Samuelson on Worth

Paul Solman: All week, we’ve been posting transcripts of past conversations with the late economist Paul Samuelson. Below, Samuelson on calculating worth.

SOLMAN: Is an auction a good way to figure out what something’s worth to people?

SAMUELSON: Yes, it is. Yes, it is. May I point out a complication and a pitfall? In the early editions of my textbook, I gave a dramatic example, which I took out from later editions, and what I wrote was that in a market economy, goods sell for what people will pay for them. And therefore, when a market economy is working well, to do what it is only fitted to do, John D. Rockefeller’s dog,will get the milk which a poor worker’s child, with rickets, cannot get.

SOLMAN: Because he can afford it.

SAMUELSON: Because he can afford it. And the reason I took it out was that, in every exam, all they answered [LAUGHTER] was Rockefeller’s dog, and I thought it was overdramatic. It made a point, but I didn’t want it to be the only point. A Harvard Business School professor went ape at this. He said it was untrue and, if it was true, that would be a great condemnation of the system. Each person’s money measure of utility depends upon how much money he has, and you can’t really add it between Peter and Paul. And you can’t say that everything is priced just right when poor Peter is meeting the same price that rich Paul has to meet.

SOLMAN: But at the end of the day, I do one thing as opposed to something else that would almost be worth just as much to me, but isn’t quite?

SAMUELSON: Just like going to the smorgasbord table and looking at the things and saying, ‘well, since I have this choice, and since my stomach can only tolerate so much, this is my preferred choice on this occasion.’

SOLMAN: A little bit of lox, a little bit of egg, a little bit of caviar.

SAMUELSON: Yeah.

SOLMAN: What’s your favorite example to explain thinking on the margin?

SAMUELSON: Everything is determined at the small margin, in the actual pricing, not by the total utilities. That’s Adam Smith’s paradox of value. How is it that water, which is so important, sells for so little (or at least that used to be the case [LAUGHTER]), whereas diamonds, which to a Scot is so valueless, really, sells for so much? The total utility of water is much greater than the total utility of diamonds, but the marginal utility, because of differential scarcities of water compared to diamonds, is the reverse of that.

SOLMAN: When you were thinking about somebody who wasn’t going to take economics, let’s say, and you asked yourself, ‘what concepts do I want to make absolutely sure they get?’ was marginal thinking one of them?

SAMUELSON: Yes, because most economic decisions are quantitative. They aren’t zero/one decisions; they’re how much of this, how little of that, and where you stop, that’s the marginal point. You have to have a balance of forces, namely: how much you want it and how limited your income is, against how scarce it is and how highly it gets priced in the marketplace And so [the answer] is at the margin. For example, if I propose that we do something for the environment, and somebody says, ‘oh, but business [will incur] costs that will have to be passed on in price,’ I say, everything worth doing is worth doing at a cost, and the reason that you stop doing it is when that cost, relative to the marginal benefit, comes into equilibrium. Up to that point, you want to deliberately incur costs. I say the same thing if I’m debating with Milton Friedman. The government should do something altruistic for us all. He says, yes, but that involves a deadweight loss. I say, everything worth doing should be done even at the cost of some deadweight loss, but should cease to be done when the overall deadweight loss exceeds the advantage of doing it. That’s all marginal thinking.

SOLMAN: Alfred Marshall has a great example in his textbook of a guy picking berries: you pick those berries up until the moment that costs outweigh benefits.

SAMUELSON: Yeah, he is actually balancing disutilities, the extra sweat of exertion and sacrificed leisure against that 19th berry, and then you say, enough already.

SOLMAN: [LAUGHTER] But it’s a perfect example of what we all implicitly do, isn’t it?

SAMUELSON: Yes, yes. Yes, and that’s why Robinson Crusoe keeps coming into the economics classroom, not because we want to neglect the social element, but Robinson Crusoe is doing what we all do in our subconscious personal life.

SOLMAN: Constantly figuring out how much more effort I’m going to make for this return.

SAMUELSON: Right, yeah.