19 Apr 2014

Maybe Sargent Should Have Used 1,000 Words?

Economics, Noah Smith 17 Comments

We don’t see eye to eye on many issues of economic policy, but Noah Smith is quite possibly even a bigger smart*ss than me, so I try to follow his blog out of solidarity. I have to agree with Noah that the gushing over Thomas Sargent’s 2007 graduation address to Berkeley students has been completely overblown. (I saw people on Facebook referring to it as the greatest economic lecture ever, etc.) Also, in case you’re curious, I have no idea why people starting talking about it now, when the event occurred 7 years ago. Perhaps something to do with asymmetric information.

Anyway, Noah is mad because it smacks of policy advocacy. It’s not the neutral discussion of objective economic law, the way Noah’s heroes Paul Krugman and Brad DeLong dispense.

But I’m more concerned that at least two of Sargent’s 12 principles don’t even make sense. First and most serious: “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.”

Huh? One out of twelve main points that the science of economics can teach young people, is that it’s difficult for government policy to make things worse? (If you read the whole thing, I think it’s pretty clear that Sargent is including the possibility of well meaning outsiders working through the government to try to change things for the better.) And doesn’t this superficially at least conflict with Sargent’s 5th principle, that there are tradeoffs between equality and efficiency? Or is he saying in #5 that there are tradeoffs, but in #6 that we can never really move along that dimension much from our starting point?

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 is the kind of thing where it sounds like he’s saying something deep, but if you actually read the above three times in a row, you see it doesn’t really make sense. If I can break it down, it’s something like:

a) Sometimes it would benefit you today, if you could promise to do something in the future that is against your interest. But when it comes time for to follow through on that promise, you won’t, because you will be responding to the incentives at that time. However, recognizing this, people won’t believe you today if you try to make such a non-credible commitment, meaning that in practice you will not be able to benefit today from issuing such a promise.

b) Try to gain a reputation as someone who will not respond to the incentives you will face in the future. Then people will believe you when you promise to do something that is not in your interest.

Look, I know what Sargent is trying to say in the above, or at least I think I know what he’s trying to say. But my point is, what he actually said makes no sense to me.

So in summary, I agree with Noah that this is hardly a “summary of economics.” Not only is it an odd collection of principles (the last one seems to come out of left field), but at least one is flat-out wrong and would (if it were true) justify getting rid of 99% of the world’s economists, and another one is very poorly worded.

Yet having said all of that, I’m sure the kids loved it, because the whole thing was 297 words.

17 Responses to “Maybe Sargent Should Have Used 1,000 Words?”

  1. Keshav Srinivasan says:

    Bob, as far as 7 goes, I think this is what he’s trying to say: don’t make promises you can’t keep. Sometimes you’ll be tempted to make a promise, but before you do that examine the incentives you’ll face in the future and determine whether you’re really likely to follow through on it. If you only make promises you know you’ll be willing to keep, then you’ll acquire a reputation for your promises being reliable and trustworthy.

    • Ken B says:

      Yes. Bob’s reading is just bizarre. Just because there are some promises you cannot keep doesn’t there won’t be some you can. Learn to tell the difference. You can do this by thinking about the incentives you’ll face just as you would think about the incentives anyone else would face.
      It’s not about you inability to gain now so it’s futile to promise.

    • Bob Murphy says:

      Keshav I was about to say I totally agree that that’s what he’s trying to say, but even your wording isn’t right. It’s not “don’t make promises you can’t keep.” Rather it’s “don’t make promises you WON’T keep.”

      Let me put it like this: Sargent seems to be putting all the weight on the front end, sort of: “You know very well that you will do what’s in your immediate interest at T=5. So don’t promise at T=1 to do something that will not be in your interest at that point.”

      But if that is true, then your promises mean nothing at all.

      The only reason your promises and reputation matter, is if you actually show that you will *not* respond to incentives (narrowly defined) at T=5.

      • Ken B says:

        Can’t/won’t is a good distinction here.

      • Keshav Srinivasan says:

        “But if that is true, then your promises mean nothing at all.” I don’t see how that follows. Sargent isn’t talking about building a reputation for living up to your word even when it’s difficult. He’s talking about building a reputation for being honest about what you’re likely to do in the future.

      • andrew' says:

        I think Bob is right AND I like Sargent’s nugget of truth.

  2. Major_Freedom says:

    Murphy, your criticism of Sargent’s speech is founded upon an economic critique.

    Smith’s criticism is founded upon his disdain for Sargent’s seeming anti-government ideology.

    You beat Smith in terms of both smart*ssness and intelligence.

    • Bob Murphy says:

      You beat Smith in terms of both smart*ssness and intelligence.

      I dunno… He’s really a smart*ss.

  3. Noah Smith says:

    I’m not mad at all. And I think political advocacy is fine anyway.

    I just didn’t like the list being billed as a summary of the main things we know about economics. It’s not.

    • Bob Murphy says:

      Fair enough. And “mad” was a rhetorical flourish. You not mad, bro?

  4. Tel says:

    b) Try to gain a reputation as someone who will not respond to the incentives you will face in the future. Then people will believe you when you promise to do something that is not in your interest.

    Right! Then after building up a valuable reputation, later on when you do respond to the incentives and you break your promise, that sucker won’t see it coming. Ka-Ching! Cash in big time.

    Sargent’s one smart cookie, playing the long scam, I like that.

  5. Andrew_FL says:

    Yeah, it really doesn’t make any sense to say “everyone is satisfied with their choices, I can’t make things better or worse by overriding some of their choices.”

    Of course you can make things worse! You can only make things worse!

    • andrew' says:

      I think he should have said it is easier to make things worse.

      You can also fairly easily make things better by undoing previous limitations on the available choices.

      I don’t even think saying that is policy advocacy. I think those ate basically knowns.

      • Andrew_FL says:

        Yes, you can make thing better by increasing the choices they can make. But by overriding choices? You can’t.

        • Ken B says:

          Actually you can. If the game has an unstable Nash equilibrium better than the stable one for instance. And there are many games where you are better off if some of your choices are eliminated and known to be eliminated.
          Whether or not those conditions can arise in normal markets is a different question.
          So he’s right about difficult.

  6. Yancey Ward says:

    I took issue with Sargent’s claim that economics was organized common sense. In an ideal world, that is what it would be, but as practiced, it seems to be organized around the principle of defying common sense.

  7. andrew' says:

    You aren’t required to listen to these pompous essays if you are graduating.

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