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

 

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 gov-

 

ernments 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.

 

*: New York University and Hoover Institution. Email: ts43@nyu.edu.

 

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