After he won the Nobel, Tom Sargent was “interviewed” in an ad for Ally bank in which his response was simply (and correctly), “no.” The joke is even better than I realized because Sargent has a history of giving very short speeches. In 2007 he gave a graduation speech to Berkeley undergraduates summarizing economics in just 335 words.
It’s a damn fine speech.
I remember how happy I felt when I graduated from Berkeley many years ago. But I thought the graduation speeches were long. I will economize on words.
Economics is organized common sense. Here is a short list of valuable lessons that our beautiful subject teaches.
1. Many things that are desirable are not feasible.
2. Individuals and communities face trade-offs.
3. Other people have more information about their abilities, their efforts,
and their preferences than you do.
4. Everyone responds to incentives, including people you want to help. That
is why social safety nets don’t always end up working as intended.
5. There are tradeoffs between equality and efficiency.
6. In an equilibrium of a game or an economy, people are satisfied with their
choices. That is why it is difficult for well meaning outsiders to change
things for better or worse.
7. In the future, you too will respond to incentives. That is why there are
some promises that you’d like to make but can’t. No one will believe those
promises because they know that later it will not be in your interest to
deliver. The lesson here is this: before you make a promise, think about
whether you will want to keep it if and when your circumstances change.
This is how you earn a reputation.
8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.
9. It is feasible for one generation to shift costs to subsequent ones. That is
what national government debts and the U.S. social security system do
(but not the social security system of Singapore).
10. When a government spends, its citizens eventually pay, either today or
tomorrow, either through explicit taxes or implicit ones like inflation.
11. Most people want other people to pay for public goods and government
transfers (especially transfers to themselves).
12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.