PAUL A. SAMUELSON

Professor emeritus, Massachusetts Institute of Technology, and 1970 Nobel laureate in economics

The 88-year-old MIT sage, who wrote the textbook that everyone in Economics 101 reads, has some preaching to do about modern capital management.

“The major symphony for the last 300 years has been, and for as far as we can envision will be, the advancement of knowledge and technology and the law of diminishing returns.

“Diminishing returns involves, too, the depletion of resources and the bugs that become resistant to antibiotics. It’s a constant never-ending struggle between new knowledge and diminishing returns. I kind of think new knowledge will win the battle.

“But with new knowledge comes dynamite. We see that with derivatives. If you want to insure (your assets) and reduce risk, derivatives are a valuable tool. But it’s a tempting tool to augment risk.

“In ancient times, arrogance of power was reflected in the Tower of Babel. Today, it’s reflected in capital management. You wouldn’t get Barings or rogue traders if they weren’t using new and powerful knowledge. Today, one can blow up the Oklahoma City federal building. It’s the same nitrogen farmers use. We’re not going to keep nuclear weapons knowledge from spreading.

“Markets are becoming more microefficient. Pricing of securities, such as pricing a convertible one to straight bonds or equities, will improve. We have fast computers, bigger databases, better regulation. . .

“But in terms of macroefficiency, pricing the Standard & Poor’s 500 stock index or the Wilshire 5000 stock index, markets won’t stay close to a predictive value. There will still be big swings above and below a fundamental value. I don’t see any signs of any convergence in that.

“I regard economics as a soft science, between art and a science. There are no indispensable men or women. If Newton didn’t do what he did, probably someone else would have done it.”