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The Art and Practice of Economics Research: Lessons from Leading Minds (Edward Elgar Publishing, 2012)

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The Art and Practice of Economics Research: Lessons from Leading Minds (Edward Elgar Publishing, 2012) The Art and Practice of Economics Research: Lessons from Leading Minds (Edward Elgar Publishing, 2012) Simon W. Bowmaker, New York University Interview with Thomas J. Sargent, New York University December 23, 2010 1 Thomas Sargent was born in Pasadena, California in 1943 and graduated with a BA from the University of California, Berkeley in 1964 before obtaining a PhD in economics from Harvard University in 1968. Professor Sargent has taught at the University of Pennsylvania, 1970–1971, the University of Minnesota, 1971–1987, the University of Chicago, 1991–1998, Stanford University, 1998–2002, and New York University, where he currently serves as the Berkley Professor of Economics and Business. Since 1987, he has been a Senior Fellow at the Hoover Institution, Stanford University. Professor Sargent’s research fields are macroeconomics, monetary economics and time series econometrics. He is perhaps best known as one of the pioneers of the rational expectations revolution in macroeconomics in the 1970s. His most-cited articles in chronological order include ‘“Rational Expectations,” the Optimal Monetary Instrument, and the Optimal Money Supply Rule,’ Journal of Political Economy (1975), co-authored with Neil Wallace, ‘Estimation of Dynamic Labor Demand Schedules under Rational Expectations,’ Journal of Political Economy (1978), ‘Some Unpleasant Monetarist Arithmetic,’ Federal Reserve Bank of Minneapolis Quarterly Review (1981), co- authored with Neil Wallace, ‘Convergence of Least Squares Learning Mechanisms in Self-referential Linear Stochastic Models,’ Journal of Economic Theory (1989), co-authored with Albert Marcet, and ‘The European Unemployment Dilemma,’ Journal of Political Economy (1998), co-authored with Lars Ljungqvist. His books include Macroeconomic Theory (Academic Press, second edition, 1987), Dynamic Macroeconomic Theory (Harvard University Press, 1987), Rational Expectations Econometrics (Westview Press, 1991), co-authored with Lars Hansen, Bounded Rationality in Macroeconomics (Oxford University Press, 1993), The Conquest of American Inflation (Princeton University Press, 1999), The Big Problem of Small Change (Princeton University Press, 2002), co-authored with François Velde, Recursive Macroeconomic Theory (MIT Press, second edition, 2004), co-authored with Lars Ljungqvist, and Robustness (Princeton University Press, 2008), co-authored with Lars Hansen. Professor Sargent’s academic awards include the Mary Elizabeth Morgan Prize for Excellence in Economics (1979) from the University of Chicago, and the Erwin Plein Nemmers Prize in Economics (1996) from Northwestern University. He holds honorary doctorates from the Stockholm School of Economics (2003), and the European University Institute (2008). He was elected as a Fellow of the Econometric Society in 1976 and a Fellow of both the National Academy of Sciences and the American Academy of Arts and Sciences in 1983. He was awarded the Nobel Prize in Economic Sciences in 2011, along with Christopher Sims, “for their empirical research on cause and effect in the macroeconomy.” I interviewed Thomas Sargent in his office in the Department of Economics of the Stern School of Business at New York University. It was late morning of Thursday, December 23, 2010. BACKGROUND INFORMATION Bowmaker: What was your attraction to economics? Sargent: I was very interested in the Great Depression because it affected my family members, and they talked about it a lot. And when I first studied economics, it just seemed intrinsically fascinating. You got to look at problems in society using some math and history, and even a little psychology. Bowmaker: As a student, which professors were most influential or inspirational? Sargent: I had a bunch of professors who were influential. When I was a freshman at Berkeley in the early ’60s, I took a class in economics from Benjamin Ward. Berkeley was a very intellectual place at that time, and Ward would often get standing ovations after some of his lectures. George Archibald, 2 Hyman Minsky and James Pierce were also wonderful professors, and I was helped by a very inspirational TA called Jerry Kenley. When I went to graduate school at Harvard, John Meyer was my advisor, and I took his econometrics class. It was quite disorganized, and I didn’t really understand any of the ideas when he was teaching them, but somehow they stuck. He was a great teacher. Bowmaker: Why did you decide to pursue an academic career? Sargent: It’s what I’m best suited for. I get paid to do things during the week that I’d do in my free time anyway, like reading books and thinking about hard problems. Not only are those problems intellectually hard, but they are occasionally of use to making society and the economy better off. Also, I have the opportunity to interact with some very talented students, which means you get to give back. Bowmaker: As a researcher, which colleagues have been most influential or inspirational? Sargent: When I got out of graduate school, I didn’t know very much math at all, and so I was very lucky early on to meet people like Neil Wallace, Bob Lucas, Ed Prescott, and Ned Phelps, who knew more than I did. But I’ve also worked with some of my students, such as Lars Hansen and Albert Marcet, who have been extremely influential to me. And there are others, like Chuck Whiteman, Marty Eichenbaum, and Larry Christiano, with whom I haven’t worked, but whose research has fed into my own. I continue to learn from my students to this day. GENERAL THOUGHTS ON RESEARCH Bowmaker: What is the value of pure versus applied research in economics? Sargent: Most research falls on its face, even if you publish a paper. It just doesn’t turn out to be fruitful for other people to build on to understand the world. But if you look at the basic tools that applied researchers use today, you find that they were supplied by theory that was viewed as very abstract 50 or 60 years ago. Expected utility is one example; it is used everywhere. Bowmaker: How would you describe the dialogue between theory and empirics in economics? Sargent: In macroeconomics and monetary economics, there is an intimate relationship between theory and empirics. For example, our general equilibrium theories are designed to explain how markets work in normal times or during crises. And it’s always been true that getting models to more or less fit the data has been something we’ve aspired to. The reason I say “more or less” is that there’s a longstanding tension between theory and rational expectations econometrics, which imposes tremendous discipline on empirical work. I’ve heard friends of mine, like Bob Lucas and Ed Prescott, say it imposes too much discipline because it rejects too many ‘good theories.’ And it has. One reaction in the ’80s was that many people backed off using, say, maximum likelihood techniques, and proceeded to lower the bar for doing successful empirical work. In particular, they gave up trying to obtain good fits in the sense of the likelihood function, and instead engaged in calibration. What has happened in the last 10 years is that we are again focusing on the likelihood function, because the economics itself drives you to do that if you are going to do serious empirical work. But the tension is still there because the likelihood function is a cruel master. Are you fitting or over- 3 fitting the data? That is a big-time issue in applied macroeconomics. Some people have proliferated shocks and frictions in attempts to fit the data and they’ve been successful in some ways, but the hazard of over-fitting the data is that you sacrifice your ability to extrapolate outside the sample. But this continuing tension has been very fruitful, because in the endeavor to repair poor fits, new theoretical boundaries have been pushed, which is how it should be. Bowmaker: How would you characterize your own research agenda and how has it changed through time? Sargent: Joseph Schumpeter said that nobody over 30 ever had an original idea. Having studied many economists, he argued that we form our view of how the economy is put together at an early age. I think that’s probably true of me. My overriding vision of the economy has always been one in which individuals confront dynamic, stochastic problems. When you’re doing research on a day-to-day basis, things have a momentum of their own. That’s true both in empirical and in theoretical work. Just as you solve one problem, you learn that another one has popped up. I’m not sure you would describe that as a research agenda. Bowmaker: Do you think it is important to have broad research interests? Sargent: That’s a tough call. Adam Smith talked about the benefits of specialization, and we are seeing more and more economists doing just that. But the downside is that you have specialists within a department who can’t talk to each other. And so, in some ways, it has been an adverse development. Bowmaker: Do you think there is any difference in the types of work done by researchers at different stages of their careers based on tenure concerns, publication requirements or other pressures? Should there be a difference? Sargent: That’s interesting. There’s a fraction of people my age and younger who, whether they admit it or not, quit doing hard work at the frontier. But that’s not true of my close friends in the profession, like Neil Wallace, Chris Sims, Bob Lucas, and Ed Prescott. They are in their late 60s or early 70s, but when they give a talk, young people listen, and it’s not purely out of respect. Their papers are technically demanding because I don’t think any of those guys are capable of changing their research technology. IDEA GENERATION Bowmaker: Where do you get your research ideas? Sargent: If you read and participate in the research process, your work has a life of its own.
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