Samuelson and finance theory

I found it surprising that most of the Samuelson obituaries do not refer to the impact that he had on finance theory. Along with Modigliani and Arrow, Samuelson was among the few mainstream economists who had an enduring impact on finance theory.

Indeed it appears odd that while modern finance theory is often regarded as the bastion of free market economics, it owes so much to Samuelson who was the dominant left wing economist of his era. By contrast, Samuelson’s great right wing rival, Milton Friedman, contributed very little to modern finance theory apart from his famous pronouncements on destabilizing speculation.

Samuelson more or less established the modern “martingale” concept of market efficiency (as opposed to the now largely discredited random walk model) in his landmark paper entitled “Proof that Properly Anticipated Prices Fluctuate Randomly.”

Samuelson also had a strong influence on option pricing through his doctoral student Robert Merton though Samuelson’s own work in this area is completely obsolete.

Above all, I think the mathematical approaches that Samuelson brought to economics were necessary prerequisites for modern financial economics to develop.

Posted at 6:06 pm IST on Wed, 16 Dec 2009         permanent link

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