12 alternative principles

An old speech by Tom Sargent has had some praise  and some criticism. But what would a more heterodox list of 12 economic principles look like? Here's my effort, observing Sargent's constraints of concision and relevance for young people starting out in life:

1. People have different motivations: wealth, power, pride, job satisfaction and so on. Incentive structures which suit one set of motives might not work for another.

2. Many things are true but not very significantly so.

3. Power matters: conventional economics under-states this.

4. Luck matters. The R-squareds in Mincer equations are generally low.

5. There is a great deal of ruin in a nation, and in an organization.

6. Individual rationality sometimes produces outcomes which are socially optimal as in Adam Smith's invisible hand, and sometimes not.

7. Trade-offs between values are more common than politicians pretend, but are not ubiquitous.

8. Cognitive biases are everywhere.

9. Everything matters at the margin, but the margin might not be very extensive.

10. The social sciences are all about mechanisms. The question is: which ones work when and where? This means there are few if any universal laws in the social sciences; context matters.

11. Accurate economic forecasting is impossible. But time-varying risk premia might give us a little predictability.

12. Risk comes in many types. Reducing one type of it often means increasing exposure to another type. 

Comments

[Donald]

Hello Chris (or anyone else)

Could you give some examples for 7, 9 and 11 please?

Thanks

Donald

[Art]

A better list. But is it really necessary though, to emphasise that power matters? Most left-leaning types already tend to base their analysis of the world on power. Economic insights are cast aside.

[chris]

@ Donald - a non-existent tradeoff might be that between gender equality & GDP growth;
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2014/04/income-gender-equality.html
By a "not very extensive margin" I had in mind minimum wages; they depress labour demand (eg by reducing hours worked), but not by much:
http://ideas.repec.org/p/wrk/warwec/746.html
My favourite eg of time varying risk-premia is the Halloween-May Day effect: equity prices are too high in May and too low in the autumn. But there's also evidence that (eg) foreign buying of US equities is a sentiment indicator:
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2014/02/how-not-to-write-about-stock-markets.html

[Luis Enrique]

That's a good list, although only a few of your points are heterodox. 1. is mainstream, 2 I come across a lot and 6. is a core lesson of mainstream economics (game theory).

I think Sargent's is a pretty good list too, albeit from a political perspective I don't share. Noah gets it about right, although overstated it, for example Sargent does not "caution against safety nets". I'm sure Sargent favours safety nets. He just says they have unintended consequences. I'm pretty sure Sargent would agree with 4. on your list.

As written, Sargent is correct to say there are equity efficiency trade offs. But there are also equity efficiency complementarities, and the fact he said one and not the other shows us his biases. Or maybe he just thinks the trade offs are more pervasive then you or I.

I think Sargent usually comes across very well in interviews, when he says a few things about his views. And his work is incredible. I've just been studying his stuff on how to model Knightean uncertainty, and it's brilliant,

UnlearningEcon, unfortunately, very rarely has anything worthwhile to say about economiescs.

[BT London]

Order fixed:

1. Cognitive biases are everywhere.

2. Many things are true but not very significantly so.

3. Power matters: conventional economics under-states this.

4. Luck matters. The R-squareds in Mincer equations are generally low.

5. People have different motivations: wealth, power, pride, job satisfaction and so on. Incentive structures which suit one set of motives might not work for another.

6. Individual rationality sometimes produces outcomes which are socially optimal as in Adam Smith's invisible hand, and sometimes not.

7. Trade-offs between values are more common than politicians pretend, but are not ubiquitous.

8. Everything matters at the margin, but the margin might not be very extensive.

9. Accurate economic forecasting is impossible. But time-varying risk premia might give us a little predictability.

10. Risk comes in many types. Reducing one type of it often means increasing exposure to another type.

11. The social sciences are all about mechanisms. The question is: which ones work when and where? This means there are few if any universal laws in the social sciences; context matters.

12. There is a great deal of ruin in a nation, and in an organization.

[Jonas]

Good list. But what does 9 mean? "The margin might not be very extensive"?

[Martin]

"1. People have different motivations"

True, but the implication is politically incorrect: the "gender gap" and similar gaps exist because men have different goals (on average) than women, not because of the patriarchy etc.

[Donald A. Coffin]

One of my immediate reactions to Sargent's list was that the converse of his very first principle ("Many things that are desirable are not feasible") is even truer and even more important as a principle:

Many things that are feasible are not desirable.

[Atkins]

Good list, as far as it goes.

Per my Rooster Cognitive biases, would add some physics / evolution substrate:

Complexity increases over time, accelerating exponentially now. (Yes, periodic interruptions, meteor hits, etc.)

Code is infrastructure, scaffolding for complexity in networks—genetic code / bio network;
Moral, religious, math, language (verbal and written), legal, monetary, etiquette codes / cultural network;
Software code / tech network.

Survival in bio, cultural, and tech networks is a function of processing information with sufficient speed, accuracy, and power: animals fleeing predators, immune systems processing viral invaders, a nation processing A bomb construction before its rival, computers staying market-relevant, world culture processing its newly complex relationship with carbon, the atmosphere, tech, etc.

Coding structures / mechanisms expedite the processing of complex network relationship information (CNRI).

In the transition from simple hunter-gatherer social structures to the exponentially more complex city-state structures, we added writing, legal, etiquette, and monetary coding structures to aid in processing CNRI.

Arguing that we need to do this again, that our cultural genome is increasingly complexity inadequate, i.e., the composite of our cultural coding structures can't process all the new inputs into networks, and the new relationships / behaviors they engender, with sufficient speed, accuracy, and power, contributing to the externalities, whether obesity, climate change, species extinction, etc.

Monetary code is increasingly an abacus-like culture tech. It doesn't have the reach necessary to process relationship value with sufficient speed, accuracy, and power in and across geo, eco, bio, cultural, and tech networks.

Know of incipient, theoretical cultural coding structures, mechanisms for processing relationship value with greater reach / utility per complexity.

[BigBozat]

Some better links re: #3...

http://faculty.virginia.edu/theorygroup/docs/capital-and-power.fm-and-chap1.pdf

http://www.paecon.net/PAEReview/issue61/BichlerNitzan61.pdf

[BigBozat]

Some better links re: #3...

http://faculty.virginia.edu/theorygroup/docs/capital-and-power.fm-and-chap1.pdf

http://www.paecon.net/PAEReview/issue61/BichlerNitzan61.pdf

[Dan Kervick]

Yes, heartily to number 6.

A principle I would endorse:

The role of state power, organization and planning in modern economic development has been systematically under-appreciated by most contemporary economic theorists.

But I guess that's not an economic principle so much as a met-economic observation.

[Socialism In One Bedroom]

I think some have already pointed this out but number 1 assumes the status quo, and the ideology that supports it. Hardly words of a dissenter!

[Donald]

@chris Thanks, much appreciated.

Donald

[Metatone]

@Luis Enrique

You do know Sargeant's work on Knightean uncertainty is about 15 years behind other disciplines?

[Luis Enrique]

Metatone,

Yes, in so far as he cites antecedents, although I am not familiar with what other disciplines have done. But of course his work will also be a development because other disciplines do not deal with forward looking agents, prices etc. He is quite explicit about having taken ideas from other disciplines and extended them to work in context of economics.