The Economic Crisis in Retrospect

The Economic Crisis in Retrospect

Explanations by Great Economists

Edited by G. Page West III and Robert M. Whaples

As the United States continues its slow recovery from the global financial crisis of 2008, politicians, policymakers and academics are increasingly turning to the lessons of history to gain insight into how we might address both current and future economic challenges. This volume offers contributions by eminent economists and historians, each commenting on the theories of a particular 20th century economist and the ways in which those theories apply to modern economic thought.

Chapter 8: Drawing lines in US monetary and fiscal history

Thomas J. Sargent

Subjects: economics and finance, economic psychology, history of economic thought, international economics, political economy


Economists now widely use the powerful notion of ‘equilibrium’. It is different from the notion that physicists use. It does not mean a system at rest, where there is no propensity to change. It is a description of a system that consists of many people with their own motives, interests, incentives, information, opportunities and constraints. The notion of equilibrium is that things have settled down to a situation where at that particular point in time no one has incentive to deviate, given what everybody else is doing. The system has come to rest in that sense. Technically, that is the notion behind competitive equilibrium or Nash equilibrium, which pervades economics. That sets the stage for the following meaningful anecdote. I went to a dinner at the Hoover Institution with a small group of friends in the 1980s. Milton Friedman and George Stigler were there. They were very good friends and leaders in creating the Chicago School of Economics in the 1950s and 1960s, but they often had very different views of things. Stigler viewed his job as interpretive, to understand the world as it was. You would ask him, ‘Do you want to improve things?’ ‘No,’ he would say, ‘my job is to explain them as equilibrium outcomes.’ So he did not give advice. But, Milton Friedman spent part of his career as a public intellectual giving advice to the government.

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