bank et al. and probably a bunch before that (S&L crisis? 80’s pension fund raiders? whatever)
Meanwhile, I’m not an expert in Macroecon but I don’t see macroeconomists screaming from the rafters “it’s all a fucking sham, shut it down now!” and that’s the only thing that makes any sense to me. so yeah, macro-economists need a special place in hell, at least as a general rule. I’m happy to have anyone who wants to point out exceptions because I’d like to read what an intellectually honest macro-econ person has to say.
Unfortunately I can’t find a good article I read a few years back about an ex Fed Reserve board member now retired who was outspokenly against all the manipulation between 2005-2020 or so… he was my hero… if anyone wants to point to that article go ahead. I don’t remember where I read it
I’d also be interested in hearing other perspectives on macro.
I have an article stuck in spam moderation… but it referred to a guy and an article who I couldn’t remember… here’s the article I was thinking of
https://www.politico.com/news/magazine/2021/12/28/inflation-interest-rates-thomas-hoenig-federal-reserve-526177
Samuelson was initially opposed to expected utility theory a la von Neuman and Morganstern. In series of letters in 1950 with Savage, Friedman, and others Samuelson eventually came to be convinced that his opposition to the new theory was not justified. It is all nicely reviewed by Ivan Moscati*.
In light of the later Soviet growth extrapolation in his textbook, the letter from Samuelson to Friedman in August 1950 is interesting…..
Dear Milton: … [L]et me make an important surrender. Savage’s patient letters and the induced cogitation have convinced me that he is right on the only important difference between us. … I called the [Independence] assumption gratuitous, arbitrary, etc. … etc. (You know how I can lay it on when I get going.) But now I must eat my words. As you know I hate to change my mind, but I hate worse to hold wrong views, and so I have no choice. (p. 221)
*Journal of Economic Perspectives—Volume 30, Number 2—Spring 2016—Pages 219–236
Wow. A lot of integrity to admit you were wrong. Respect.
I can hardly speak with any authority on Samuelson — although Wade Hands, if he’s in hearing distance, would be a good source on this. My guess is that he paid particularly close attention to financial markets because it was personally significant to him and his circle. OTOH, I’ve seen no evidence that he invested time and effort into uncovering empirical evidence on other matters his theorizing pronounced on. (And his theoretical domain covered a large part of 20th c. economics.)
I would contrast this, for instance, with someone like Ken Arrow, who was also (obviously) a theorist-specialist but who did take note of empirical studies (e.g. in health econ) and, from what I could hear, was rather more open to ideas that challenged his.
Regarding the Soviet economy overtaking thing, I have to say I was always weirded out by the way the optimal central planner was invoked in microtheory. I agree with the Austrians that the very possibility of doing this points to an implicit critique of the approach. Of course, Samuelson would hardly have equated the idealized central planner with the folks who ran things in the USSR.