Saturday, April 19, 2014

Not a summary of economics




Today both Alex Tabarrok and Ezra Klein posted this list of economics "lessons" given by Tom Sargent (a strong contender for "smartest living economist") at a 2007 graduation speech in Berkeley. Ezra calls it "everything you need to know about economics", and Alex says the list "summarizes economics", but this is quite a bit of overhype. What Sargent actually says is: "Here is a short list of valuable lessons that our beautiful subject teaches." Sargent isn't summarizing the findings of econ; he's telling the Berkeley grads some things he thinks they need to take away from the subject.

So what does Sargent think Berkeley grads need to know? Let's go through the list and see.
1. Many things that are desirable are not feasible.
This is the basic idea of all of econ. But I think Sargent has a special reason for reiterating it.
2. Individuals and communities face trade-offs.
Implied by #1, but in a speech this short I think we can forgive Sargent this slight verbosity.
3. Other people have more information about their abilities, their efforts, and their preferences than you do.
Asymmetric information is of course very important in econ, but I also think Sargent has a special reason for mentioning it in the list.
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.
Here we start to see a policy implication emerge from the list, as Sargent cautions against social safety nets.
5. There are tradeoffs between equality and efficiency.
Actually, this is not true in general! The Second Welfare Theorem shows how under certain conditions, there is no tradeoff at all. So why does Sargent say that such tradeoffs exist? Probably because - and here I'm putting words in Sargent's mouth - he thinks that the kinds of policies Berkeley grads will want to try will involve equality-efficiency tradeoffs. What kind of policies are those? Well, #4 gives a clue: social safety nets. 
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.
This is also a caution against government intervention in the economy. A theme is beginning to emerge.
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.
This just sounds like general "good life advice" for young people, and it doesn't fit with the theme of the other "lessons", so let's skip it and move on to #8.
8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.
Personally I don't think economics has learned much at all about the incentives of government voters (why the heck do voters vote anyway, when their vote will never change an election outcome?!), but Sargent's point here is to caution against the use of government to try to solve the problems of the world. So this fits with #6, 5, 4, 3, 2, and 1.

By this time we can sort of see why Sargent might have put #1, 2, and 3 on the list, above and beyond the fact that they are important foundational principles of economics. By discussing tradeoffs, he's saying "You might want to use government to help people, but there will be costs." By discussing asymmetric information, he's also saying "Other people know what's best for them better than you do, so if you try to help them with government policy, you might end up hurting them instead." 

It's all shaping up to be one big caution against well-meaning government intervention in the economy by do-gooding liberals concerned about promoting equality and helping the poor.
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).
Actually, this is only true up to a point - there is a cap on the amount of real costs that can be shifted to future generations by one currently living generation, even if there is no cap on the amount of government debt. But again, Sargent's point is that attempts at government intervention in the economy have more costs than their proponents may realize.
10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.
I'm not quite certain this is completely true, since countries can default on their debt, but close enough. Anyway, it definitely fits with the theme of all of the previous "lessons" except #7.
11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves).
This definitely fits with the theme.
12. Because market prices aggregate traders' information, it is difficult to forecast stock prices and interest rates and exchange rates.
This is good life advice, but it does not obviously fit the theme (unless Sargent is thinking of govt. intervention to pop asset bubbles).

So 10 out of Sargent's 12 "lessons" are cautions against trying to use government to promote equality or help people. It's not hard to see why Sargent - himself a Clintonite sort of Democrat - might emphasize this point to a bunch of Berkeley grads. Berkeley is a famously liberal school (and was even more so when Sargent went there), and thus its graduates seem more likely than other people to be overzealous in wielding the government as a tool of human welfare.

Fair enough. If I were giving a graduation speech to students at Tokyo University, I'd tell them much the same thing (speaking of which, hey Tokyo University administrators, my schedule is wide open!).

But I think that when this kind of list is put forth as a "summary of economics", it does a disservice to the profession. It reinforces the notion that econ is basically a form of political advocacy, and that it's main value-add is to innoculate us against communism. That may have been true to some degree back in the 1960s, but nowadays ideological capitalism-cheerleading is not a big part of what professional economists do (or good ones, anyway). Econ has become a much more technocratic field, and new theories and discoveries have made the question of "government vs. markets" a much less simple one, even as communism has become much less of a political threat. Sargent, of course, knows that, and is just playing to a very particular audience of what he takes to be starry-eyed, wet-behind-the-ears, do-gooding Berkeley hippies. But it would be nice if bloggers did not hype lists like this as "everything you need to know about economics".

106 comments:

  1. FYI Business Insider writers were also promoting it as the best graduate speech on Twitter with a link to a BI article.

    ReplyDelete
    Replies
    1. Anonymous3:36 PM

      This is nothing more than a 12 point mantra for Market Fundamentalism

      Delete
  2. 10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.

    Yes but some government spending now (on primary education for example or roads and bridges) can have such large economic payoffs that the public are net better off even after paying those taxes.

    ReplyDelete
    Replies
    1. Totally agree. Mr Sargent is demonstrably speaking about a very small part of economics, even in regard to its chapters on government.

      You "pay now, or later" even for a consumer good, like a new washing machine. This machine reduces the transformations costs to you, of washing your clothes. (Of course, it does not necessary reduce the transformation costs to your surrounding natural ecosystem, and you also have to follow the law of entropy even for "soft energy", at least all the way to atmospheric dissipation back into space. But let's leave those aside.)

      Next to consider, the washing machine was manufactured by a private corporation, which exists to the extent that central management/profit can reduce the transaction costs of the assembly line workers (soon to be machines themselves, but put that aside too) to make and market the same washing machines, IF the assembly line workers were independent contractors in the open market, contracting with each other WITHOUT the upper management. The washing machine is clearly put together faster by the private firm, at least under current conditions of information capacity limits, and human skills: again, central management/profit reduces transaction costs.

      Thus both technology and business firms work by reducing tranformation/transaction costs, at different hierarchical levels.

      Now take government, and the existence of goods and services that have transaction costs which government reduces best or second best. (Sargent does not appear from the evidence above to have said there are NO such goods and services, by the way, so perhaps he would continue in a longer speech.) It therefore follows that paying for them today or tomorrow should hardly matter to you, since you have bought an efficiency improvement of some sort: an improvement in how society provides a safety net or protects the environment, alongside, and in addition to, how society washes your clothes.

      So pay for it.

      Of course this gets us into the other kind of decisionmaking, in addition to decisionmaking by prices: votes. The best economists have responded with interesting conundrums, but nothing especially condemnatory. The existence of things like Arrow's impossibility theorem are immaterial to that fact that votes are useful, and that institutions can be useful and efficient. And if you don't like it, you have the freedom to vote against it until it is changed. This is rather similar to the market sector, where you the individual may not like the choices either, while its students and economists notably decide some policy questions by statistics.

      Delete
  3. Anonymous7:00 PM

    I thought that econ was about putting a technocratic facade (utils, propensities, welfare functions, etc) around political advocacy.

    ReplyDelete
    Replies
    1. For a few economists it is, but for most it's not.

      Delete
    2. So I don't want to be a jerkface or anything, but why do you think Sargent isn't one of those economists?

      Delete
    3. Just looking at his research, he doesn't seem to be a shill.

      Delete
    4. And also, he doesn't do any policy advocacy or opinion writing, to my knowledge.

      Delete
    5. Anonymous7:32 PM

      Does one have to be a corrupt paid shill to be guilty of putting up a technocratic facade around a political position?

      Does "saltwater vs freshwater" refer to any political orientations or is it a politics-free intellectual disagreement like oscillating vs big bang theories of the universe?

      Do Robert Lucas and Paul Krugman have, shall we say, certain world-views that shape their work?

      Delete
    6. Does one have to be a corrupt paid shill to be guilty of putting up a technocratic facade around a political position?

      No.

      Does "saltwater vs freshwater" refer to any political orientations or is it a politics-free intellectual disagreement like oscillating vs big bang theories of the universe?

      It was partly political; that divide is fading, but the political divide persists.

      Delete
    7. For a few economists it is, but for most it's not.

      Four hundred economists put their name to the "Economists for Romney" letter endorsing an economic plan that did not exist. Is four hundred really only a "few", is the profession that big?

      Delete
    8. Yep, there are tens of thousands of economists.

      Delete
    9. An economist bubble!

      Delete
    10. Anonymous11:59 AM

      Actually modern economics is the reverse - presenting reality - or more correctly a perception of it into the technocratic facade you identify.

      Delete
    11. Anonymous2:52 PM

      And yet here he is shilling. That he has done real research is immaterial. It's not right to pretend science supports your political views. This happens all the time with economists, and they don't appear to suffer any consequences.

      Delete
  4. Anonymous7:09 PM

    Ezra Klein's title "This graduation speech teaches you everything you need to know about economics in 297 words" is pretty sad. There's brevity and then there's superficial.

    That snark aside, some of Sargent's lessons are truly great ones. If I could teach everyone (including economists) one lesson it would be #2 about tradeoffs. I do not think it is "common sense" as he implies because sometimes the tradeoff are over time (forecasting is tough for everyone) and sometimes progress makes the tradeoffs less apparent. Within a year or so of his 2007 graduation speech, many economists too were waking up to some of the big tradeoffs that had been ignored in the economy.

    So many lessons here - but I do think Sargent gives a bit too much deference to the status quo (a common economist default). It may be hard to improve on the status quo but there have been enough discriminatory equilibria (that if nothing else are a huge waste of resources) that suggest an upside to some intervention. Markets do fail - because people fail. Governments are not immune to this weakness either (also run by fallible people). It's our failings that need more than 297 words.

    ReplyDelete
  5. Once again, you nailed it!

    ReplyDelete
  6. Anonymous8:28 PM

    One of the best posts I've read all year at any website. We should always be attuned to the subtext of supposedly balanced and innocuous articulations.

    ReplyDelete
  7. --When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.
    -I'm not quite certain this is completely true, since countries can default on their debt,

    Or they simply never pay it. Like, for instance England for the last 400 years? Or the U.S. (aside from one egregiously successful effort) for the last 200+?

    Cue MMT and functional finance on this one...

    ReplyDelete
    Replies
    1. You have one valid point and one invalid one. If the interest on government debt is less than the economy's growth rate, then a government can debt-finance payments today, and never ever pay off the balance, in which case Sargent is wrong.

      On the other hand, if the government eventually defaults, this is identical to a tax on the bondholders, so that falls in the category of "pay tomorrow."

      Delete
    2. Anonymous11:36 PM

      And also, he doesn't do any policy advocacy or opinion writing, to my knowledge.

      He does. In fact Sargent is one of the most ideological of economists. He attributes hyperinflation in the 1920s to moving off the gold standard, and its containment to moving back on to it (even though the real causes of this according to mainstream historians - repeat historians - not economic historians and certainly not new-classical ones -were political factors such as the respective countries losing wars or becoming failed states. He has also opposed uncoventional monetary policy such as what we saw in 2008 in the media. He also says that countries face budget lines with respect to debt as individuals do. He is big on micro-foundations which assume limited resources and unlimited wants - greed - a major ideological and empirically questionable assumption about human behaviour to begin with - and a very cynical one.

      If Sargent is a representative economist, the subject really needs some deep soul-searching.

      Delete
    3. Anonymous11:42 PM

      I would say that Sargent's work is some of the most unpleasant in economics.

      Delete
    4. I would say that Sargent's work is some of the most unpleasant in economics.

      The monetarist arithmetic, at least...

      Delete
    5. I'd say it's still "paying later" even if you're only paying the interest. Whether you're paying the principal or the interest, payments are being made, and citizens bear the cost of those payments in some sense.

      Delete
    6. "He is big on micro-foundations which assume limited resources and unlimited wants - greed - a major ideological and empirically questionable assumption about human behaviour to begin with - and a very cynical one."

      Brad Delong once pointed out that Ptolemaic astronomy had micro foundations, but the Gallilean astronomy did not (even after Newton, it didn't; gravity was an unexplained thingamajigger).

      Delete
  8. It's also a good summary of things liberal non-economists should know. It just shouldn't be interpreted as a summary of economics, nor even a comment on current government policies. It's a comment on naive pre-Clintonian liberalism.

    ReplyDelete
    Replies
    1. "It's a comment on naive pre-Clintonian liberalism."

      And this would be what, exactly? Carterian deregulationism?
      LBJ's rather effective reforms?
      The New Deal?

      Delete
  9. Number 6 is rather troubling: "In an equilibrium of a game or an economy, people are satisfied with their choices."

    Actually, no. People may be stuck in awful equilibria. And they cannot change that on their own. Why would we want to infer that these people are "satisfied"?

    (This does not imply that political leaders will be able or motivated to change an unproductive equilibrium - but there are often ways to improve eqm selection through diverse instruments.)

    If I may suggest a "lesson" which most social scientists appreciate but struggle to pass on to students, it would be:

    *In many games, rational choice leads to the collectively worst outcome.*

    ReplyDelete
    Replies
    1. Anonymous8:36 PM

      I agree this one was a disturbing thing to say (combined with the "That's why it's difficult..."), either because it's silly to someone who's studied game theory or because it gives an entirely false impression of equilibrium to someone who hasn't. Even stepping away from government interventions, this seems an argument against mechanism design.

      Delete
  10. Anonymous10:00 PM

    The Second Welfare Theorem doesn't hold in a meaningful sense under 3, hence 5 is implied by 3.

    ReplyDelete
    Replies
    1. That doesn't follow.

      Delete
    2. I think (as I think Noah implies) that 3 is not about asymmetric information but about decentralized decisions being made in markets rather than by "central planners". But even if it is about asym-inf, the lack of "perfect information" somewhat undermines the idea that society is operating at the efficiency-equality frontier (where you can't move in a direction win-win direction). I am not sure if the e-e tradeoff is implied by the FWT but that theorem doesn't hold either.

      Delete
    3. My point is, just because the Second Welfare Theorem doesn't hold does not mean that there is always a tradeoff between equality and efficiency.

      Delete
    4. Anonymous2:50 AM

      Noah, please follow your own link into Wikipedia:

      This appears to make the case that intervention has a legitimate place in policy – redistributions can allow us to select from all efficient outcomes for one that has other desired features, such as distributional equity. The shortcoming is that for the theorem to hold, the transfers have to be lump-sum and the government needs to have perfect information on individual consumers' tastes as well as the production possibilities of firms.

      Now go back and read Sargent's point #3 again. He is spelling it out to you, government always has worse information than the people themselves (and that's presuming the decision makers in government have the right incentives which in itself is a big stretch).

      Delete
    5. Anonymous4:56 AM

      This!

      "Now go back and read Sargent's point #3 again. He is spelling it out to you, government always has worse information than the people themselves (and that's presuming the decision makers in government have the right incentives which in itself is a big stretch)."

      And I agree with Krystal below that Noah suffers from pretence of knowledge syndrome, an ailment very common among "liberal" (I want that word back!) types with ridiculously high IQs.

      The cause for this ailment is well-known, though, because Nozick explained it to us:

      http://ricochet.com/archives/why-do-intellectuals-oppose-capitalism/

      -Anônimo

      Delete
    6. Nathanael8:43 PM

      Psst. Sargent is wrong. I can think of plenty of examples where government has far better information than "the people". The FDA is a great example!

      If that isn't convincing enough to you, the NSA certainly has *more* information than the people, though I don't think they have any incentive to analyze it properly.

      Delete
  11. "Second welfare theorem" ha! There are no "theorems" outside formal logic. Least of all in the social sciences. I'm surprised you still swallow this Noah.

    ReplyDelete
    Replies
    1. Sorry, officer, it won't happen again!

      Delete
    2. See that it doesn't. Now... on your way!

      Delete
    3. The fundamental theorems of welfare economics are mathematical theorems about the logical possibilties of what a vector space with some utilty functions and price functions associated with it can do. Whether this theorem has any relevance to the real world is where social science enters the picture. But as mathematical theorems they do what they need to do.

      But the terminology of welfare economics (and the fact that real-life economies fail the assumptions of the theorems) certainly encourages people to confuse the mathematical theorem with a scientific law.

      Delete
  12. "3. Other people have more information about their abilities, their efforts, and their preferences than you do."

    Which is why employers and teachers always accept the grade you give yourself, right?

    ReplyDelete
  13. Anonymous11:57 PM

    There are tradeoffs between equality and efficiency

    That is not true. In fact it is increasingly evident that a pre-condition for growth in poor countries is a fairly equitable distribution of income. Skewed and oligarchic income distribution structures actually lead to a distortion of resources.

    Sargent needs to study anthropology and history. He should also visit the third world. Maybe then his subject will not look so beautiful.

    ReplyDelete
    Replies
    1. Nate O.3:33 AM

      Maybe someone could enlighten me as to why "efficiency" is so often held up as objectively, inherently good. Appeals to "efficiency" seem more like a way to obfuscate the true intentions of policies whose outcomes you favor.

      I don't think a system where Larry Ellison owns an island, but babies starve in Africa could be described "efficient," unless that system is designed to produce that outcome.

      Delete
    2. But Larry is deserving of those islands for the economic value has has created. Those children in Africa don't produce any value

      Delete
    3. The real problem is with the implicit definition of "efficiency," which seems to be "maximize the (inflation adjusted) value of current output." That is, it assumes that the appropriate definition of "efficient" use of resources is wholly determined by the use of those resources to produce market goods and services. The definition of "efficiency" rules out ex hypothesis any concern for distribution. The definition, then, flies in the face of one of the underlying concepts in economics, the principle of diminishing marginal utility. Something wrong there.

      Delete
    4. Nate O.3:41 AM

      It's common for firms, governments, and people to spend money without immediate value realized. That's typically called "investing."

      Maybe one of those dead kids would've invented cold fusion, or maybe 1000 of those dead kids would've become productive members of society. It seems silly to allow your (human) capital stock to decline given how cheap it would be to maintain it.

      Like Doc mentioned, diminishing marginal utility means that, even if Larry "deserves" tremendous compensation, is it really "efficient" to give him total control of so many assets, given investments the world needs to make in other areas, not just the "make Larry feel warm and fuzzy" industry.

      Delete
    5. doc: "The real problem is with the implicit definition of "efficiency," which seems to be "maximize the (inflation adjusted) value of current output." That is, it assumes that the appropriate definition of "efficient" use of resources is wholly determined by the use of those resources to produce market goods and services. The definition of "efficiency" rules out ex hypothesis any concern for distribution. The definition, then, flies in the face of one of the underlying concepts in economics, the principle of diminishing marginal utility. Something wrong there."

      To take it to psychotically logical conclusions (IOW, being a Chicagoist), what would be the effect of the rich buying the organs of the poor? If they can outbid the poor person, then they pay the money to the, ah - donor's choice of parties, and then harvest away!

      Delete
  14. Anonymous5:57 AM

    a strong contender for "smartest living economist"

    What contribution, particularly in terms of ideas informing policy that improve human welfare, do you think makes him such a contender?

    ReplyDelete
    Replies
    1. By "smart" I mean raw brainpower. Very few can compete with Sargent in that department...

      Delete
    2. Anonymous4:41 PM

      OK thanks for the qualification Noah. Personally I found a lot of his stuff very unpersuasive. For me his historical studies are the worst. They simply lack depth.

      Delete
    3. Is there a world where "raw brain power" has a an impact on human experience? Is it somehow different that saying, eg, he is the professor with the biggest feet?

      Delete
    4. Sorry to belabour the point Noah, but how does one perceive this "raw brain power", leave alone actually measuring it? What is his IQ? (Actually I was witness to one of Sargent's presentation at NYU a few years ago, and what struck me, was his raw desire to head for the exit, when faced with hard questions. As I mentioned to you in a comment earlier this month, Paul Samuelson had the right take on Lucas, Sargent & Co.)

      Delete
    5. Nate O.7:10 AM

      Re: Sargent's "brain power," I feel like it's worse to be smart, but stay stupid stuff anyway. It reminds me of something Orwell wrote about Wells: "since 1920 he has squandered his talents in slaying paper dragons. But how much it is, after all, to have any talents to squander."

      Delete
    6. Noah Smith12:29 PM

      "By "smart" I mean raw brainpower. Very few can compete with Sargent in that department..."

      That's actually skipping the question. How are you measuring raw brainpower?

      And, of course, my original point still holds, that even if he's a genius, that doesn't mean that we can trust what he says.

      Delete
  15. Well, #6, though true under one definition of "satisfied", is misleading. In a game that permits multiple Nash equilibria and in which the equilibrium that has been achieved is suboptimal for all players, each player is content with their move given the moves all other players, but each player also recognizes that had they all played some alternative move, they would also be content, and would also have been better off. And in any psychologically realistic picture of human beings, unlike those characterizing the one-dimensional robots of economic theory, that recognition will thus be attended by some natural past-directed emotion like regret or wishing something else had happened. They might even wish some thoughtful and powerful external agent had compelled them to make different moves.

    On the, "when governments spend, It's citizens eventually pay" point, even if this were true, the citizens might pay out a higher aggregate income than would have been achieved if the government hadn't spent.... which is just another way of stating one of the other classic lessons of economics:

    Some investments pay for themselves, and even reap a profit.

    That's true whether those investments are made by private enterprises taking their profit in the form of market sales of what is produced, or public enterprises taking their profits in the form of the distribution of what is produced among the producers themselves.

    But also, government can sometimes spend on the production of goods and services without the citizens ever paying. If the national economy is capable of achieving a higher sustainable level annual output, then a government can in principle spend new money into the economy in such a way as to bring the economy to that higher level without generating inflation, and without having any need to get the spent money "back" from the public.

    Sargent is trying to recruit and demoralize those young Berkeley graduates with the self-serving, slow-witted pseudo-realism that has given the United States decades of social decay and failure. I sincerely hope they ignore the old fool.

    ReplyDelete
    Replies
    1. Where I wrote:

      "the citizens might pay out a higher aggregate income than would have been achieved if the government hadn't spent"

      I should have written:

      "The citizens might pay out of a higher aggregate income than would have been achieved if the government hadn't spent."

      Delete
    2. Nathanael8:41 PM

      "If the national economy is capable of achieving a higher sustainable level annual output, then a government can in principle spend new money into the economy in such a way as to bring the economy to that higher level without generating inflation, and without having any need to get the spent money "back" from the public."

      Yep. This is the famous result of Keynes -- when people are unemployed, print some money to employ them to do something useful, and it's a complete win-win at no cost to anyone. I was seriously offended to hear Sargent spouting discredited anti-Keynesian nonsense.

      Delete
  16. "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."

    In other words you need to threaten people with starvation or else they won't work!

    And it was the Clintonoids working with Newt Gingrich who ended "welfare as we knew it." They need to be purged from the party.

    Many economists like Dean Baker point out that the debate isn't just about government versus private sector. Often the government sets up the parameters of the market, like the deregulation of the financial sector which caused the epic housing bubble and panic of 2008.

    ReplyDelete
    Replies
    1. Anonymous11:53 AM

      My guess is that Sargent actually favours tough regulation for the financial sector, but no bailing it out due to moral hazard concerns. Strip the maths away and basically you have an old-fashioned monetarist. In substance I do not think he really had anything really new to add. He likes things like the gold standard, independent central banking and rule based macro-policy.

      Delete
    2. Anonymous10:02 AM

      I don't have a problem with Sargent saying that well-intentioned progressive tax systems and social welfare systems can distort incentives and therefore lead to a welfare loss. What I do not like is when it is dressed up in algebra and presented as a universally applicable scientific fact.

      Delete
    3. Anonymous9:43 AM

      Krugman is surprised that Cochrane favours tough regulation for the financial sector. But this is a classic monetarist position. Monetarists such as Sargent and Cochrane are against government intervention on equity grounds. But they are big on incentives. For that reason they are big on rules - especially monetary/financial, regulations and prudish Victorian morals and discipline. Rules above discretion. This is also the logic behind #7.

      Delete
  17. 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...

    The whole point of overlapping generations models is to reflect the fact that it is hard for one generation to cover its costs. Instead economies are built around intergenerational transfers. Ultimately the goods and services consumed in retirement have to come out of then-current production – you can't put doctors in cold storage for 25 years. When you have a large cohort entering retirement, as with the US baby boomers, those in the labor force either have to save more or be taxed more – in either case consume less – whether or not the "boomers" saved while themselves working.

    Now perhaps Sargent is talking about a failure to invest (presumably by the current generation). There is no particular reason why social security will raise (or lower) national saving – if I read him correctly, Sargent is assuming it lowers savings. Increased savings have to be invested productively: no diminishing returns, no bubbles and no "white elephant" investments (ballistic missle submarines). Productive investment does boost future output. But that the pie is larger does nothing to overcome the need to split the pie, and does nothing to change the fact that the boomers will want a slice commensurate with their numbers (and pre-retirement standard of living, cf. permanent income / lifecycle consumption models).

    ReplyDelete
    Replies
    1. When you have a large cohort entering retirement, as with the US baby boomers, those in the labor force either have to save more or be taxed more – in either case consume less – whether or not the "boomers" saved while themselves working.

      I wish this point were acknowledged more in the regular what-to-do-about-social-security articles. The hope seems to be that we could replace government taxation with self-taxation and accomplish something, or that if only instead of putting the trust fund in treasury bonds we had put it in equities the financial markets wouldn't have been efficient and resulted in more private investment in bonds and less in equities, and somehow we wouldn't be in the same economic situation. My own preference would be to see Social Security explicitly returned to a pay-as-you-go program, because that makes the issue explicit, whereas any sort of trust fund or personal accounts create exactly the same situation but help to pretend the issue isn't there.

      Delete
    2. 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...

      It is possible but not straightforward. To do do one needs to reduce investment (or the return on investment) today in a way the reduces income in the future. Does SS or a federal deficit do this? Not necessarily. A deficit incurred to invest in high yielding infrastructure shifts income from the the present to the future.

      Delete
  18. Anonymous10:51 AM

    There is no particular reason why social security will raise (or lower) national saving.

    Yeah, I do not think there is a connection between countries that save and don't save according to national social security systems. At least among industrialised countries anyway. Perhaps he his assuming that social security systems imply a larger government sector and he is assuming Say's Law?

    The Singapore Government is an active sovereign investor. There is more government intervention in this economy than a lot of people realise. Some of it is actually quite heavy handed. Mind you they pay government officials well. Perhaps his reasoning is that government ownership and direction of production does not harm incentive effects if they pay their staff well???? Perhaps Sargent is more open-minded than we might realise.

    ReplyDelete
    Replies
    1. Anonymous12:01 PM

      It should also be added, what is defined as the private sector in Singapore are actually semi-autonomous and semi-official entities.

      Delete
    2. Anonymous10:54 AM

      "The reason" is incentives. But of course, social security systems can free people from only being concerned about current income - for example people living day to day in third world countries (ie most of the world's population). In this way it can provide the basis for savings and investment.

      This Sargent ideology is something we really have to battle against.

      Delete
  19. Sargent is just another right-wing ideologue pretending to himself that he's being 'objective'.

    ReplyDelete
  20. "12. Because market prices aggregate traders' information, it is difficult to forecast stock prices and interest rates and exchange rates.

    This is good life advice, but it does not obviously fit the theme (unless Sargent is thinking of govt. intervention to pop asset bubbles)."

    What he's saying is: government bond yields might rise to sky-high levels any day now, and then we will be like Greece, Greece I tell you.

    ReplyDelete
  21. "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."

    This is completely misleading propaganda.

    To not be completely dishonest, he should have said something like "people are satisfied with their choices given their initial conditions and lack of other available choices."

    So for example, a sweatshop child labourer might be "satisfied" with his "choice" to work in a sweatshop like a slave for a pittance, because the only other "choice" available to him was starvation or prostitution. In other words his initial conditions (extreme poverty) meant that he had no other real choices.

    Right-wing liars like Sargent simply use economics as a tool for ideological propaganda. But they are so profoundly ideological, they actually delude themselves into believing that the propaganda they spout is objective and honest truth.

    ReplyDelete
  22. Anonymous11:29 AM

    @Noah Smith: [W]hen this kind of list is put forth as a "summary of economics", it does a disservice to the profession.

    It doesn't, because populist, anti-market views and pretence of knowledge (Hayek)* is a problem way (waaaay) more severe than free market cheerleading (look around).

    -Anônimo

    * Sargent' point about distributed knowledge was a profound and Hayekian one - and obviously. He wasn't making a superficial point about information asymmetry or the like. Neoclassical economists are dumb sometimes.

    -Anônimo

    ReplyDelete
    Replies
    1. you're saying it doesn't matter if people like Sargent deceptively present their ideology as a form of 'objective' economics, i.e. it doesn't matter if they lie and deceive, because anti-market views are a bigger "problem". Therefore Sargent is justified in deceiving his audience.

      Delete
    2. Anonymous12:13 PM

      @James: it doesn't matter if they lie and deceive

      First, a graduation speech need not to be "objective" to be effective and moving. It's not its purpose to be so. Second, he wasn't lying: he was making some points that are generally TRUE (as Noah admites), even though they aren't in all cases and particular situations. If I say "free trade is good policy", I'm not deceiving, misleading or lying, because the statement is indeed true in GENERAL, even though there are exceptions.

      -Anônimo

      Delete
    3. Anonymous2:07 PM

      I say "free trade is good policy", I'm not deceiving, misleading or lying, because the statement is indeed true in GENERAL, even though there are exceptions.

      There is nothing generally true about this statement at all. In fact there is a large body of historical studies which argue that import substitution policy played a role in the industrialisation of Japan, China, Germany, and even the US and Britain. It is not true to say that import protection or free trade is generally good. Import substitution policies appear to have been successful in the above countries, and not in others (South America and Africa). More likely, however, it is factors that have nothing to do with the free trade or import substitution policies that have provided for successful industrialisation.

      To understand these things you need to put model away and look at detailed historical case studies.

      Delete
    4. Anonymous3:23 PM

      @Anonymous:T o understand these things you need to put model away and look at detailed historical case studies.

      I agree with you. But I would classify "infant industry" argument as a PARTICULAR case that doesn't invalidate the classic - and more general - Ricardian argument of comparative advantage, which explains why free trade is so good on so many situations.

      We can discuss if the nascent industry is really a good refutation of the general Ricardian point, but I think we would derail the thread. There's evidence (DeLong, 2004) that one of the two great economic successes of the previous decades (India post-"License Raj" was strengthed (not weakened) after trade liberalization:

      http://www.j-bradford-delong.net/econ_articles/India/India_Rodrik_DeLong.html

      "Standard simple growth theory would predict that over time after reform the speed of growth would slow as the economy closed in on its new, higher steady-state growth path. After a decade the "convergence" component of economic growth should be between .85 and .60 of its initial, immediate post-reform value. This would suggest a slowing of growth by the late 1990s of between 0.6 and 1.4 percentage points relative to the second half of the 1980s, if Rajiv Gandhi’s reforms were the only powerful change in the economy’s long-run growth prospects.
      However growth did not slow in the 1990s. Further, larger waves of reform washed over the economy in the 1990s. Economic growth accelerated by at least one further percentage point per year in the 1990s.”

      Delete
    5. Nathanael8:39 PM

      There is no evidence -- zero data -- to support the theory of comparative advantage.

      At all!

      Absolute advantage works, of course. It's comparative advantage which is false. If country A is the lowest-cost, most-efficient producer of good #1, good #2, good #3, ... and indeed all goods, and country B is the highest-cost, least efficient producer.... then eventually country A will manufacture everything and the people of country B will go begging. Sure, country A has a larger advantage in good #1 and a smaller advantage in good #2 -- it'll dominate in both.

      Why? Because country A doesn't have to choose between investing in wool and investing in cotton; it can and will do both. In the real economy there are *practically always slack resources*. The theory of comparative advantage depends on country A being at full employment and full resource deployment, so much so that taking over the market for good #1 uses up all of its resources and it can't take over good #2. This simply doesn't happen often if at all.

      Delete
  23. 5. There are tradeoffs between equality and efficiency.

    Yes, and efficiency is often in the eye of the beholder. Because inducing workers to underbid each other is "efficient" in the eyes of the few. IOW, there are very good reasons to avoid either extreme equality or extreme efficiency.

    1. Many things that are desirable are not feasible.

    At least not right away.

    :^)

    ReplyDelete
  24. Anonymous12:20 PM

    Many things that are desirable are not feasible.

    This is the old limited resources unlimited wants cliche. Why not say many things that are desirable are feasible? Is it really true that people always want more? If that is true, is that innate or socially constructed?

    These are big questions. I doubt Sargent has really consulted the psychology, sociology or other literature which is more likely to have the answers.

    ReplyDelete
    Replies
    1. You know, it occurs to me that the inverse of that proposition is more true than the proposition as stated:

      "Many things that are feasible are not desirable."

      And perhaps more important.

      Delete
    2. Anonymous2:10 AM

      Many things that are desirable are not feasible.

      What an uplifting message Sargent has for graduates with their lives ahead of them who want to make things happen!

      Delete
  25. Anonymous3:49 PM

    This seems a rather poor and unrealistic list to me. I would like to suggest a first move for something I believe is more realistic:

    1. People are only willing to operate in our society if that is in their own interest. That's the raison d'etre of our society. But only as long as our society and economic system function in the interest of the majority of the people.

    2. It’s not about the information people have, but about what they can do with it, dependent on their skills, social network and financial means.

    3. There is not trade-off between equality and efficiency, but between equality and rewards for people acting in their own interest.

    4. There is no such thing as an economic equilibrium. Our society and (the structure of) our economic system are constantly evolving and changing.

    5. People are only to a certain extent satisfied with their choices and the results of these choices. But change means uncertainty, and people tend to be afraid of uncertainty, as it could also mean that things will get worse for them.

    6. In the real world, the lesson does not seem to be that you have to think about whether you will want to keep your promise before you make it. In the real world, the lesson seems to be that you have to weigh the gains you can make with your promise against the losses you can make with it that you cannot put on others.

    7. When a government spends, citizens receive. But other citizens do not pay for that, as in the reality of our world the nominal debts of our governments continuously swell and are continuously rolled over. But that is only possible as long as these debts are primarily made to invest in employment and sustainable productivity in the interest of the majority the people (i.e. the "working capital" of our society), and not in speculation with existing assets in the interest of a small minority of the people.

    Anton van de Haar

    ReplyDelete
    Replies
    1. With all due respect, sir, you have an undergraduate-level, rather than a Nobel prize-level, mastery of vacuous philosophical platitudes about the human experience. Nevertheless, Berkeley will keep you in mind for future graduation ceremonies, if we have a cancellation.

      Delete
  26. It would be interesting to see the same kind of "leaning against the wind" list of principles directed at a group of college "conservatives."

    ReplyDelete
  27. You ask, someone on the internet will provide:

    http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2014/04/12-alternative-principles.html

    ReplyDelete
  28. Is this serious? Now, we have the highly technically developed new economic theories that let us optimize the market-state boundary? This is just a ridiculous statement on the face of it.

    Sargent's warnings are not directed to the incoming communist wave, but against the very disease you suffer from: pretense of knowledge syndrome.

    The case for market economies and markets in general is not based on welfare theorems and same such, but on the paucity of our understanding of actual economies and a collection of rough historical examples giving us warning against the scourge of (social) optimization.

    That does not mean that some interventions are not advisable, but humility comes first.

    ReplyDelete
  29. Berkeley is a school famously filled with people from Orange County. The town is famously liberal and the 60s were crazy. Sergant is not so foolish as to believe it is a "famously liberal" place.

    ReplyDelete
  30. Anonymous4:32 AM

    Great post Noah. I hope the organizers at Berkeley have taken note.

    ReplyDelete
  31. Anonymous7:39 AM

    Anyway, it definitely fits with the theme of all of the previous "lessons" except #7.

    #7 is also about government - and particularly macro policy- sticking to rules rather than using discretion- eg a gold standard to earn "credibility".

    ReplyDelete
  32. Vox is great so far - it's fun watching Ezra try to play it safe and Yglesias on fire.

    ReplyDelete
  33. This graduation speech was actually the core of Sargent's 5-minute Nobel Banquet speech in 2011 (http://www.nobelprize.org/mediaplayer/index.php?id=1758), where he shortens the list to (in order) points 1, 5, 3, 4, 10, 9, and 11. This timing no doubt adds more fuel to Paul Krugman's fire here: http://krugman.blogs.nytimes.com/2014/04/21/no-time-for-sargent/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body.

    ReplyDelete
  34. This comment has been removed by the author.

    ReplyDelete
  35. The comments section from Krugman get to many of these points well. The usual issue with the Sargent viewpoint is the assumption that all government spending is wasted. So 10 could just as easily be written as "When the government invests, succeeding generations benefit". The ECONOMIC point is that all transactions have both a buyer and a seller (or equivalent e.g. lender and borrower). It is a POLITICAL point is to only focus on one side of the transaction.

    ReplyDelete
  36. Anonymous6:56 PM

    It's incredibly disingenuous or naive to pretend that because a person of authority doesn't write opinion pieces or policy papers that there is no ideological commitment in their work. This is the worst element of economics, looking in on it from mathematics (a field that too has problems with representing work as something other than it is by virtue of abstraction, claims to pure theory, etc. See, e.g. the number of people on DOD grants). Economics pretends that what it does is physics, so that the philosophy that it embodies passes unnoticed.

    ReplyDelete
  37. Good job Noah titled this "not a summary of economics". If the best an economics Nobel can come up with is four falsities and eight platitudes the filed would be in very bad shape.

    ReplyDelete
  38. Anonymous8:28 PM

    It is also very striking that no form of market failure (even those implied by #3, #6, or #11) make the list.

    ReplyDelete
  39. This is an interesting and reasonable interpretation of Sargent's list. However, how do you know this is what Sargent intended? Sargent might actually believe in this wholeheartedly, not merely as a mental inoculation for Berkeley grads. Your interpretation appears to be putting too much words into Sargent's mouth here: "It's not hard to see why Sargent - himself a Clintonite sort of Democrat - might emphasize this point to a bunch of Berkeley grads. ... Sargent, of course, knows that, and is just playing to a very particular audience of what he takes to be starry-eyed, wet-behind-the-ears, do-gooding Berkeley hippies"

    ReplyDelete
    Replies
    1. "Sargent might actually believe in this wholeheartedly,..."

      Which says nothing good about him.

      Delete
  40. "When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation"

    I think the key word there is "eventually". What do you get to do with that money in the meantime? And, when the citizens do re-pay, what does the government do with those repayments? I'm sure we had to repay the government for the TVA, but after repaying them, we had this real nice electricity distribution system left over...

    ReplyDelete
  41. Noah: "...(a strong contender for "smartest living economist")..."

    I don't care if he's smart, I care if he's trustworthy. I've seen lots of really, really smart economists spouting bullsh*t. I've seen lots of really, really smart economists look at their bullsh*t, look at contradictory reality, and continue spouting bullsh*t.

    In general punditry and commentary, describing somebody as 'nice' arouses my suspicions ('he's a really nice guy; he always sends flowers to his victims' funerals...').
    In economics, describing somebody as 'smartest' is d*mning praise.

    ReplyDelete
    Replies
    1. Adding on - when was the last time that we saw the elites in a field look at massively dis-confirming data, and blithely proceed on as if nothing happened?

      Delete
  42. Great post! I am impresed to read your blog It takes me almost half an hour to read the whole post. Definitely this one of the informative and useful post to me. Thanks for the share. you also visit my site  Contractor Accounting At intouchaccountants We are dedicated to providing a professional yet affordable and efficient service to small and medium sized business.

    ReplyDelete
  43. "This is the basic idea of all of econ. But I think Sargent has a special reason for reiterating it.
    2. Individuals and communities face trade-offs.
    Implied by #1, but in a speech this short I think we can forgive Sargent this slight verbosity."

    No 2 is not necessarily implied by 1. It is unfeasible to fly to the stars, but that doesn't create any tradeoffs.

    ReplyDelete
  44. "By discussing asymmetric information, he's also saying "Other people know what's best for them better than you do, so if you try to help them with government policy, you might end up hurting them instead." "

    This same argument can be used against private charity (and in fact can be used to argue that public support - where people get to vote on the distribution is better than private charity). Very wishy washy arguments here in general. Almost none of them hold up to close scrutiny. Not a very good advertisement for economics.

    ReplyDelete
  45. Nathanael8:34 PM

    "10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation."

    Complete, utter, arrant nonsense. Lies, in fact. This was proven false by John Maynard Keynes.

    When a government prints money and spends it to deploy undeployed labor (hire unemployed people) or to deploy other undeployed renewable resources (for instance, harnessing solar power, planting crops in fallow fields), its citizens benefit. Period. They never pay -- they only benefit. It's win-win!

    This is one of the most important results in all of economics. It requires understanding the nature of money (it's a social construct) and the nature of labor (if we don't use it, we waste it and it's a deadweight loss gone forever).

    Keynes spent a LOT of time explaining this very slowly to economists and politicians. His theories were tested, and they were right.

    Sargent should resign his position and return his PhD if he has one. He shouldn't spew such bull. It's dishonest.

    ReplyDelete