Economists From The United States

"A theory of power has long been the Holy Grail for political science, but the Grail has not been found."

"If you take the story I've given you, if you recognize that the traditional way we looked at politics had a lot of romance in it, then Public Choice comes along and removes the romance. I think the natural outcome of that is you're going to be more skeptical about government than you would have been otherwise. Mancur Olson, a good friend of mine, has been influential in Public Choice and objects very strongly to this argument that there is this conservative bias. There is no bias in it as such. But Mancur himself has necessarily had to look at politics differently because of that, despite the fact that his natural proclivity would be more left than mine. There's nothing inherently biased about it. It's just that the fact that if you start looking at the political sector or politics from a non-romantic view, you come to a different view on what has been traditional."

"Jurisprudence addresses the questions about law that an intelligent layperson of speculative bent — not a lawyer — might think particularly interesting."

"The spontaneous individual optimization that drives the theories with which I began is important, but it is not enough by itself. If spontaneous Coase‐style bargains, whether through laissez-faire or political bargaining and government, eliminated socially wasteful predation and obtained the institutions that are needed for a thriving market economy, then there would not be so many grossly inefficient and poverty-stricken societies."

"Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion of cavalry tactics at the Battle of Austerlitz. If I do that, I'm getting tacitly drawn into the game that he is Napoleon Bonaparte. Now, Bob Lucas and Tom Sargent like nothing better than to get drawn into technical discussions, because then you have tacitly gone along with their fundamental assumptions; your attention is attracted away from the basic weakness of the whole story. Since I find that fundamental framework ludicrous, I respond by treating it as ludicrous – that is, by laughing at it – so as not to fall into the trap of taking it seriously and passing on to matters of technique."

"Using the popular macroeconomic models of the time, Lucas and Sargent showed how replacing traditional assumptions about expectations formation by the assumption of rational expectations could fundamentally alter the results. … Most macroeconomists today use rational expectations as a working assumption in their models and analyses of policy. This is not because they believe that people always have rational expectations. Surely there are times when people, firms, or financial market participants lose sight of reality and become too optimistic or too pessimistic. … But these are more the exception than the rule, and it is not clear that economists can say much about those times anyway. When thinking about the likely effects of a particular economic policy, the best assumption to make seems to be that financial markets, people, and firms will do the best they can to work out the implications of that policy. Designing a policy on the assumption that people will make systematic mistakes in responding to it is unwise."

"If judges are pragmatic, as I think they largely are in our system, it can only be in the everyday sense of the term. But immediately the counterexample of Holmes, a gifted and serious though not systematic philosophical thinker, comes to mind."

"No analysis of the limits of economic freedom or the uses of coercion by government, labor unions, or organizations of any kind can do justice to the complexity of the subject without taking account of the distinction between collective and noncollective goods."

"These ideas have implications not only for theoretical and econometric practices but also for the ways in which policymakers and their advisers think about the choices confronting them. In particular, the rational expectations approach directs attention away from particular isolated actions and toward choices among feasible rules of the game, or repeated strategies for choosing policy variables. While Keynesian and monetarists macroeconomic models have been used to try to analyze what the effects of isolated actions would be, it is now clear that the answers they have given have necessarily been bad, if only because such questions are ill-posed."

"Tom Sargent is a bit out of touch with the real world up there in his office in Minneapolis. A lot of the disagreement is ideologically based, though certainly not on Tom's part. I see this by talking to people. Certain people have a capacity for ignoring facts which are patently obvious, but are counter to their view of the world; so they just ignore them."

"What policymakers (and econometricians) should recognize, then, is that societies face a meaningful set of choices about alternative economic policy regimes."

"I remember a seminar here while Tom was visiting in Chicago. Every body was talking; it was a very chaotic seminar. In the middle of the seminar. Tom made some point and the speaker didn't seem to understand it. Tom dropped it and didn't say anything for the rest of the seminar. At the end, he just handed the speaker a piece of paper with a bunch of equations on it and said, "Here's what I was trying to say." I thought it was a very friendly, constructive thing to do, but the speaker said, "this is Sargent's idea of a conversation" and laughed. I think it's just that Tom thinks he can get things settled on a more technical level. Tom and I talk quite a bit. I think that we influence each other a lot."

"My reaction to “creative capitalism” as lauded by Bill Gates, Warren Buffett, Michael Kinsley, and (somewhat to my surprise), Professor Glaeser of the Harvard Economics Department is a skeptical one. The embrace of massive corporate charity, the criticism of capitalism by its greatest beneficiaries, and the frequent resort by the advocates of “creative capitalism” to platitudes (such as: “the world is getting better, but not fast enough and not for everyone”; “today’s miracles of technology only benefit those who can afford them”; “economic demand is not the same as economic need”), along with the vagueness of the term itself, leave me with an uncomfortable feeling."

"Call me a masochist but one of the great pleasures of being at George Mason is that I am regularly insulted by Gordon Tullock. You have to understand, however, that in my profession not to have been insulted by Gordon is to be a nobody. In anycase, here is one from yesterday. "Gordon," I asked, "do you think we should ban child labor?" "No, keep working." The other day Gordon asked me to read one of his papers and I pointed out a few typos. "Excellent," he said, "this will surely be your greatest contribution to economics." Gordon is prone to pressing people with difficult questions. One of my colleagues responded, "Gordon, I’m not that good at thinking on my feet." Without missing a beat Gordon pulled up a chair and said "well sit down and we’ll see how you do then.""

"Sargent said in a talk here last year that it is simply a methodological mistake to regard any macroeconomic policy action as an isolated episode. The only legitimate way to think of economic policy is as if the government adopts a policy rule (which may have a random element). What he meant was that he can't apply his methods to isolated policy episodes. My reaction is that the man in the street or even the man in the corporation boardroom, looking at the US Congress making macroeconomic policy, regards it as a possibly unstable episode. He not only doesn't know how it is going to come out, he doesn't imagine it to be the application of a policy rule plus a random error."

"An alternative “rational expectations” view denies that there is any inherent momentum in the present process of inflation. This view maintains that firms and workers have now come to expect high rates of inflation in the future and that they strike inflationary bargains in light of these expectations."

"It is paradoxical that an administration that came to office rejecting the whole apparatus of Keynesian economics finds itself presiding over a stream of what threaten to be permanent deficits."

"For policy, the central fact is that Keynesian policy recommendations have no sounder basis, in a scientific sense, than recommendations of non-Keynesian economists or, for that matter, non-economists."

"My published work is just a record of my learning. I'm sharing it with people so they won't make the same mistakes that I did. It's been a painful and slow process. My work is like a journey, a journey of discovery."

"Both the existence of these parallels and their tragic nature would not have escaped Charles Kindleberger, whose World in Depression, 1929-1939 was published exactly 40 years ago, in 1973. Where Kindleberger’s canvas was the world, his focus was Europe. While much of the earlier literature, often authored by Americans, focused on the Great Depression in the US, Kindleberger emphasised that the Depression had a prominent international and, in particular, European dimension. It was in Europe where many of the Depression’s worst effects, political as well as economic, played out. And it was in Europe where the absence of a public policy authority at the level of the continent and the inability of any individual national government or central bank to exercise adequate leadership had the most calamitous economic and financial effects."

"My old teacher Charles Kindleberger used to say, “Anyone who spends too much time thinking about international money goes mad” — by which he meant that you start to believe subjects like the world’s choice of reserve currency aren’t just interesting and glamorous, but are what drives everything. They don’t."

"Charlie Kindleberger was a delightful colleague: perceptive, responsive, curious about everything, full of character, and, above all, lively. Those same qualities are everywhere evident in Manias, Panics, and Crashes."

"My recollection is that Bob Lucas and Ed Prescott were initially very enthusiastic about rational expectations econometrics. After all, it simply involved imposing on ourselves the same high standards we had criticized the Keynesians for failing to live up to. But after about five years of doing likelihood ratio tests on rational expectations models, I recall Bob Lucas and Ed Prescott both telling me that those tests were rejecting too many good models."

"A follow-the-leader process develops as firms and households see that others are profiting from speculative purchases. ‘There is nothing as disturbing to one’s well-being and judgment as to see a friend get rich.’ Unless it is to see a nonfriend get rich."

"The monetary history of the last four hundred years has been replete with financial crises. The pattern was that investor optimism increased as economies expanded, the rate of growth of credit increased and economic growth accelerated, and an increasing number of individuals began to invest for short-term capital gains rather than for the returns associated with the productivity of the assets they were acquiring. The increase in the supply of credit and more buoyant economic outlook often led to economic booms as investment spending increased in response to the more optimistic outlook and the greater availability of credit, and as household spending increased as personal wealth surged."

"We were conscious of a great sense of excitement about the plan. Marshall himself was a great, great man — funny, odd but great — Olympian in his moral quality. We'd stay up all night, night after night. The first work ever done that I know about in economics on computers used the Pentagon's computers at night for the Marshall Plan. I had a tremendous sense of gratification from working so hard on it."

"Economic responsibility goes with military strength and an undue share in the costs of peacekeeping. Free riders are perhaps more noticeable in this area than in the economy, where a number of rules in trade, capital movements, payments and the like have been evolved and accepted as legitimate. Free ridership means that disproportionate costs must be borne by responsible nations, which must on occasion take care of the international or system interest at some expense in falling short of immediate goals. This is a departure from the hard­ nosed school of international relations in political science, represented especially perhaps by Hans Morgenthau and Henry Kissinger, who believe that national interest and the balance of power constitute a stable system. Leadership, moreover, had overtones of the white man's burden, father knows best, the patronizing attitude of the lady of the manor with her Christmas baskets. The requirement, moreover, is for active, and not merely passive responsibility of the German—Japanese variety. With free riders, and the virtually certain emergency of thrusting newcomers, passivity is a recipe for disarray. The danger for world stability is the weakness of the dollar, the loss of dedication of the United States to the international system's interest, and the absence of candidates to fill the resultant vacua."

"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."

"The explanation of this book is that the 1929 depression was so wide, so deep, and so long because the international economic system was rendered unstable by British inability and U.S. unwillingness to assume responsibility for stabilizing it by discharging five functions:(1) maintaining a relatively open market for distress goods; (2) providing countercyclical, or at least stable, long­ term lending; (3) policing a relatively stable system of exchange rates; (4) ensuring the coordination of macroeconomic policies; (5) acting as a lender of last resort by discounting or otherwise providing liquidity in financial crisis."

"The dilemma posed by a choice between rules and men largely begs the question. There are, to be sure, times when rules, constraints, commitments, contract or treaty provisions stand in the way and should be transcended because of force majeure, acts of God, some deus ex machina that makes clear that all bets are off. ... If one relies on men of responsibility to make the right choice in crisis among conflicting rules, or to follow an altogether different course for which no precedent exists, there is a danger of creating new precedents and new rules, which may be applied mistakenly under different circumstances. … The alternative to rules—men, which of course includes women—begs another question. Men have different responsibilities, principles, understandings, interests."

"Q: “Professor Sargent, can you tell me what CD rates will be in two years?” Sargent: “No.”"

"Cagan’s adaptive mechanism for explaining expectations of inflation has sometimes been criticized as an ad hoc formulation that is inconsistent with the hypothesis that expectations are rational. In this paper, we have showed that conditions exist under which adaptive expectations are fully rational."

"He is the kind of guy who attracts the attention of brilliant people and so when he was at the university of Chicago during World War II he was ruled ineligible for the draft because of a heart condition so he went to work in a munitions factory, actually weapons plant building bombers, parts for bombers but he was working with this metal shop at the university of Chicago and earn some money to pay for his education. In walks a guy who is working on his cyclotron and they haul off Marshall and he helps them fix fix it with order of magnitude improving in the cyclotron. He ends up playing bridge with a guy named Kenneth Arrow who ends up winning the Nobel prize in economics. It's one after another after another and it almost reminds you of the Forest Gump. You have this really smart guy who keeps bumping into all these fascinating people. And the other thing I guess that's quite interesting is he is sort of on the ground floor of some path breaking work on how we understand human behavior, behavior of organizations and there was a huge debate in the 1970s of how formidable the soviet union was. It was a big battle between Marshall and the CIA and he had the moral convictions to pursue that debate. In the end he was proven right. The other thing I would say, another reason we haven't heard a story he is terrible at self-promotion which is why we had to do the book instead of him. [laughter] but I used to kid and say you throw words around like manhole covers. These sorts of things but behind that sort of exterior masks a very emotional person and there are some stories in the book and I'd be glad to talk to you about them if you're interested of the deep feeling he has about other people, but the people he has mentored, many over the years and also about his country. I thought that was reflective of the other to the greatest generation."

"While the group of real strategists at RAND probably never numbered more than about 25 people, the overall quality, in sheer intelligence and intellectual breadth, is simply astonishing."

"Well I certainly second that, I think in addition, well I mean other things I've written suggest reading a lot of history, and uh, clearly one of the things you want people to understand is the uncertainty of things. I mean, how you really have to look at a variety of alternative futures. Any notion that you know what's going to happen, I think is, not going to work."

"In fact, as we shall see in the next section, most attempts to explicitly measure military power are mere tabulations of forces of various sorts: the numbers of men underarms, the number of weapons of a given type, etc. This is in itself an evasion of the problem since it says nothing about the actual capabilities of the forces of one country to deal with another."

"Merely adding up all U.S. forces and comparing them with Soviet Forces, actual or potential, present or future, does not really tell one very much."

"On reflection, it is not even clear if military power is a transitive relationship. Until we have defined more explicitly how we are going to measure military power, it is not clear that if A is more powerful than B, and B more powerful than C, that A is more powerful than C."

"Research in statistical theory and techniques is necessarily mathematical, scholarly, and abstract in character, requiring some degree of leisure, detachment, and access to a good mathematical and historical library. The importance of continuing such research is very great, though it is not always obvious to those whose interest is entirely in practical applications of already existing theory. Excepting in the presence of active research in pure science, the application of the science tend to drop into a deadly rut of unthinking routine, incapable of progress beyond a limited range predetermined by the accomplishments of pure science, and are in constant danger of falling into the hands of people who do not really understand the tools that they are working with and who are out of touch with those that do. ... It is in fact rather absurd, though quite in line with the precedents of earlier centuries, that scientific men of the highest talents can live only by doing work that could be done by others of lesser special abilities, while the real worth of their most important work receives no official recognition."

"The Predatory State is an economic system where entire sectors have been built up to feast upon public systems built originally for public purposes and largely serving the middle class. The corporate republic simply administers the spoils system. On a day-to-day basis, the business of its leadership is to deliver favors to their clients. These range from coal companies to sweatshop operators to military contractors."

"They include the privatizers of social security and those who put the drug companies in position to profit from Medicare. Everywhere you look, regulatory functions have been turned over to lobbyists. Everywhere you look, public decisions yield gains to specific private persons. Everywhere you look, the public decision is made by the agent of a private party for the purpose of delivering private gain. This is not an accident: it is a system."

"A state that does not plan does not, by default turn this function over to the market. Even if the market is perfectly efficient, it still suffers from two ineradicable defects. The first relates to the distribution of income and power: the market conveys signals only in relation to the purchasing power of the individuals transmitting them. The poor do not matter to the market. The second relates to representation: people not yet born do not turn up at the stores. They send no market signals at all"

"For Brzezinski, doing damage to Russia is a hobby."

"Since the 1980s, the American business cycle has been based on financial and credit bubbles, and therefore on the enrichment, through the capital markets, of a very small number of people in a very few places. Truly we have become a 'trickle-down economy' — as we were not before. A rising tide may lift all boats, but recent business cycles have been more like waves, whereby certain sectors and areas ride the peaks before crashing to the shore. This is a sign, surely, not of the social evil of inequality per se but of the instability of bubble economies, closely associated with inequality of income, wealth, and power, for which we now pay a fearsome price."

"Is the country full? No of course it isn’t. Have you tried flying over it lately?... Net immigration brings people, economic activity, jobs and taxes; businesses flourish where the population is growing and they suffer where it is not... So what is the argument about? Politics, mainly. Legal immigrants... are helping to turn the Southwest from red to blue... a mortal threat — to the leadership of the Republican Party. There’s also the appeal, in some parts of the country, to fear of ‘the other.’"

"People say monetary policy is easy and quick to implement. It can even be done overnight on the telephone, they say fiscal policy drags out in political and congressional debate in our country. It might take months to implement. But the point is that once fiscal policy is implemented, it might go to work much faster than monetary policy."

"In the past few years there has grown up a large group of young economists who have accepted the theoretical doctrines of the Keynesian Revolution and who have come into national prominence through their support of an economic policy of full employment."

"I think the Kennedy-Johnson tax cut was a marvelous success in 1964. It was too bad it was not implemented a little sooner, and Kennedy died, of course. After that, Johnson dallied for a while about raising taxes to pay for the war in Vietnam. The stimulus did not get reversed until the tax increase and expenditure cap of 1969, and that had a quick effect once it was enacted. As you know, we had a recession in 1969–1970."

"From Keynes' point of view the economic system, before the war failed in its solution of the unemployment problem"

"There are many reasons there was higher inflation in the 1970s. But that is a complicated story that deals with much more than tax policies."