Maggie's Farm

I sent Thomas Sargent’s list of 12 valuable economic lessons to my son and added a quick translation:

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.
You don't get everything you want.

2. Individuals and communities face trade-offs.
Trade-offs aren't the most important thing – they are the only thing. See #1

3. Other people have more information about their abilities, their efforts, and their preferences than you do.
Don't tell people what to do. And don't elect politicians that do either.

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.
People are smarter than cats, and you can't herd cats.

5. There are tradeoffs between equality and efficiency.
Social desires vs. economic reality. See #2. Reality will out.

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.
It's not up to you to decide for someone else.

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.
Treat people honestly.

8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.
The Big Default will come in your lifetime. (note Detroit pension funds.)

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).
My dad shifted it to me and I sent it to you. So, good luck with that.

10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.
Recently read that the dollar is worth only 68% of what it was in 2002 – and you didn't even feel that.

11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves).
“I got free Obama phone... I got free Obama phone.”

12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.
Difficult in the very short term, impossible in the long term. The easiest one to fool is yourself.