A Nobel Idea

December 6, 2011

Political Theory

Economists Thomas Sargent and Chris Sims won the Nobel Prize in Economic Sciences this year due to their discoveries in macroeconomic theory. Keynesian economics, which is a train of thought that believes government can successfully intervene in the economy, has been the most widely accepted and executed by the United States. Sargent and Sims’ work postulates that this is not necessarily the case.

Their work had to do with the idea of “rational expectations” which considers the effect that expectations have on the economy. Sargent and Sims concluded that fiscal policy is ineffective because economic players change their expectations in accordance with government action.

The example they used was the Fed increasing the money supply in order to decrease unemployment. In theory, the Fed increasing the money supply should give firms more money to work with and as a result they would hire more workers. However, the workers already employed alter their expectations. They know that the increase in money supply will cause inflation, which means that the wage they currently make will not allow them to consume what they need. So in practice, workers will demand a higher wage and prevent firms from hiring more workers.

Chris A. Sims (left) and Thomas Sargent

Sims and Sargent are basically saying government intervention is useless because people will adjust expectations to seek what benefits them best. The question is: what does this say about human nature?

While it is argued that it is beneficial to the individual to do what is best for society, it seems most individuals do not agree. The Nobel Prize discovery reveals that US consumers look at the economic crisis as an every man for themselves situation. While the world suffers from economic shortcomings, solutions have not surfaced. Washington D.C. has been grudgingly attempting to make changes to recover but their efforts seem to be useless according to Sims and Sargent.

That is the irony of the entire situation. These Wall Street occupiers are complaining about everything they can possibly think of and blaming whomever they can when it seems that they themselves are at least partially responsible.

It has been popular to berate Wall Street and Washington for their greed. However, the greed seems to go further than that. Obviously greed of consumers is on a smaller scale but it is consumers who make the economy go. Without their cooperation there is no possible solution in sight.

Clearly “the 99%” has not committed the same travesties as the corporations. Those people were intentionally hurting others to gain for themselves. Nevertheless, it is irrational for society to expect a remedy while individuals are acting similarly to the actors they loath.

One could argue that the government already violated the social contract, absolving individuals from holding up their end of the bargain. However, it is in their best interest to act in the way the government wants them to.

The discovery Sims and Sargent made might be more reflective of human nature’s negative affect on economic expansion.



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One Comment on “A Nobel Idea”

  1. wjpetok24 Says:

    Given the accolades for winning a nobel prize, these two men have a strong grasp on the pitfalls of our economy and should be evaluated with genuine objectivity. However, I am less inclined to agree with their position because of the inability of recent actions to infuse the economy and create jobs.

    The fact is, increasing money supply in the fed would only return short term results. The author’s comment, “In theory, the Fed increasing the money supply should give firms more money to work with and as a result they would hire more workers” is entirely true, yet it would also have a negative effect of employees altering their expectations of wages and salary. With those altered expectations, the corporations, who have always shown a propensity to protect themselves, would hire less workers.

    Furthermore, this action could escalate the outsourcing of jobs in key components of our society to immigrants. Those willing to take less money for a job are more likely to entice larger corporations trying to secure every dollar, and effectively shrink the applicant pool even more of deserving citizens.

    Thus, it is my belief that the discovery Sims and Sargent made is more representative of human nature’s negative affect on economic expansion rather than positive.

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