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short essays and reports on the economic issues of the day
2005 ■ Number 8

Paul Samuelson and Monetary Analysis
Edward Nelson
aul Samuelson, who turns 90 on May 15, won the
Nobel Prize in economics in 1970 “for the scientific
work through which he has developed static and
dynamic economic theory.” Although he is perhaps best
known for his work in the field of international trade,
Samuelson has described himself as the “last ‘generalist’ in
economics,” a description reflected in the fact that his collected scientific papers contain over 500 pages of material
on monetary analysis and on macroeconomic policy.1
Samuelson made a key contribution to monetary analysis
as one of the earliest economists to adapt Keynesian economics to incorporate a greater role for monetary policy.
As Samuelson once put it, “Economists of my generation
have had to unlearn a lot in the sphere of monetary policy.”
As he saw it, the initial Keynesian revolution that followed
the publication of Keynes’ General Theory in 1936 had led
to the view that monetary policy was an ineffective means
of influencing aggregate demand. “As one who lived through
those times, I can testify how money got lost by economists,”
Samuelson observed. Samuelson distinguished this “1936
‘Model T’ version of Keynes” from the eclectic version of
Keynesianism that he developed, in which monetary policy
was an important tool of demand management. Reflecting
this development, Samuelson wrote in 1962, “Contrary to
the opinions of many contemporary economists (and to
some of my own earlier views), I believe that monetary and
credit policies have great potency to stimulate, stabilize, or
depress a modern economy.” By the early 1960s, Samuelson’s
economics textbook included a discussion of how “monetary policy does have an important influence on the total
of spending,” an important development because his text
was a major tool in the teaching of Keynesian economics.2
This revision of Keynesian economics went in the direction
of the “counterrevolution” that monetarists launched against
Keynesianism. Samuelson, however, played down the similarities between his views and monetarism, telling the Wall
Street Journal in 1984, “The day I become a monetarist is
the day I have lost my marbles.”


Another contribution that Samuelson made to monetary
analysis has itself been the subject of much subsequent
debate and revision. In 1960, Samuelson and Robert Solow
published an article studying the Phillips curve—the relationship between inflation and unemployment—in the
United States.3 The message taken by the economics profession from Samuelson and Solow’s paper was that government policies that stimulated aggregate demand could buy
a permanently lower unemployment rate at the cost of a
higher average inflation rate. Subsequent contributions by
Milton Friedman and Edmund Phelps established the
“natural rate hypothesis,” which overturned the view that
there was a permanent trade-off between inflation and
Defenders of Samuelson and Solow’s paper point out
that the authors acknowledged that changes in inflation
expectations could shift the trade-off relationship, an insight
that is a key component of the natural rate hypothesis. But
Samuelson and Solow’s discussion acknowledged only that
the Phillips curve could undergo shifts, not that its long-run
shape was vertical, which is the most important message
of the natural rate hypothesis. The natural rate hypothesis,
and therefore the belief in no long-run inflation/unemployment trade-off, has come to be widely accepted in the economics profession. Samuelson, however, appears to have
remained skeptical, reaffirming in a 1978 interview that he
had been “warning for 25 years that our mixed economy
doesn’t know how to command price stability with efficient
full employment.” ■

The Collected Scientific Papers of Paul A. Samuelson, published by MIT Press in
five volumes from 1966 to 1986, is the main source for the quotations from
Samuelson given here.
See Blinder, Alan S. “Ruminations on Karl Brunner’s Reflections,” in R.W. Hafer,
ed., The Monetary Versus Fiscal Policy Debate. Totowa, NJ: Rowman and Allanheld,
1984, pp. 117-26.
Samuelson, Paul A. and Solow, Robert M. “Analytical Aspects of Anti-Inflation
Policy.” American Economic Review, May 1960, 50, pp. 177-84.

Views expressed do not necessarily reflect official positions of the Federal Reserve System.