{"id":3535,"date":"2025-11-15T10:09:29","date_gmt":"2025-11-15T15:09:29","guid":{"rendered":"https:\/\/magazine.tepper.cmu.edu\/?page_id=3535"},"modified":"2026-01-06T10:40:13","modified_gmt":"2026-01-06T15:40:13","slug":"a-dynamic-economist","status":"publish","type":"page","link":"https:\/\/magazine.tepper.cmu.edu\/index.php\/tepper-digest\/a-dynamic-economist\/","title":{"rendered":"Thomas J. Sargent: A Dynamic Economist"},"content":{"rendered":"\n
\n\"Thomas\n\n\n\n
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Thomas J. Sargent: A Dynamic Economist<\/h1>\n\n\n\n

Story by John Miller<\/p>\n\n\n\n

On March 20, nine portraits adorned the wall of the Nobel Laureate Gallery in the Tepper School of Business. The next day, Thomas J. Sargent joined his fellow economists, colleagues, and peers as the tenth portrait in the gallery.

Sargent, a former Research Affiliate at the Tepper School, shared the 2011 Nobel Memorial Prize in Economic Sciences with Christopher A. Sims “for their empirical research on cause and effect in the macroeconomy.” This work on rational expectations showed that individuals anticipate economic conditions when making decisions, meaning certain government policies have little impact on spending, saving, or pricing.

During his keynote address at the Tepper School’s 75th Anniversary Academic Symposium, Sargent highlighted the deep personal and professional connections he shared with his colleagues, stating, \u201cI personally knew all the people who are on that wall, those portraits, so I’m going to tell you \u2026 I am a product of having known them.\u201d

Sargent elaborated on his relationships with the other Nobel laureates, revealing how their collective work contributed to the growth and application of economics, its implications for social questions, and its influence on decision-making.<\/p>\n\n\n\n

An edited transcript of selections from Sargent\u2019s speech is below, in the gray boxes. Annotations from other Nobel laureates and colleagues, in white boxes, highlighting their connections and contributions to each other, the Tepper School, and field of economics.<\/p>\n<\/div>\n<\/section>\n\n\n\n

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Thomas J. Sargent<\/strong><\/p>\n<\/div>\n\n\n\n

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I feel lucky that I was here when I was 23 \u2026 I am thinking about some of the graduate students here. They’re 23. And when they’re standing up here when they’re my age, it’s going to be amazing.<\/strong><\/p>\n<\/blockquote>\n\n\n\n

Tom Sargent, Keynote Address at the 75th Tepper School Anniversary Academic Symposium<\/strong><\/p>\n<\/div>\n<\/section>\n\n\n\n

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HERBERT A. SIMON<\/strong><\/p>\n<\/div>\n\n\n\n

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Tom Sargent on Herbert A. Simon<\/strong><\/p>\n\n\n\n

I think he’s one of the founders of behavioral economics.<\/strong><\/p>\n\n\n\n

He distrusted maximizing models and statistics. He wrote about bounded rationality. Oh, and he had strong opinions \u2026 I authored a book called Bounded Rationality in Macroeconomics and got a letter from Simon<\/strong> saying, “You’re out of your mind!” What did I do? I replaced the agents in the Lucas<\/strong>-type model with a model he didn’t know as much, with agents he didn’t know as much, and I had to use statistics. And he said, “That’s not what I meant by bounded rationality.” That was fun.<\/p>\n<\/div>\n\n\n\n

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\u201cIn the past few years, it has become quite acceptable (some would even say ‘fashionable’) in economics to challenge the heroic portrait of human rationality that is displayed by the theory of maximization of expected utility. One erstwhile devotee (and coinventor) of rational expectations, Thomas Sargent<\/strong>, has even titled a recent book Bounded Rationality.”<\/p>\n<\/blockquote>\n\n\n\n

Herbert A. Simon, April 30, 1999 letter to Hugh Schwartz<\/a><\/strong><\/p>\n<\/div>\n<\/section>\n\n\n\n

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FRANCO MODIGLIANI<\/strong><\/p>\n<\/div>\n\n\n\n

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Tom Sargent on Franco Modigliani<\/strong><\/p>\n\n\n\n

Modigliani is one of the founders of modern macroeconomics.<\/strong><\/p>\n\n\n\n

Although macroeconomics was invented by John Maynard Keynes, Modigliani<\/strong> tried to make sense of Keynes. He had concepts that would map the loose words in Keynes’s work into a set of mathematics.<\/p>\n\n\n\n

He was very big into micro foundations for macro models; he lived by it. Micro foundations for the demand for money, for the difficult statistical relations that are revealed by statistics, and the failures of the Keynesian consumption function. He wrote a lifecycle model with students here that was revolutionary. And, if you want to think about demographics and their effect on growth and interest rates, that’s Modigliani<\/strong>, still to this day.<\/p>\n<\/div>\n\n\n\n

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Herbert Simon<\/strong> on Franco<\/strong> Modigliani<\/strong> ” … ask Franco<\/strong> how scheduling lines of paint cans in a factory fit into the life and career of a Nobel-winning economist. He will probably get angry if you ask him that.”<\/p>\n<\/blockquote>\n\n\n\n

Herbert A. Simon in “Three Nobel Careers,” GSIA Magazine, 1992.<\/a><\/strong><\/p>\n<\/div>\n\n\n\n

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Franco<\/strong> Modigliani<\/strong> on Herbert Simon<\/strong> “Ask Herb Simon how he managed to keep from being contaminated by all his involvement with economists.”<\/p>\n<\/blockquote>\n\n\n\n

Franco Modigliani in “Three Nobel Careers,” GSIA Magazine, 1992.<\/a><\/strong><\/p>\n<\/div>\n\n\n\n

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“The people who were then at Carnegie included Cyert, March, Simon<\/strong>, and Modigliani<\/strong> \u2026 It was quite an impressive group \u2026 The Carnegie experience was extraordinary. I really so enjoyed it \u2026 it was such an interesting place to be. Interdisciplinary work was going on, and the people I was taking courses with encouraged students to be enterprising in their own work.”<\/p>\n<\/blockquote>\n\n\n\n

Oliver Williamson, interview with Richard Swedberg, June 7, 1988.<\/a><\/strong><\/p>\n<\/div>\n\n\n\n

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\u201cBut the most glaring flaw of [macroeconomic rational expectation hypothesis] is its inconsistency with the evidence: if it were valid, deviations of unemployment from the natural rate would be small and transitory\u2014in which case [Keynes\u2019s] The General Theory would not have been written and neither would this paper. Sargent<\/strong> has attempted to remedy this fatal flaw by hypothesizing that the persistent and large fluctuations in unemployment reflect merely corresponding swings in the natural rate itself.\u201d<\/p>\n<\/blockquote>\n\n\n\n

Franco Modigliani, 1995. \u201cThe Monetarist Controversy, or, Should We Forsake Stabilization Policies?\u201d<\/a> <\/strong><\/p>\n<\/div>\n<\/section>\n\n\n\n

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MERTON MILLER<\/strong><\/p>\n<\/div>\n\n\n\n

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Tom Sargent on Merton Miller<\/strong><\/p>\n\n\n\n

Merton Miller<\/strong> wrote a famous paper with Modigliani<\/strong>. He had been teaching MBAs, and in those days, it was about, \u201cWhat’s a big problem for a firm? How should it finance itself? Should it issue debt or equity? If it issues debt or equity, what kind?\u201d All sorts of books said it should depend on stuff and circumstances, but as it turned out, it’s irrelevant.<\/p>\n\n\n\n

The Modigliani-Miller theorem said, \u201cDon’t worry about it.\u201d<\/strong><\/p>\n\n\n\n

Debt or equity, it doesn’t matter. It’s because of some competition, considering those who are buying your debt or equity, and what they can do.<\/p>\n<\/div>\n\n\n\n

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From the first day, I was able to talk to Franco<\/strong> [Modigliani]<\/strong>. At Carnegie, there was no great gap between the senior and junior faculty. We were a community of scholars.<\/p>\n<\/blockquote>\n\n\n\n

Merton Miller in “Three Nobel Careers,” GSIA Magazine, 1992.<\/a><\/strong><\/p>\n<\/div>\n\n\n\n

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“‘As our discussions evolved, we decided that maybe we should write some of it down \u2026 We wrote our first paper in 1958. The collaboration, for the time, was very unusual but very Carnegie.’ The 1958 paper defined the project and research agenda for the “M&M Theorems<\/strong>.” Nicknamed for Modigliani<\/strong> and Miller<\/strong>, the theorems state that the way a corporation finances its operations – whether through bonds that increase its debt or through stocks that disperse its ownership – is irrelevant to investors. What matters is the profitability of those operations.”<\/p>\n<\/blockquote>\n\n\n\n

Teresa Sokol, “Three Nobel Careers,” GSIA Magazine, 1992.<\/a><\/strong><\/p>\n<\/div>\n<\/section>\n\n\n\n

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ROBERT E. LUCAS<\/strong><\/p>\n<\/div>\n\n\n\n

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Tom Sargent on Robert E. Lucas<\/strong><\/p>\n\n\n\n

I’m going to talk about Lucas<\/strong> and Prescott<\/strong> as a pair. One had the gift of language, Lucas<\/strong>, and Prescott<\/strong>, well, he’s basically inarticulate. But those two guys could talk to each other.<\/p>\n<\/div>\n\n\n\n

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“Beginning in 1971, [Robert] Lucas<\/strong> and Tom Sargent<\/strong> … brought the theory of rational expectations into national and international prominence. It is not without irony that bounded rationality and rational expectations, two of the major proposals after Keynes for the revision of economic theory (game theory is a third), though entirely antithetical to each other, were engendered and flourished at the same small business school at almost the same time.\u201d<\/p>\n\n\n\n

Herbert A. Simon, Models of My Life, 1991<\/a><\/p>\n<\/blockquote>\n<\/div>\n<\/section>\n\n\n\n

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EDWARD C. PRESCOTT<\/strong><\/p>\n<\/div>\n\n\n\n

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Tom Sargent on Edward C. Prescott<\/strong><\/p>\n\n\n\n

Prescott<\/strong> was a graduate student here. He knew Markov chains, and he knew dynamic programming. Lucas was doing some deterministic continuous-time control. <\/p>\n\n\n\n


Together, they [Lucas and Prescott] created applications of dynamic programming in macroeconomics.<\/strong> 
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“Every day about 3:30 PM, Bob Lucas<\/strong> and Leonard Rapping headed to the lounge to drink coffee and discuss economics with passion and intensity. I listened. Bob<\/strong> and Leonard were in the process of creating their model about the aggregate labor supply that featured intertemporal substitution and adaptive expectations.”<\/p>\n\n\n\n

Tom Sargent, “Learning from Lucas”<\/a><\/strong><\/p>\n<\/blockquote>\n<\/div>\n<\/section>\n\n\n\n

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FINN KYDLAND<\/strong><\/p>\n<\/div>\n\n\n\n

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Tom Sargent<\/strong> on Finn Kydland<\/strong><\/p>\n\n\n\n

In the tradition of Modigliani, Kydland built one of the most beautiful modern models of the man for money.<\/strong><\/p>\n\n\n\n

Finn Kydland<\/strong> is a student of Prescott<\/strong>. He reworked optimal taxation problems or optimal monetary policy problems in a rational expectations model. <\/p>\n\n\n\n

Kydland<\/strong>, who knew dynamic programming, looked at the problem and immediately said it does not fit dynamic programming. It’s not recursive. It’s like the simultaneity goes both ways. It’s a so-called non-serial problem. On the basis of that, he wrote one of the first two papers about time inconsistency.

Four years later, Kydland<\/strong> came back to write a 1980 paper with Prescott<\/strong>. What they showed, they invented something, I call it dynamic programming squared. They showed how to, if you used the planners, Bellman equation had as a state variable, the value function from another Bellman equation.<\/p>\n<\/div>\n\n\n\n

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\u201cWhether forecasts are rational is still open to debate. In Sargent<\/strong> the rational-expectations hypothesis is tested and accepted. He also explains why many other tests that rejected the hypothesis are invalid.\u201d<\/p>\n<\/blockquote>\n\n\n\n

Finn Kydland<\/strong> and Edward Prescott<\/strong>, Rules Rather than Discretion: <\/em><\/strong>
The Inconsistency of Optimal Plans<\/em>, June, 1977<\/strong>.<\/a><\/p>\n<\/div>\n\n\n\n

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\u201cI work in a macroeconomic tradition developed by John Muth, Robert E. Lucas, Jr.<\/strong>, Edward C. Prescott<\/strong>, Finn Kydland<\/strong>, Nancy Stokey, and Neil Wallace.\u201d<\/p>\n<\/blockquote>\n\n\n\n

Tom Sargent, \u201cMacroeconomics After Lucas,\u201d October 3, 2024.<\/a><\/strong><\/strong><\/p>\n<\/div>\n<\/section>\n\n\n\n

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OLIVER WILLIAMSON<\/strong><\/p>\n<\/div>\n\n\n\n

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Tom Sargent<\/strong> on Oliver Williamson <\/strong><\/p>\n\n\n\n

The next person is the reason I ever got to Carnegie [Mellon], my benefactor, Oliver Williamson. I was his RA (research affiliate)<\/strong>.<\/strong><\/p>\n\n\n\n

He was about the theory of the firm. He thought hard about what a firm is and what a market is.<\/p>\n\n\n\n

What’s a market? Well, first thing, it involves prices that are somehow set. You let people trade at them. The competitive equilibrium. So, you have prices and you decentralize. Or you have a command economy.<\/p>\n<\/div>\n\n\n\n

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“The Objective of the present paper is to develop a model of the firm which is both behavioral and analytical \u2026 The primary tool used for developing the implications of the model is maximization (minimization) analysis.\u201d<\/p>\n<\/blockquote>\n\n\n\n

Oliver Williamson, “A Behavioral Model of the Firm,” August 1961.<\/a><\/strong><\/p>\n<\/div>\n\n\n\n

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“Everyone knows that Herb [Simon]<\/strong> had strong views about how social science research ought to be done and that he had grave reservations about the neoclassical economics research agenda … As a Graduate student in Herb’s<\/strong> class on Mathematical Social Science in the spring of 1962, I had the occasion to test that.” (Williamson<\/strong> proposed a paper, “Selling Expense as a Barrier to Entry.”) “To my enormous relief [Simon’s]<\/strong> reply was ‘Anything that advances our understanding of complex phenomena is valued.’ My recollection is that Herb gave me a good grade on the paper … “<\/p>\n<\/blockquote>\n\n\n\n

Oliver Williamson, “A Tribute To Herbert A. Simon,” March 19, 2001.<\/a><\/strong><\/strong><\/strong><\/p>\n<\/div>\n<\/section>\n\n\n\n

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DALE MORTENSEN<\/strong><\/p>\n<\/div>\n\n\n\n

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Tom Sargent<\/strong> on Dale Mortensen<\/strong><\/p>\n\n\n\n

Dale Mortensen was a student here, and you can tell.<\/strong><\/strong><\/p>\n\n\n\n

The Arrow-Debreu model is the standard macro model that Lucas<\/strong>, Prescott<\/strong>, and Kydland<\/strong> have, and it’s a model Lucas<\/strong> stuck to. He thought it was the best model. There’s labor supply and labor demand, and they intersect. The market clears every day. There are no jobs. There are homogeneous types of labor\u2026there are no enduring relationships in that model. Mortensen<\/strong> said, \u201cWell, there are.\u201d So, there’s something wrong with the model, and he built a model with the jobs. And now there are vacancies in unemployment. So, he talked about a way to do that. This remains today a leading model.<\/p>\n<\/div>\n\n\n\n

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“The paper by Mortensen<\/strong> also seeks an efficient labor contract. Mortensen<\/strong> determines the arrangement and intensities of search that maximize the expected product of the match between worker and job when search for new matches is uncertain and costly.”<\/p>\n<\/blockquote>\n\n\n\n

Edward C. Prescott, “Introduction to Festschrift for Herbert A. Simon, June 1977.<\/a><\/strong><\/p>\n<\/div>\n\n\n\n

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“Edward Prescott<\/strong> and Dale Mortensen<\/strong> had just graduated from Carnegie. The junior faculty told admiring stories about both of them and their works.”<\/p>\n<\/blockquote>\n\n\n\n

Tom Sargent, “Learning from Lucas.” September 2021<\/a><\/strong><\/strong><\/p>\n<\/div>\n<\/section>\n\n\n\n

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LARS PETER HANSEN<\/strong><\/p>\n<\/div>\n\n\n\n

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Tom Sargent<\/strong> on Lars Peter Hansen<\/strong><\/p>\n\n\n\n

If a graduate student \u2026 comes in and they say, “I have a great stochastic discount factor,” the first thing you say is, “Show me it’s inside the Hansen-Jagannathan bounds.<\/strong><\/p>\n\n\n\n

[Robert] Lucas<\/strong> wrote a paper saying everything the way we were doing econometrics before was wrong because it didn’t build in rational expectations. And he said someone should figure that out, but it’s hard. Lars <\/strong>basically figured it out, leading to a pair of papers that year.<\/p>\n\n\n\n

One was doing it with a complete model. There are two, Hansen<\/strong>-Singleton. [Hansen]<\/strong> did something very clever. Maybe I can find an M that will make it work, without telling you what the M is. After all, the stochastic discount factor is just a random variable. So, what he did was to reverse engineer a class of stochastic discount factors that would satisfy that equation. As it turns out, it’s a class, a set of random variables. This is the birth of the Hansen<\/strong>-Jagannathan bounds.<\/p>\n<\/div>\n\n\n\n

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“As a graduate student at the University of Minnesota, I had the opportunity to take classes from Chris Sims and Tom Sargent<\/strong>. Both emphasized the idea that dynamic econometric models should be viewed as restrictions on stochastic processes.”<\/p>\n<\/blockquote>\n\n\n\n

Lars Peter Hansen, “An Interview with Lars Hansen”<\/a><\/strong><\/strong><\/strong><\/p>\n<\/div>\n<\/section>\n<\/section>\n","protected":false},"excerpt":{"rendered":"

Nobel Laureate Thomas J. Sargent joined nine fellow economists in the Tepper School\u2019s Nobel Laureate Gallery. His keynote speech credits colleagues and peers for inspiring his groundbreaking contributions to the Economic Sciences.<\/p>\n","protected":false},"author":2,"featured_media":3931,"parent":2682,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","meta":{"footnotes":""},"class_list":["post-3535","page","type-page","status-publish","has-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/magazine.tepper.cmu.edu\/index.php\/wp-json\/wp\/v2\/pages\/3535","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/magazine.tepper.cmu.edu\/index.php\/wp-json\/wp\/v2\/pages"}],"about":[{"href":"https:\/\/magazine.tepper.cmu.edu\/index.php\/wp-json\/wp\/v2\/types\/page"}],"author":[{"embeddable":true,"href":"https:\/\/magazine.tepper.cmu.edu\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/magazine.tepper.cmu.edu\/index.php\/wp-json\/wp\/v2\/comments?post=3535"}],"version-history":[{"count":63,"href":"https:\/\/magazine.tepper.cmu.edu\/index.php\/wp-json\/wp\/v2\/pages\/3535\/revisions"}],"predecessor-version":[{"id":4352,"href":"https:\/\/magazine.tepper.cmu.edu\/index.php\/wp-json\/wp\/v2\/pages\/3535\/revisions\/4352"}],"up":[{"embeddable":true,"href":"https:\/\/magazine.tepper.cmu.edu\/index.php\/wp-json\/wp\/v2\/pages\/2682"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/magazine.tepper.cmu.edu\/index.php\/wp-json\/wp\/v2\/media\/3931"}],"wp:attachment":[{"href":"https:\/\/magazine.tepper.cmu.edu\/index.php\/wp-json\/wp\/v2\/media?parent=3535"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}