All you need to know about economics

From a graduation speech delivered by Nobel Prize winner, Professor Thomas Sargent.

The Greatest Graduation Speech Ever Given Is Bullet-Point List Of 12 Economic Concepts

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 organised 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.

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19 Responses to All you need to know about economics

  1. RodClarke

    This is also a cracking resource for Students in about year 10

    http://mises.org/books/economics_in_one_lesson_hazlitt.pdf

  2. Could someone please email this list to Fairfax Media?

  3. DrBeauGan

    Waste of electrons, Philippa.

  4. rafiki

    “9. It is feasible for one generation to shift costs to subsequent ones.”

    Yes, and this has happened, and is happening, in Australia. I suspect that a clear point of cleavage between the parties may lie in just whether and how this should be reversed. Fom Joe Hockey we are geting signals that the Liberals wish to address the issue. If they can sell this message to the younger demographic, they might be on a winner (and on the right side of history). Malcolm Turnbull (who does have appeal to the younger ones) might be called upon to make the case. This tactic might nicely nullify the attraction of the Greens.

  5. MaxR

    Rafiki, excellent point. I am sure if I were 18 again and working hard I would not relish knowing that I may not get the same goodies as a pensioner today. This cradle to the grave mentality has to go.

  6. JC

    Rafiki
    Stop being a dill. Turnbull has his hands full dealing with the wreck of the NBN left by the Liars party. Why on earth would Gorman or Hockey want the minister of comm to be doing their job for them?

    You really don’t exhibit much common sense at times and it’s quite worrying.

    Now don’t give me any of your sanctimonious sermons as I heard it all before.

  7. JC

    MaxR

    The welfare state will remain until we have a serious crisis. It will disappear for a while after that and return with a vengeance. Things will only change when the Liars Party stops promising free stuff to its constituency. That doesn’t appear to be happening for the next 20 years or longer.

  8. entropy

    The problem with that theory is until the young have something to lose, arguing about future pensions won’t make much sense to them. Up to this point in their lives, the typical 18 yo has had almost everything handed to them by big daddy. So why not expect things to continue with big mummy government?

    And besides, they will never get that old.

  9. Notafan

    18 year olds are mostly finishing high school, they won’t start thinking about these things until they get those paychecks which show how much tax and hecs is being deducted from their gross pay, which means around the age of 24, these days.

  10. Alfonso

    13. Socialism has no price discovery mechanism so it is invalid, end of story.

  11. H B Bear

    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).

    I don’t know why inter-generational issues don’t get more air play in Australian politics. Government debt is nothing more than time shifting of expenditure and the burden of taxation.

    The Singaporean model of combined superannuation/housing/medical savings is looking pretty good compared to Keating’s model, as bastardised by Costello and others.

  12. Tel

    9. It is feasible for one generation to shift costs to subsequent ones.

    Until a generation comes along and just folds arms and says “No!” at which point shit hits the fan. Sooner or later, such a generation will come.

  13. Tel

    The Singaporean model of combined superannuation/housing/medical savings is looking pretty good compared to Keating’s model, as bastardised by Costello and others.

    The US Social Security has about 10 years left and something has to give. Probably there will be a way to gently defuse the entitlements but it’s going to be very tough. Difficult to see how the US economy can withstand higher taxes and there will come a point where they can’t keep raising the debt.

    I think the Australian system is considerably more robust than that. I bloody hope so.

  14. blogstrop

    In our family we try to move assets from one generation to the next. But who are the enemies of this?

  15. Brett_McS

    Preferences cannot be ranked between people.

  16. I am the Walrus, koo koo k'choo

    V. good.

    14. If people can gain an advantage from an activity and at the same time shift the costs of this activity onto someone else, they will do so.

  17. RodClarke

    13. Socialism has no price discovery mechanism so it is invalid, end of story.

    +1

    The way that the Free Enterprise Price discovery system can deliver fresh fruit all year round (and millions of other goods and services), all over the world is truly amazing when you think about it.

    Socialism couldn’t get Oranges from Florida to Sydney much less a Mobile Phone / Computer in the pocket of 1/2 the people in the 3rd world.

  18. Judy, when I originally posted the link, I neither expected it to go viral nor expect Paul Krugman to imply that I am the double-secret ring-leader of a vast right-wing conspiracy!

    The other day in his blog at the New York Times, Krugman said:

    “…why the sudden attention to Sargent’s 2007 speech?

    I think it’s fairly obvious: it’s essentially stealth anti-Keynesian propaganda, cloaked in the form of a widely respected and liked economist uttering what sound like eternal truths.

    But they aren’t, and the real goal here is to undermine the case for fighting unemployment in the here and now.

    There are virtues to that 2007 talk, but right now is no time for 2007 Sargent.”

    In my reply at his blog, I said that I posted the link to make a point that most economic analysis is free of politics because the average economist is a moderate Democrat. Tom Sargent is a life-long democrat.

    Krugman said earlier in his post that:

    “It’s not so much that what Sargent said is wrong, although some of his principles are by no means universally agreed upon, even in normal times.

    What’s so striking about Sargent’s points is that it’s hard to think of a worse time to cite them.

    And the people citing that old speech clearly have ulterior motives.”

    I live in New Zealand. Not everything is about U.S. domestic politics.

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