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Presentation Speech - The Sveriges Riksbank (Bank
of Sweden) Prize in Economic Sciences in Memory of Alfred Nobel
KUNGL. VETENSKAPSAKADEMIEN THE ROYAL SWEDISH ACADEMY OF SCIENCES
October 1970
Speech by Professor ASSAR LINDBECK, Stockholm
School of Economics
Your Majesty, Your Royal Highnesses, Ladies and Gentleman.
One of the salient features of the development of economics during
the last decades is the increased degree of formalization of the
analytical techniques brought about partly with the aid of
mathematical methods. We can perhaps distinguish two different
branches of this development.
One branch is econometrics, designed for immediate statistical
estimation and empirical application - with pioneers such as Ragnar
Frisch and Jan
Tinbergen, who, last year, jointly received the first prize in
economic science in memory of Alfred Nobel - a prize based on a
donation by the Bank of Sweden.
The second branch is orientated more toward basic theoretical
research, without any immediate aims of statistical, empirical
confrontation. It is in this latter area that Professor Paul
Samuelson, Massachusetts Institute
of Technology, USA, has made his great contributions, and for
which he has now been awarded the prize in economic science.
Generally speaking, Samuelson's contribution has been that, more
than any other contemporary economist, he has contributed to raising
the general analytical and methodological level in economic science.
He has in fact simply rewritten considerable parts of economic
theory. He has also shown the fundamental unity of both the problems
and analytical techniques in economics, partly by a systematic
application of the methodology of maximization for a broad set of
problems. This means that Samuelson's contributions range over a
large number of different fields. If we are to try to summarize his
research achievements and to give a concrete idea of them, it is
therefore necessary to limit ourselves to a few examples. We can
perhaps divide his contributions into four main areas.
The first area is dynamic theory and stability analysis. The
characteristic feature of this field is that the analysis is not, as
in static analysis, limited to equilibrium positions. Instead, the
emphasis is on the question of how the economic system behaves
outside equilibrium, and how the economy develops from period to
period in a chain of development phases. What Samuelson has done
here is, in particular, to specify the conditions under which an
economic system is stable, in the sense that it tends to return by
itself to equilibrium after a disturbance. He found that the
conditions for stability often coincide with the conditions under
which static analysis leads to what are usually regarded as
"normal" conclusions, such as the conclusion that an
increase in demand results in a rise in the equilibrium price. This
is, in fact, an application of Samuelson's famous
"correspondence principle", whereby a bridge was built
between static and dynamic analysis, which earlier had usually been
regarded as two completely different methods of analysis.
Another area where Samuelson has made great contributions is
consumption theory and the closely connected theory of index
numbers. In older theory in this field, it was usual to start with
the assumption that households display well-defined preference
patterns for consumer goods, in the sense that they can define how
they evaluate alternative baskets of consumer goods. On this basis,
theorems about consumer behavior were derived by deductive methods,
by analyzing the effects of changes in, for instance, incomes and
prices. Samuelson started at the other end, by defined preferences
on the basis of observable behavior. The household, so to speak,
revealed its preferences by its own behavior. This was the starting
point for Samuelson's theory of "revealed preferences", a
theory which has provided economists with considerably improved
tools for analysis in consumption theory. Empirical studies of
observable behaviour became better integrated with our theoretical
constructs.
A third area where Samuelson has made great contributions is general
equilibrium theory, in which is studied the interaction between a
great number of different variables - in principle, all prices and
quantities in the economic system. A few examples from international
trade theory can be used as illustrations of this.
One example is the question of the gains from international trade.
It has long been known that international trade, under certain
well-defined conditions, leads to a higher national income for the
countries concerned. It is also known that foreign trade may lead to
income redistributions within countries, with the result that
certain groups are in fact pushed into less-preferred positions. The
question then is whether we may say, in a meaningful way, that a
country, as a whole, has gained by international trade. What
Samuelson did here was to show that those individuals gaining by
such trade will be better off even if they have to compensate
completely those who tend to lose on international trade. In this
sense, free trade is potentially superior to protection. In
analyzing the effects of tariffs on the distribution of income,
Samuelson also showed, together with Wolfgang Stolper, that a tariff
that raises the price of an import commodity results in an increase
in the factor rewards for those factors of production which are used
relatively intensively in the production of the protected commodity,
whereas the factor rewards for other factors will fall.
Samuelson also showed under what conditions international trade
results in an equalization of the factor rewards between countries
engaged in international trade - the so-called "Factor Price
Equalization Theorem". Here Samuelson followed up a line of
research started by Eli Heckscher and Bertil
Ohlin.
A fourth area, finally, where Samuelson has made outstanding
contributions, is in the field of capital theory. One criticism
which has long been directed against traditional capital theory is
that it is based on the assumption that it is possible to construct
a concept of an aggregate stock of capital, that is, a sum in money
terms of the value of all capital goods in society. Samuelson now
showed, partly in cooperation with Robert
Solow, that it is possible to develop a logical capital theory -
and to speak about a well-defined price of capital - even without
adopting such an aggregate concept of capital.
Another contribution within capital theory was that Samuelson
further elaborated the conditions for economic efficiency over time.
It is in this context that we should see his famous "turnpike
theorem" which defines conditions for maximal growth and shows
that it might pay for a country to choose an economic growth path
characterized by a maximal growth rate - what he calls a
"turnpike" - with proportions between the production
sectors that are completely different from the proportions we start
from, or those we intend to achieve in the final position.
I now turn to you, Professor Samuelson. You have, probably more than
anybody else, shown the advantages of strict formalization of
economic analysis. Thereby you have, in fact, set the style for
several generations of economists during the last decades. In spite
of the high level of abstraction of much of your work, you have
dealt with important economic and social problems in the real world.
The sense of relevance in your production can be found in
practically all fields where you have worked: in building your
consumption theory on observable behavior, on the basis of your
theory of "revealed preferences"; in formulating capital
theory in the context of a large number of heterogenous capital
goods; in analyzing dynamic processes and stability in situations
outside equilibrium situations; in explaining business cycles by a
combined multiplier-accelerator model; in studying the place of
collective goods in the context of general equilibrium analysis; in
analyzing maximum growth; in studying the distribution of
consumption between generations by your "consumption loan"
model; and in analyzing the gains from trade and the effects of
tariffs on the distribution of income.
It is safe to say that, in many of these fields, you have achieved
classical, not to say, "definite", formulations in the
context of neo-classical or neo-Keynesian economic theory.
It is a great honour to convey to you the congratulations of the Royal
Academy of Sciences, and to ask you to accept from the hands of
His Majesty, the King, the 1970 Prize in Economic Science dedicated
to the memory of Alfred Nobel.
From Nobel
Lectures, Economic Sciences 1969-1980.
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