a commencement speech by an economist: a bullet point list of 12 important economic concepts

A story by Business Insider intrigued me [Link]. It posted the 335 word graduation speech by Nobel economist Thomas Sargent to graduates of Cal-Berkeley in 2007. This short graduation speech is simply a numbered list of 12 important concepts from economics that graduates should know about. Here is the speech, with the points most relevant to OR/MS in bold:

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 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.

What do you think? I am delighted by this list and think that we could put together a list of important OR/MS concepts. Would the boldface items make the cut? The concepts of tradeoffs between objectives/criteria is important and would make my top 12, because I haven’t seen a OR/MS model address a real-world problem with at least some discussion regarding the tradeoffs between criteria.

We often focus on scarce resources, which shows up in #1 above. Would you add more bullet points about scarce resources, constraints, and/or feasibility? What else would you add?

Would the ideal OR graduation speech be a bulleted list, or would it be better as a series of inputs, constraints, and objective function(s)?

And finally, here are 12 alternative economic principles by @CJFDillow (HT: @waltzingmonkey)

 

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2 responses to “a commencement speech by an economist: a bullet point list of 12 important economic concepts

  • Matthew Saltzman (@SaltzmanMJ)

    For an alternative take on Sargent from another Nobel economist, here’s Krugman: http://krugman.blogs.nytimes.com/2014/04/21/no-time-for-sargent/

    One point: While it’s true that there are tradeoffs between equality and efficiency, in fact it is likely that extreme inequality is not conducive to maximum efficiency. We usually think of the efficient frontier of a multiobjective optimization problem as achieving the maximum value for each objective at the nadirs for the others, but that mental picture can be misleading.

    Another point: If spending now increases future revenue (economic growth) with a multiplier greater than one over what it would have been without the investment, then it’s not true that the spending must eventually be paid for–it pays for itself. That’s kind of the point of investing, no?

  • Ivan Taylor

    Points 3., 4.and 7. are also worth including in advice to operational researchers.

    For example, (3) when trying to improve the efficiency of an organization it is worthwhile getting suggestions from the people at the front line. They do the job every day and know what would make them more efficient. It is presumptuous for an outsider to assume he or she knows more about the job than the worker doing the job.

    (4) Everyone responds to incentives even you (7). One of the books that I highly recommend to young operational researchers is Gordon Tullock’s “The Politics of Bureaucracy”. The first half of the book is about how one can get ahead in a bureaucracy and the second half of the book is for those who have gotten ahead in the bureaucracy and how they get subordinates to work for them.

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