Lessons from Economics at U of M

Last week, a 2007 Berkley graduation speech by Nobel prize winner Thomas Sargent made the rounds on the blogosphere. Ezra Klein at Vox was one of the first to share. Dr. Sargent’s concise speech – it was less than 300 words – summarized what he felt are some of the most important lessons economics teaches. While there has been some criticism from commentators like Paul Krugman and Noah Smith, I wanted to look at Dr. Sargent’s lessons and see how they aligned with the lessons I am taking away after receiving Economics and Business degrees from the University of Michigan.

Dr. Sargets first two points, from my perspective, are some of some of the most important basic lessons in economics:

1. Many things that are desirable are not feasible.

2. Individuals and communities face trade-offs.

These are lessons learned in Economics 101 and 102. I remember the first week of Economics 101 with Professor Malone, we learned the concept of opportunity cost. In a world of limited resources, like the one we live in, there are trade offs and desirable outcomes that are just not feasible. These lessons were hammered home in 102, and taken as a basic assumption in upper level courses, but learning them was an important point in my economics education.

The next point that I feel my Michigan Economics education hammered home was:

5. There are tradeoffs between equality and efficiency.

My favorite economics class taken at the University was Econ 482 – Government Revenues with Professor Jim Hines. The class was almost entirely about the economics of taxation, and Professor Hines was a passionate and incredibly knowledgeable instructor in the subject. This class, more than any other, gave me an understanding of the difficult trade off policy makers face when designing a tax system. On the one hand, taxes are distortionary and cause deadweight loss, so in order to minimize the cost to society of taxation, policy makers should look for the most efficient forms of tax. The trade off here is that the most efficient forms of tax – like a propery tax, or a tax on a life saving drug – also typically are the most regressive and have the worst equality properties. Other classes, such as Government Regulation have dealt with this issue as well.

The last of Dr. Sargent’s points that I want to discuss is:

12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.

As a business student with an interest in finance and a future investment banker, this point is especially important. In Finance 300 and this class – Econ 411 – we learned about the Efficient Markets Hypothesis. Beating the market is incredibly difficult to do, as discussed in a Random Walk Down Wall Street, because in financial markets information is disseminated immediately and reflected in the price of an asset. In order for a trader or an investor to have abnormal returns, they must rely on analysis that no one else is doing or have information others do not have. Insider trading is illegal and independent analysis can be right or wrong, so beating the market is incredibly difficult to do, even though countless friends and colleagues will attempt to do so for the rest of their careers.

Overall, it is not a perfect list, but some of Dr. Sargent’s points really hit home for me as I near the end of my economics and business education. I hope to keep these points in mind as I begin my professional career and realize the true value of an economics degree.

 

4 thoughts on “Lessons from Economics at U of M

  1. jhchamot

    Nice post. I agree that these are important points that have been drilled into us here. Economics is such a vast and complex subject, but these are definitely some of the most important things to understand.

  2. bdinger

    Good read, I can definitely agree with all of those points including the last few, while still wanting to be a trader myself. I think that your commentary on the tradeoffs between taxes equality is well noted and very interesting; all too frequently politicians make it seem like there is only one right answer when that is just not the case.

  3. xcharles

    Nice post, studying econ and business as well, I started to reflect on my time here while reading this. I liked the part on equality vs. efficiency. Sometimes it’s strange how we stray so far from the basics when really equality vs. efficiency applies to a lot of situations. For example, applying the optimal amount of handicapped spaces in a parking lot that would be fair for those who are handicapped while also providing an efficient outcome.

  4. zsalem

    Haha nice points driving the blogging assignment to a close. Congrats on the degree and good luck on your career.

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