A quiet place to think
In the snowy mountains of Montana, 320 miles from Salt Lake City, lies the little town of West Yellowstone with a population of just over 1,000 people. During summer months, it’s full of tourists visiting the national park of the same name. At this time of year, with all the wooden houses covered in snow, it feels like the quietest place in the whole world.
Thomas Sargent wears snow boots with a suit and red tie for the occasion. Next to an unlit fireplace he explains how much he enjoys his condo outside of town, the nature and especially fly fishing, a popular sport in the area (and the reason why fellow Nobel Laureate Angus Deaton often visits too).
It’s an unlikely location to interview a Nobel economist, quite different from dusty offices, but it is the perfect place to tell a good story. Which is exactly what Sargent is about to do.
What do astrophysics and economics have in common?
The Nobel Laureate of 2011 likes to use examples from the past to illustrate his point. When asked about his Nobel work, he mentions the great physicist Richard Feynman and explains why economics is like a game of chess before taking us back to the 16th century. “It’s a beautiful analogy,” Sargent begins, referring to Nicolaus Copernicus and later Johannes Kepler who were working on the laws of planetary motion at a time when people still believed that the earth was the center of the universe. Sargent explains how Kepler put his many observations into mathematical equations. “It was pattern recognition,” he says. It’s similar to the work of an economist today who work with huge amounts of data in order to select patterns. “You’re very agnostic and don’t try to have a prejudice at that point. Much of one.”
But the most challenging task is to turn a non-causal model into a causal one. For astrophysics, it took 60 years before Isaac Newton used Kepler’s work as a basis and established a causal model. “That’s the gold standard,” Sargent says. “You can teach a machine to do what Kepler did. But you need something else to do what Newton did.”
The friends and foes of fiscal authorities
It’s quite similar to what Sargent and his co-workers did when they developed a method for interpreting patterns. Their work was not concerned with planetary motion but with fiscal and monetary authorities and their influence on economic variables such as GDP, inflation, employment and investment. Sargent established methods to analyze causal relationships concentrating not on the effect of unexpected events, as his fellow Laureate Christopher Sims was, but on temporary and long-term policy changes.