October 10, 2011 4:43PM

Sargent’s Sharp Pencil

Today, The Royal Swedish Academy of Sciences announced that it had awarded this year’s Nobel Prize in Economic Sciences to Prof. Tom Sargent (along with Prof. Chris Sims). Prof. Sargent is not only a high priest of economic theory — the rational expectations variety — but also one of the last in a dying breed of economists who can read a balance sheet and wield a sharp pencil.

For students of hyperinflation, there is no better place to start than Prof. Sargent’s classic: Rational Expectations and Inflation (Second Edition, 1993). That’s where I began when I started to grapple with the problem of estimating Zimbabwe’s hyperinflation.

In my study of Zimbabwe’s inflation, Prof. Sargent’s work proved to be invaluable. Prof. Sargent’s theoretical rigor and ability to do sharp pencil work on central bank balance sheets, fiscal accounts and many other relevant data, allowed me to clear away a great deal of Zimbabwean underbrush.

Prof. Sargent’s Rational Expectations and Inflation remains one of the best examples of economic sharp pencil work. The details of just how Germany ended its infamous hyperinflation are all there. For example, to put its fiscal house in order and stop its hyperinflation, Germany, among other things, slashed the number of government employees by 25 percent with a decree of 27 October 1923. Where there is a will, there is a way.