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Economics & Finance - BLOG

The Contradiction in Economics

Antonio Fatas, INSEAD Professor of Economics |

The study of economics includes many assumptions about behaviour, one of which is that everyone has learned all the lessons of economics.

In 2007, Thomas Sargent, a well-known American economist gave a graduation speech to graduates of the University of California Berkeley that still stands as one of the shortest introductions to the subject. Sargent, who won the Nobel Prize in economics in 2011, famously delivered the 12 lessons that economics has taught the world in just 297 words.

This speech recently resurfaced on Vox and has been the subject of debate among several bloggers. While some have found the lessons interesting and insightful, others have criticised them as either too simplistic, partial or just wrong (among the critics, Noah Smith, Paul Krugman or Chris Dillow).

I share some of the criticism that has been raised by others but my initial reaction was different. Several of the 12 lessons that Sargent lists are about individual behavior and decision making (not even about how individual behaviour affects economic outcomes). For example, "individuals face trade-offs" or "many things that are desirable are not feasible" or "people are satisfied with their choices".

Why it is that economics is so good at understanding individual behavior is already a puzzle, but my real concern is the following: if these are the lessons that economics has taught the world, how do people who have not learned those lessons behave? Is it the case that someone who has not been taught economics does not understand the existence of trade-offs? And if this is true, why do economists tend to assume that everyone is so good at decision-making?

This contradiction in economics is present when academics write complex mathematical models. It takes a PhD in economics and a lot of hard work to solve these models and we are rewarded by being the first ones who figured out how to solve them. But in these models we assume that every individual in an economy is capable of solving the equilibrium! Somehow in our models everyone has already learned all the lessons of economics.

Antonio Fatas is Professor of Economics at INSEAD. You can follow him on Twitter at @AntonioFatas, and read his blog.

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