12 Rules

In a few weeks, students will begin to receive their undergraduate and graduate degrees from universities across the country. They will enter an economy that remains bleak, with few good jobs, slow growth, and a wide variety of impediments so that change for the better is unlikely to occur. Those who leave degree programs in gender studies, or theatre arts, or similar soft curricula will be ill-prepared for the real world, and as a consequence, struggle to find meaningful jobs. Worse, they will be in debt because of the college loans they were encouraged to accept.

Rob Wile remembers a 335-word commencement address, presented at Cal Berkeley in 2007 by Nobel economist Thomas Sargent. Every graduate should read it, and then re-read it. Here's what Thomas Sargeant had to say to a large audience of Berkeley grads:

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.

Concise and wise economic 'rules' that govern both personal actions and the actions of institutions. It's really too bad that most students won't understand their broader meaning and won't recognize when our current national leaders try to convince them that these 'rules' can be broken.