Common Sense about Economics


University of California at Berkeley graduation speech


Thomas J. Sargent*


May 16, 2007


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




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 gov-


ernments sometimes default on loans and other promises that they have



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.


*: New York University and Hoover Institution. Email:


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