Admirable brevity

Economist and Nobel laureate Thomas Sargent:
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.

H/t Maggie's Farm.


Grim said...

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.

What a strange thing to say. I believe that promises will be kept against interest all the time, assuming that the men making the promises are men of honor. But of course honoring your promises does not always make economic sense.

E Hines said...

Yes, but a reputation for honorability takes time to build, and it only takes a very few aw s**ts to cancel an otherwise hard-won reputation. Even if that aw... turns out to be something beyond a man's control, the bottom line remains that the promise was broken, its effect on reputation will be palpable, and it'll be on the promiser to demonstrate both that the cause of the break was beyond his control and that it's reasonable that he couldn't foresee the possibility of that when he made his promise.

At the outset, lacking reputation, it's reasonable to believe a promise won't be kept when it becomes inconvenient to keep it. Granting the benefit of the doubt in that situation isn't unheard of. No one will believe probably overstates the case, but I don't think most will not believe does.

Eric Hines

Texan99 said...

Nor is just a question of how difficult it is to keep a promise against "economic" interest (though evil money motives always ring Grim's chimes!): all sorts of other changing interests serve as temptations.

Why should it be a surprise that the speaker recommends building a reputation as a promise-keeper in unexpected adversity? A young person shouldn't expect society to assume he's exceptional before he's given any evidence of it. One's promise doesn't become currency with other people in large things until he shows he's a promise-keeper in smaller things. Until then, no one knows whether he's unusually principled, or just a callow youth who hasn't yet experienced the strong temptation to say "I meant to keep that promise, but things changed," and who may or may not hold up well in that trial.

Grim said...

Brevity is a virtue insofar as you are saying no more than you need to say to make yourself clear. Here, though, you and I clearly are reading these few words in different ways. To me, they read something like, "Because you will respond to incentives, never promise to do anything that you don't have an incentive to do (or, worse, that you have an incentive not to do). That way you will keep your promises and earn a reputation for honesty."

A person who will only make promises when he has something to gain from them is not honorable. That's vicious, not virtuous.

But it sounds like you are reading it differently.

Grim said...

Indeed, it sounds like the character Angel-Eyes from The Good, the Bad, and the Ugly. (He's 'The Bad,' as I assume everyone here knows.) As he explains right before executing his previous employer, "You know that when I'm paid, I always see the job through. You know that."

Texan99 said...

You take him to be recommending to young people that they break their promises? I take him to be cautioning people that others won't assume they're virtuous until they've shown that they are. Where are you seeing an approval of vicious behavior here?

Grim said...

I'm not taking him as recommending that you break promises, but rather as recommending that you not make promises in the first place unless you have an interest (some incentive) to do so.

Where you do, of course, I might not even need your promise -- you will do what you would promise to do because there are incentives! The place where I need your promise is where there is some duty you have that may not be in your (financial or other) interest. Honor is shown most keenly on the battlefield, where you may be asked to do something that isn't in your interest at all -- but completely in accord with your oath, with your duty.

Grim said...

I suppose marriage is a promise of the same sort, really. Should you promise to have and to hold, in sickness and in health, if you're worried about the incentive structure? It's just when those promises are least economically wise that they are most important.