Another draft extract from my book-in-progress, Economics in Two Lessons. It’s the last part of the section on “predistribution”, dealing with Intellectual Property. Next up, “redistribution” through taxation and public expenditure.

As always, encouragement is welcome, constructive criticism even more so.

The system of property rights in market societies is based primarily on private property rights, that is, the exclusive allocation of control over some asset to a single person (or, in modern forms of capitalism to a corporate entity). The concept of ‘private goods’ in economics refers to goods that are rival and excludable in consumption. There obvious similarity between these concepts, which often leads to the assumption that the two are identical

In reality, the are crucial differences. The economic concept of private goods relates to the technological properties of the good in question. Private property is a right created and ultimately enforced by law, which may be applied, or not, to almost anything, whether or not it corresponds to the economic idea of a private good.[1]

In particular, public goods (in the economic sense) may be the subject of private property rights. The most important example is that of ‘intellectual property’, that is, rights to control the use of information, such as copyrights, patents and trade marks. Enforcement of such rights typically involves the imposition, after the fact, or penalties for reproducing information without the consent of the owner of the rights.

More than any other kind of property, intellectual property rights such as patents are obviously creations of the states that define and enforce them. Patents were originally monopolies over common goods such as playing cards, used by the Tudor and Stuart monarchs in England to reward favorites or sold off to raise money to fund wars and other expenditure.

The creation of intellectual property rights provides an incentive to generate new ideas, or at least ideas that are sufficiently distinctive in their formulation to attract intellectual property protection. But the enforcement of these rights means that use of the ideas in question is restricted, even though, since ideas are non-rival, there is a social benefit to unrestricted use. Economists have examined the trade off between the costs and benefits of intellectual property protection and have concluded, in general, that the costs of strong forms of intellectual property protection outweigh the benefits.

By the time the US Constitution was drawn up in the 18th century, patents and copyrights were recognised as a way to encourage innovation, as were the dangers of excessive restrictions on the flow of information. The powers of Congress included (emphasis added)

To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.

The first Copyright Act passed in 1790, granted authors the exclusive right to publish and vend “maps, charts and books” for a term of 14 years. This 14-year term was renewable for one additional 14-year term, if the author was alive at the end of the first time. Similarly, inventors could patent their ideas for 14 years.

The terms of copyrights and patents were extended moderately over the subsequent two centuries. Since the resurgence of market liberalism in the 1970s, however, both the duration and the scope of what now became known as ‘intellectual property’ have expanded massively.

Just about anything, from colours to chromosomes has now been made the subject of intellectual property. In 2010, Apple Computer even attempted to claim a trademark the letter ‘i’ but an Australian court rejected the claim.

The duration of copyright was extended to the life of the author plus 50 years in 1976, and to life plus 70 years by the Sonny Bono Copyright Term Extension Act of 1998, with corporate owners of ‘work for hire’ getting a further 25 years. The passage of the Act was due in part to pressure from the European Union, which has generally supported strong versions of IP [2], and in part to the efforts of the Disney Corporation, whose copyrights on cartoon characters such as Mickey Mouse and Winnie the Pooh were in danger of expiry (leading to the derisive label of the Mickey Mouse Protection Act,

The claims of IP have also been used to suppress public debate and support secrecy about wrongdoing by governments and corporations. The Church of Scientology is particularly notorious for its use of copyright claims to silence critics. Less spectacular, but almost certainly more damaging is the development of the doctrine of ‘commercial in confidence’ intellectual property. This doctrine is used, in particular to suppress information about dealings between corporations and governments, providing a convenient cloak for misrepresentation and corruption.

The expansion of patents is equally problematic. The barriers to claiming a patent have been steadily lowered, and the scope of patents expanded. Among the most problematic results have been the patenting of obvious and well-known ideas in computer programming and the development of ‘business method’ patents. The two coincided during the ‘dotcom’ boom of the 1990s, when just about any business transaction, from corporate procurement to selling dogfood, could be patented with the simple addition of the words ‘on the Internet’.

Paradoxically, this expansion of intellectual property rights has happened at the same time as the explosive developments in information and communications technology. Ideas, in the form of text, audiovisual material, open source software and the designs required to make physical products can now be shared globally on a massive scale and at almost no cost.

The result is a mess. On the one hand, intellectual property rights are routinely violated, on a massive scale, by just about everybody. On the other hand, the combination of massive scope and haphazard enforcement creates a minefield for anyone in a position to be sued. A snatch of an old song playing in the background of a movie or a few lines of recycled computer code can open up scope for costly litigation, with the result that it is usually easier to pay up than to fight.

“Patent trolls” make a profitable living in this fashion. And despite the name, these trolls include major corporations. Warner Brothers made millions suing anyone who had the temerity to perform the song “Happy Birthday to You” in public, even though the song had been in the public domain for at least a century. (The tune, with different lyrics, dates back to 1893. The words we sing evolved over time, through what is sometimes called the ‘folk process’)

Economic studies of patents and copyright have reached the similar conclusion that the damage caused by IP enforcement exceeds the benefits in terms of innovation. Is there a good survey on this?

The Copyright Term Extension Act of 1998 provoked an extraordinary response from the economics profession, spanning the gamut from free market advocates like Milton Friedman to interventionists like Akerlog. These and others (including a total of five winners of the Economics Nobel) joined an amicus brief to the US Supreme Court in a case challenging the constitutionality of the Act, a challenge which unfortunately failed.

The conversion of ideas into IP has had even more corrosive implications, by providing one of the key vehicles for global corporate tax avoidance. The basic method is simple: ideas developed or bought by corporations based in the US and other large countries are turned into the IP of a subsidiary located in a tax haven which specialises in concessional treatment of such property. Ireland, for example, charges only 6.25 per cent on income from IP. Companies then pay themselves (or rather their Irish subsidiaries) large amounts for the right to use their own ideas. This payment reduces their profits at home, while the Irish subsidiary pays almost no tax.

The basic method was, until recently, improved by using a second Irish company located in a Caribbean tax haven (the ‘double Irish’) and then rerouting the profits through the Netherlands (the ‘Dutch sandwich’) thereby eliminating tax altogether.

The problems of international tax avoidance and evasion are complex and the effort to curb such avoidance will take many years to succeed, if indeed it does. But reversing the shift towards stronger and stronger IP would be an important step in the process, as well as being beneficial in itself.

What could take the place of strong IP? In many cases, no replacement is needed. No social purpose is served by restricting publication of the works of long-dead authors, who could not possibly have anticipated this outcome when they wrote. Even looking forward, it’s absurd to suppose that I (or any author writing today) am writing in the hope of providing an income for my unborn great-grandchildren.

Similarly, most of the new categories of patents that have exploded in recent decades (business methods, adaptations of standard ideas to the Internet and so on) are positively undesirable. If a new patent required a positive demonstration that the alleged invention was in fact novel, non-obvious and socially beneficial most of these patents would disappear, along with the ‘patent trolls’ who exploit them to blackmail genuine innovators.

In some cases, such as pharmaceuticals, it is necessary to reward the private corporations that produce new medicines. Around 15 per cent of the total revenue of pharmaceutical companies is allocated to research and development, a figure matched only by the information technology and communications sector.

But nearly all of the money these corporations receive from patent-protected medicines comes, directly or indirectly, from governments. In the United States, and other developed countries, governments contribute to the pharmaceutical industry through support for basic research. Much more important, however, are payments through Medicaid and Medicare, which have greatly expanded as a result of Medicare Part D, introduced under the Bush Administration. In addition, the US government subsidises health insurance for most of the population through tax benefits for employer-provided health insurance and through the Affordable Care Act (Obamacare). A substantial part of this subsidy flows through to support the purchase of prescription drugs.

Unlike other governments, the US government does not bargain with pharmaceutical companies over the price of medications (Medicare is explicitly banned from doing so). Rather, companies set their own prices in bargains with private insurers. Unsurprisingly US pharmaceutical prices are around 50 per cent higher than those in other developed countries.[3]

Advocates for the pharmaceutical industry claim that this system enables funding for research and development, and that other countries are effectively being subsidised by the United States. There is some truth in this claim, but the higher prices in the US owe at least as much to marketing efforts and to the ability of pharmaceutical companies to secure monopoly profits thanks to the protection of intellectual property.

It would be far better for the US to follow the example of other countries and negotiate directly with pharmaceutical companies through mechanisms like the Australian Pharmaceutical Benefits Scheme. Companies with a new medication (or even a prospective new medication) could negotiate for an agreed rate of payment and a period after which generic alternatives would be allowed. Ideally, the current exemptions for poor countries would be expanded to allow immediate access to lifesaving treatments at or near the cost of production.

There would certainly be difficulties in sharing the global costs of such an arrangement between the US, EU and other national governments, replacing the current effective US subsidy. But these would be minor compared to that amounts currently wasted through the IP system.

Finally, and most importantly, governments could do more to support contributions to the public domain. Historically, the most important form of government support has been the funding of (mainly university) research through bodies like the National Science Foundation. However, the public good motivation for funding research sits uneasily with continuing pressure to ‘commercialise’ research through patents and other forms of intellectual property.

The emergence of the Internet creates a vast range of possibilities for expansion of the public domain. While much of this will take place spontaneously, governments could help in many ways. First, and most importantly, ‘fair use’ exemptions from …

A more active form of support would be the provision of grants to assist creative projects, ranging from cultural work to open source software that make their outcomes available through the public domain or through variants like the Creative Commons licensing. Repositories such as Github (for open source software) would be an obvious model. While it would be undesirable for governments to seek to control the outcomes of such projects, this is an area where relatively modest financial support could yield substantial social benefits.

As far as intellectual property rights were concerned, the drafters of the US Constitution2 understood the Two Lessons better than their successors two hundred years later[4]. Property rights are social constructions, with both benefits and opportunity costs. Markets cannot determine the appropriate balance between the two because they only permit trade in property rights that have already been created. So, the determination of property rights is a crucial aspect of predistribution.

—-
1 For example in Britain, army officers could buy and sell their commissions, a practice which continued until 1871 https://en.wikipedia.org/wiki/Purchase_of_commissions_in_the_British_Army

[2] Anecdotally, one of the forces pushing for protection was the Bavarian government, which held the copyright over Hitler’s Mein Kampf and had prohibited publication. While we might sympathise with the desire to suppress this evil book, the case indicates the way in which copyright limits the flow of ideas of all kinds

3. The absence of direct bargaining contributes substantially to this outcome, but it is not the only causal factor here. The quasi-private system prevailing in the United States produces higher costs in almost all areas of health care.
2 Of course, in other respects, most importantly the implicit acceptance of slavery, the Constitution’s treatment of property rights was appalling.

While working on my long-forthcoming book, Economics in Two Lessons, I came across an interesting article by Edwin Dolan published (with commendably openness to criticism) in the Quarterly Journal of Austrian Economics. The conclusion

On a theoretical level, Austrian writers delight in claiming the moral high ground, condemning polluters as aggressors against property rights. On a practical level, however, they leave pollution victims in the lurch. They invite them to sue, but propose a set of legal standards that would guarantee that polluters would always win. They oppose all government measures to reduce pollution, whether through regulation or through measures to make polluters pay. As a result, at least in cases of environmental mass torts, the Austrian paradigm is a polluter’s dream and a victim’s nightmare. It offers far too little of any practical value toward securing property rights, too little toward facilitating environmental coordination, and too little toward promoting libertarian justice. Much work remains to be done.

Here’s another excerpt from my book-in-progress, Economics in Two Lessons. Rather than work sequentially, I’m jumping between:

Lesson 1: Market prices reflect and determine opportunity costs faced by consumers and producers.
and
Lesson 2: Market prices don’t reflect all the opportunity costs we face as a society.

In the section over the fold, I’m looking at monopoly and regulation. Next up, public ownership.

As usual, praise is welcome, useful criticism even more so. You can find a draft of the opening sections here.

A crucial requirement of Lesson 1 is that prices are determined in competitive markets. But free markets are not necessarily competitive. If the technology of production involves economies of scale, as is the case for most kinds of manufacturing and many services, large firms will have lower average costs than small ones.

Over time, therefore, the number of firms will shrink through exits or mergers, until economies of scale are exhausted. In the limiting, but not unrealistic, case of natural monopoly, unrestrained competition will lead to the emergence of a single dominant firm.

Once a firm attains a dominant position, it can hold that position for a long time, even after any initial advantages have disappeared. Suppliers and dealers can be locked into long term contracts. If vital parts are produced to a standard design, patents over those parts can be used to exclude competitors. As an example, the AT&T Bell monopoly in the United States required that only phones made by its subsidiary, Western Electric, could be connected to its network. This and other restrictions excluded all competition for decades.

In a natural monopoly industry, production by a single firm is technically efficient. But the price that maximises profits will be higher than the opportunity cost of production. Some of the potential benefits of technical efficiency will be lost, while the bulk of what remains will go to the monopolist rather than to consumers [in a very simple model of monopoly pricing, the monopolist gets half of the potential benefits from the supply of the good, consumers get a quarter and the remaining quarter is lost because of the divergence between price and opportunity cost]

The situation is even worse where monopoly is maintained through costly devices used to exclude competitors. Not only will prices be higher than opportunity costs, they will exceed the competitive market price. Even the monopolist will dissipate much of its profit in its efforts to exclude competitors (Tullock).

These problems first emerged on a large scale in the late 19th century, as the growth of rail networks made it possible, and profitable, for firms to operate on a national scale. The railways themselves were one of the most important industries in which the benefits of scale economies, along with the appeal of potential monopoly profits, led to an rash of mergers.

These mergers were often undertaken using a legal device known as a ‘trust’, and the term came to be applied to monopolies and cartels in general. The most famous trust was John D Rockefeller’s Standard Oil company, which secured a near-monopoly (88 per cent in 1890 https://en.wikipedia.org/wiki/Standard_Oil) over the refined oil market. One of Standard Oil’s main advantages was the capacity to secure lower prices from railway companies in return for higher volumes.

The initial response, commonly referred to as ‘trustbusting’ involved breaking up large corporations into separate firms that were expected to compete against one another. Standard Oil was broken into 34 firms, the most successful of which were the Standard Oil Company of New York (later Mobil) and Standard Oil of New Jersey (later Exxon). Under the influence of the Chicago school of economics, trustbusting policies were gradually abandoned in the late 20th century. The last big corporate breakup was that of the former AT&T telephone monopoly in the 1970s. The shifting in thinking was symbolised by the 1999 merger of Exxon and Mobil to produce one of the largest corporations in the world, comparable in many ways to Standard Oil.

The logic of opportunity cost applies here, as usual. Breaking up monopolies reduces the extent of monopoly power, at the cost of forgoing opportunities for improved scale economies arising from mergers.

For much of the 20th century, the loss of scale economies was seen as an acceptable price to pay to keep monopoly in check. However, with the resurgence of free market ideas from the 1970s onwards, support for antitrust policies waned. The last big example of trustbusting was the breakup of the AT&T telephone monopoly, which took place in 1982 after nearly a decade of litigation.

As trustbusting has declined, attention has turned to various forms of regulation. The core idea of regulation is to fix the prices charged by monopolies at levels that reflect the opportunity cost of resources used in production, but not to allow the extraction of monopoly profits. In practice this balance has proved hard to achieve. The common result has been that regulated monopolies have been highly profitable.

One illustration of this is the fact that the ‘asset base’ of a regulated monopoly is typically valued at around 40 per cent more than the cost of its provision, as estimated by the regulator. This asset base premium reflects the fact that the regulated price is more than the opportunity cost of the resources used in production.

Regulation constrains the exploitation of monopoly power but it entails compliance and enforcement costs and may prevent firms and consumers from reaching bargains that are mutually beneficial. Where a natural monopoly business involves large scale investment, it may prove difficult to set a price that accurately reflects opportunity costs, while providing incentives for efficient investment.

The crucial trade-offs involve the distribution of income and property rights. To encourage appropriate levels of investment, it is desirable to offer high rates of return. However, this implies that monopoly profits will be enhanced at the expense of the community as a whole. One solution, discussed in the next section, is public ownership.

Here’s another excerpt from my book-in-progress, Economics in Two Lessons. As usual, praise is welcome, useful criticism even more so. You can find a draft of the opening sections here.

In the section over the fold, I’m looking at public ownership.

While the US adopted trustbusting and regulation as solutions to the monopoly power, most other developed countries preferred direct public ownership. This was in part due to the greater popularity of socialist ideas and in part due to the perceived failure of regulated monopolies to deliver adequate outcomes.

By the middle of the 20th century, infrastructure services such as railways, telecommunications, water supply and electricity were provided by public enterprises in most developed countries. These enterprises charged market prices for their services, typically designed to cover the opportunity costs of the resources used in providing the service and a surplus sufficient to cover depreciation and finance new investment. Over time, many of these enterprise were converted to a corporatised form and paid dividends, which provide a source of revenue for governments.

Along with redistributive policies of various kinds, the public ownership of monopoly enterprises contributed to the historically unprecedented reduction in inequality that took place in the decades after 1945, sometimes referred to as ‘The Great Compression’.

Moreover, the period of public ownership was one of substantial expansion of infrastructure networks. Electricity supply, which had previously been patchy and often confined to urban areas, became almost universal. Highway systems expanded greatly, with such developments US Interstate System as the most prominent examples. Telephone systems grew from local services to national and international networks, with steadily declining costs

However, public enterprises were subject to two significant criticisms. First, they were seen as overstaffed and inefficient. Second, although they generated sufficient revenue to cover the opportunity costs of production in aggregate, the prices charged for particular services did not necessarily reflect the opportunity cost of providing those services. There were extensive cross-subsidies, for example between rural and urban users and between households and business.

These criticisms emerged gradually over the post war decades. However, as long as Keynesian macroeconomic policies delivered full employment and continued economic growth, faith in the ability of governments to manage the economy extended to a judgement that the benefits of public enterprise outweighed the costs. Although there were shifts back and forth, with enterprises being nationalised for various reasons, and others privatised (fn: this term was not much used; the prevailing term denationalised reflected the fact that such movements were counter to the general trend) the general trend was towards greater public ownership.

The economic crises of the 1970s, and the failure of Keynesian policies to control them put an end to this. From the 1980s onwards, the trend towards greater public ownership was reversed. Beginning with the Thatcher government in the United Kingdom, public enterprises of all kinds were privatised.

Much of the political appeal of privatisation arose from the appearance of a ‘free lunch’ for governments selling assets. The proceeds of the asset sales could be used to finance current government expenditure, or new investments in desirable infrastructure, without the need to raise taxes or issue debt.

As is usually the case, the appearance of a free lunch was illusory. The opportunity cost of privatising a public asset is the loss of the income flowing to the government from ownership of the asset (dividends or earnings retained and reinvested).

In most of the privatisations undertaken after 1980, assets were underpriced, so that the value realised in the sale was less than the opportunity cost associated with lower future income. Once the sale proceeds were spent, governments were permanently poorer because of the loss of earnings flowing from the now-private enterprises.

Although free-market economists who advocated privatisation were mostly happy to let governments chase the free lunch of revenue from asset sales, their real hope was that, with government enterprisess out of the way, competitive markets would emerge, and that Lesson 1 would once gain be relevant.

Advocates of privatisation produced a range of studies suggesting that the problems of natural monopoly had been overstated and was easily soluble (fn contestability). As a result, they largely ignored the earlier failures of regulation, assuming that regulation would be needed only for a transitional period, until a fully competitive market emerged.

They disregarded concerns about the distribution of income and wealth, believing that the efficiency benefits associated with privatisation would be sufficient to provide lower prices for consumers, higher returns for investors and even some kind of compensation for displaced workers.

Initial evaluations of privatisation were highly positive. The World Bank, in particular, was an influential booster, and continues to promote the idea, though with an increasingly defensive tone.

Over time, however, problems became more evident. The cost savings from firing large numbers of technical workers were partially or completely offset by the expansion of marketing and finance divisions, and by an explosion in the salaries and bonuses paid to a growing number of senior managers, who also required support staff.

Moreover, the promised benefits to consumers often did not arise. Sometimes prices rose instead of falling. In other cases, lower prices were accompanied by reduced quality of services. Other costs have been slower to become apparent. A UN report in 2014 noted that privatisation of education had harmed educational opportunities for women and girls.

On the other hand, privatisation has proved a highly reliable method of enriching those who have managed to secure control of the process. Many of the great fortunes that symbolise the rise of the global “1 per cent”, from those of Russian oligarchs to the world’s richest man, Mexican Carlos Slim, have been derived from privatisation.

These failures have led to a slowing down in the push to privatisation, and even to some reversals. Examples include the renationalisation of the British railway track system and of the entire New Zealand rail network and Australia’s creation of a publicly owned National Broadband Network following the failure of its privatised telecom company to create such a network.

In the end, the choice between public ownership and regulated private monopoly involves the need to strike a balance between different opportunity costs. That balance has shifted over time, partly in response to technological changes and partly as a result of ideological shifts in thinking. Since the 1970s, excessive faith in Lesson 1 has led to a sharp movement away from public ownership, without any clear attempt to assess the balance of costs and benefits. Such a reassessment is long overdue.

As we saw in Section …, Lesson 1 does not apply to public goods, which can be used all, without any diminution of their usefulness, and for which no price can be charged. Many of the core activities of government may be regarded as providing public goods. These include public health measures, the control of air pollution, urban planning, police services and national defense.

More abstract services such as the legal system, the definition and enforcement of property rights, systems of weights and measures and so on are also public goods. Less obviously, macroeconomic management is a kind of public good (or sometimes a public bad). The level of economic activity, the rate of inflation, exchange rates and interest rates affect everyone, though in different ways.

Most advocates of Lesson 1 recognise at least some of these forms of public good provision as essential. The big disputes arise over services such as health, education and welfare services, which have long been provided, or at least funded, by governments. These services are commonly referred to as ‘human services’, and typically involve a personal relationship (doctor-patient, teacher-student, caseworker client and so on) between the service provider and the recipient.

Although these services are sometimes referred to as public goods, they don’t, in general, meet the criteria economists use to define public goods. A hospital bed or school place provided to one person isn’t available to others, and prices can be charged for access to these services.

On the other hand, neither do these services the standard conditions of Lesson 1. There are two central problems that arise. First, these services are expensive and recipients are rarely in a position to pay for them directly. As a result, all of the problems of risk and insurance, discussed in Chapter 10 …, apply to the financing of these services.

The second problem is that the relationship between providers and recipients typically involves an imbalance of information, power or both. A student is not in a good position to judge whether the education she is receiving is good or bad. Similarly, a patient must rely on their doctor’s expertise and professional ethics to get the appropriate treatment. In other cases, such as that of police services, there is also an imbalance of power, which may be misused.

Advocates of Lesson 1, such as Milton Friedman in Free to Choose have generally accepted the need for public funding to overcome the problems of financing education and, at least in some instances, health care. However, Friedman and others have assumed that any other problems can be overcome by market competition and consumer choice. Indeed, they have argued that market competition will help to prevent corruption and abuses of power that arise when governments provide services directly.

As a result, market advocates have favoured policies based on concepts such as ‘contestability’ and ‘contracting out’, in which for-profit firms compete to provide publicly funded services. The archetypal example is the perennial proposal for school ‘vouchers’, that is, funds allocated to students or their parents which can be paid to whichever school they choose to attend.

This idea was elaborated into a complete ‘reinvention of government’ by writers like Osborne and Gaebler in the late 20th century and implemented, to a large extent, in the wave of market liberal reform led by the Thatcher government in the UK. As a result, we have accumulated plenty of experience of market contestability and for-profit provision.

Theoretical analysis doesn’t give any clear answer as to which model of provision is likely to be best for services like health and education. However, after several decades of experience with market-oriented contestability, the empirical evidence is stark. For-profit provision of such services is at best problematic, and at worst disastrous.

The only other model with success comparable to that of public service provision is not-for-profit provision by organisations with a charitable or activist mission. Church-run schools and hospitals, and activist-run services like women’s shelters and services for the unemployed and homeless, have complemented the public sector, meeting needs that have been unrecognised or underserved.

The issue is not, in the end, one of public versus private. Rather it is the fact that market competition and the profit motive inevitably associated with it is antithetical to the professional and service orientation that is central to human services of all kinds.

Here’s another excerpt from my book-in-progress, Economics in Two Lessons. As usual, praise is welcome, useful criticism even more so. You can find a draft of the opening sections here.

In the section over the fold, I’m looking at education.

In a modern society, education is the most important single factor determining a person’s life chances. The average who holds a professional or doctoral degree earns more than twice as much as someone without a four-year college degree, and is virtually assured of being employed (at a time of deep depression in 2011, only 2.5 per cent of higher-degree holders were unemployed). In economic terms, the education sector is one of the largest in the economy.

However, this statistical analysis seriously underestimates the economic importance of sector, because it ignores the First Lesson. The true cost of education comprises not just the salaries of teachers and the cost of running schools and universities, but the opportunity cost of the time spent in education by students.

The failure to take proper account of the First Lesson is a big problem in understanding the economics of education. But the failure to understand the Second Lesson has been much more of a problem for policy.

Simple-minded analyses based on a simplistic reading of the First Lesson have driven the irsteducation debate in the US and other English-speaking countries for the last few decades. The dominant idea is that education is a product like any other and that the best guarantee of good education is market competition between providers. The villains in this story are public goods and, especially, teacher unions.

To make education more like a private good, advocates of he First Lesson tried to change the conditions of both supply and demand. On the demand side, the central proposal was that of education ‘vouchers’, put forward most notably by Nobel Prizewinning economist at the University of Chicago, Milton Friedman. The idea was that, rather than funding schools, government should provide funding directly parents in the form of vouchers that could be used at whichever school the parents preferred, and topped up, if necessary by additional fee payments.

As is typically the case, voucher advocates ignored the implications of their proposals for the distribution of income. In large measure, vouchers represent a simply cash transfer, going predominantly from the poor to the rich. The biggest beneficiaries would be those, mostly well-off, who were already sending their children to private schools, for whom the voucher would be a simple cash transfer. Those whose children remained at the same public school as before would gain nothing.

On the supply side, the central idea was the introduction of for-profit schools and colleges to a sector traditionally dominated by public and non-profit educational institutions. For-profit educational institutions had a spectacular rise and fall.

The most notable entrant in the US school sector was Edison Schools. Edison Schools was founded in 1992 and was widely viewed as representing the future of school education. Its plans were drawn up by a committee headed by John Chubb, the co-author of the most influential single critique of public sector education in the United States (Chubb and Moe 1990). For-profit schools were also introduced in Chile and Sweden.

At the university level, for-profit enterprises proliferated with the University of Phoenix was the most notable example. For-profit trade and vocational schools also expanded in the US, and, even more dramatically in Australia, where a poorly-designed subsidy scheme produced a spectacular expansion.

The story was much the same everywhere: an initial burst of enthusiasm and high profits, followed by the exposure of poor practices and outcomes, and finally collapse, with governments being left to pick up the pieces.

Edison Schools, launched on the stockmarket with a flourish in 1999, lost most of its value and was subsequently taken private. At its peak, Edison ran hundreds of schools throughout the US. It has now faded into obscurity under the name EdisonLearning.

Sweden introduced voucher-style reforms in 1992, and opened the market to for-profit schools. Initially favorable assessments were replaced by disillusionment as the performance of the school system as a whole deteriorated. Scores on the international PISA test plummeted https://www.theguardian.com/world/2015/jun/10/sweden-schools-crisis-political-failure-education and dissatisfaction became general

https://www.theguardian.com/world/2015/jun/10/sweden-schools-crisis-political-failure-education

By 2015, the majority of the public favoured banning for-profit schools. The Minister for Education described the system as a ‘political failure’, Other critics described it in harsher terms.

The Swedish for-profit ‘free’ school disaster

Although a full analysis has not yet been undertaken, it seems likely that the for-profit schools engaged in ‘cream-skimming’, admitting able and well-behaved students, while pushing more problematic students back into the public system. The rules under which the reform was introduced included ‘safeguards’ to prevent cream-skimming, but such safeguards have historical proved ineffectual in the face of the profits to be made by evading them.

Similar processes took place in Chile, under the influence of the Chicago-trained reformers whose policies were implemented by the Pinochet dictatorship. There were glowing initial reports, but the eventual outcome was to amplify inequality without improving performance. Chile banned for-profit education in 2015

http://www.gob.cl/2015/06/01/inclusion-law-the-key-changes-to-come-with-the-new-legislation/

https://dianeravitch.net/2016/11/16/tom-ultican-why-for-profit-education-always-fails/

The for-profit university sector followed a similar trajectory. The University of Phoenix epitomised the process. Enrolments peaked at 600 000 in 2010, but had fallen to 142 000 by 2016 as the US government cracked down on shady enrolment practices. Other for-profit universities closed altogether or converted to non-profit status

Perhaps the most spectacular boom and bust took place in my native Australia. From tiny beginnings around 2007, a scheme to provide loans-based funding for vocational training grew into a full-blown educational and budgetary disaster. Even more than in the for-profit US university sector, the companies involved found it profitable to exploit the weaknesses of the funding system, and the fact that students could not judge the quality of education in advance, rather than to do the hard work of providing improved education.

The results speak for themselves. By the time a conservative government radically restricted the scheme in late 2016, the estimated losses to the budget ran into the billions of dollars, while thousands of students were left with unrepayable debts and worthless qualifications. Meanwhile, the public system of Technical and Further Education, which had worked well for decades had suffered grave and possibly irreparable damage.

The failure of full-scale privatisation left the field open to the main remaining alternative ‘charter’ schools. The idea of charter schools was originally put forward by Albert Shanker, the president of the American Federation of Teachers. His idea was to encourage schools where teachers had more opportunities to try out innovative approaches, and where the student body would be more diverse, both economically and racially.

In the hands of the education reform movement, however, charter schools took on a very different tone and purpose, much closer to that of the for-profit model that failed with Edison. While some independent charter schools have pursued innovation along the lines suggested by Shanker, others are part of chains relying on services like management companies, including for-profits like EdisonLearning.

Charter schools have been, and remain, politically popular with Republicans and Democrats alike. Duncan. The only problem is that, according to the empirical evidence, they don’t work. Charter schools have not failed spectacularly, as for-profits have done, but they have not yielded any significant return for the money and political effort that has been poured into their expansion.

http://www.in-perspective.org/pages/student-achievement

Nationally, there is very little evidence that charter and traditional public schools differ meaningfully in their average impact on students’ standardized test performance.

Moreover, although the evidence is murky it seems that an increasing proportion of charters are being run on a for-profit basis, even in cases where formal structure is non-profit. Given the failure of the for-profit model in general, the prospects for the future are not good.

Why has market-oriented reform of education been such a failure? Every part of the Second Lesson is relevant here. On the ‘production’ side, education is, in many respects similar to other industries. Prices send signals about the cost of providing particular courses of study in particular ways, and of the rewards of one kind of employment or another. Institutions and educators respond to those signals. Students try to weigh the cost and the likely monetary benefits of continuing education, or of seeking employment, along with less tangible costs and benefits, and decide accordingly.

On the other hand, an analysis based on prices falls down badly in the attempt to describe education as a market transaction. All the terms of the Second Lesson are relevant here. Education is characterized by market failure, by potentially inequitable initial allocations and, most importantly, by the fact that the relationship between the education ‘industry’ and its ‘consumers’, that is between educational institutions and teachers on the one hand and students on the other, cannot be reduced to a market transaction.

The critical problem with this simple model is that students, by definition, cannot know in advance what they are going to learn, or make an informed judgement about what they are learning. They have to rely, to a substantial extent, on their teachers to select the right topics of study and to teach them appropriately.

Moreover, any specific course of education is a once-only experience in most cases. Students may judge, in retrospect, that particular teachers, courses or institutions were good or bad, but in either case they are unlikely to return, so that there is no direct market return to high quality performance.

The result is that education does not rely on market competition to any significant extent to sort good teachers and institutions from bad ones. Rather, education depends on a combination of sustained institutional standards and individual professional ethics to maintain their performance.

The implications for education policy are clear, at least at the school level. School education should be publicly funded and provided either by public schools or by non-profits with a clear educational mission, as opposed to corporate ‘school management organisations’.

Post-school education raises more complex problems, regrettably beyond the scope of this book. But the key element should be to make high quality post-school education available, and affordable, for all young people.

For quite a while now, I’ve been working through my book-in-progress, Economics in Two Lessons (partial draft here), focusing on applications of Lesson 2

Lesson 2: Market prices don’t reflect all the opportunity costs we face as a society.

Thinking about the standard market failures (monopoly, externality and so on), I’ve come to the conclusion that I need to say more about the interaction between market failure and income distribution. I’ve already looked at the opportunity costs involved in income redistribution and predistribution, but different kinds of questions are coming up in relation to issues like monopoly, privatisation and for-profit provision of public services.

The discussion here and at Crooked Timber has been very helpful in stimulating my thoughts, but I need to do a lot more clarification. Some preliminary thoughts are over the fold: comments and criticism much appreciated.

Market failures arise either when market prices don’t reflect social opportunity costs or when markets for some good or service don’t exist at all, so that some other method of allocation must be used (examples include household self-sufficiency, gift exchange and public provision). It might be thought that the problems are more severe in the case of non-existent markets. Indeed some followers of Lesson 1 see the expansion of market transactions as a universal solution to social problems (the blog Marginal Revolution runs a series of posts under the Heading ‘Markets in Everything‘, which now runs to over 1300 entries).

In reality, however, markets with the ‘wrong’ prices (those not equal to social opportunity cost) are often worse than no markets at all. The core problem is that a divergence between prices and opportunity costs creates a potential ‘free lunch’, that is, an opportunity to make profits without any net contribution to the production of useful goods and services.

Free lunches are beneficial for those who get to eat them. Precisely for this reason, strenuous efforts are made to secure free lunches by generating divergences between prices and opportunity costs. Among the ways of doing this, which will be discussed in this section

* Securing monopoly control of unregulated markets

* In regulated monopolies, obtaining a rate of return higher than the opportunity cost of the capital invested

* Avoiding the costs of waste disposal by engaging in unregulated pollution

* Providing publicly funded services at a price greater than the cost of provision

* Obtaining ownership of public assets through privatisation, at a price below the value of the asset

All of these free lunches are available only to owners of capital and all (with the exception of unregulated pollution) have become more readily available over the last few decades. Conversely, the forms of redistribution (taxes and transfers) and predistribution (unions and minimum wages) that benefit workers have declined in significance. This is both the cause and the result of the growing inequality of wealth and power that has become glaringly obvious in the last decade.

The costs of market failures aren’t confined to problems with the distribution of income. First, the search for ‘free lunches’ is costly. Firms may incur high costs keeping competitors out of their markets, or lobbying politicians to keep pollution laws lax, or in regulatory litigation aimed at keeping rates of return high. These activities are profitable enough, for the firms concerned, to justify the expenditure of many billions of dollars every year.

Finally, when prices don’t reflect social opportunity costs, productive resources are used in ways that don’t yield a social benefit equal to their costs. Consumer choices are similarly distorted. The resulting allocation of resources is, in the standard terminology of economics, ‘inefficient’. I’ve argued earlier that this term is misleading, but whatever term is used, the presence of market failures means that the resources available to society aren’t being used in the way that would yield the greatest benefits, for any given distribution of income.

It follows that policy adjustments that can reduce allocative inefficiency have the potential to improve the wellbeing of society. Economists have devoted a lot of attention to these potential gains, while often neglecting the bigger issues of income distribution (or ‘equity’). In what follows, I will look at both equity and efficiency.

Another excerpt from my book-in-progress, Economics in Two Lessons (partial draft here). As usual, praise is welcome, useful criticism even more so.

On most measures, health care is among the largest industries in a modern economy, and its share is likely to grow in future. Health costs are a major item of expenditure for Individuals, families, employers and governments, amounting to 16 per cent of national income in the US (costs are lower, but still substantial in other developed countries with more sensible policies). Yet only a tiny fraction of this expenditure takes the form of standard consumer market transactions; that is, purchases of medical services by patients at a price equal to the opportunity cost of their provision.

The majority of private health expenditure is funded, in whole or part, through insurance. Once the premium is paid, all or most of the cost of visiting the doctor or going to hospital is borne by the insurer. So, the opportunity cost to the household of using medical services is far below the opportunity cost of providing those services.

The same is true of publicly provided health care. Public health services are funded from tax revenue, sometimes specifically allocated to health care and sometimes derived from general revenue. Either way, the opportunity cost for patients of using these services is far below the opportunity cost to society of providing them.

More generally, the health sector of a modern economy involves a complex mixture of public provision, for-profit corporations, non-government organisations and individual professionals such as doctors. Systems for providing and financing health care differ radically, from comprehensive public systems like the British National Health Service to predominantly private systems like that in the US. But nowhere are such services provided primarily on the basis of prices that reflect the opportunity cost of their provision.

This was not always the case. Until the late 19th century, markets for health care were much the same as other service markets. Doctors and pharmacists provided services and medicines as patients (at least those who could afford them) demanded, and were paid fees, out of the patient’s pocket, in return. Those who could not afford to pay (the majority of the population) relied on charity or went without. This ‘fee-for-service’ system has not entirely disappeared, and remains dominant in some poor countries. But developed countries have abandoned it almost completely.

To understand why health care systems are the way they are, we must apply the Second Lesson. This will help us to understand why simple markets for health care do not work to tell us about social opportunity costs. The more difficult problem is to work out the best way of making prices and other market signals work where they can, and how to replace them where they do not work.

Rationing and opportunity cost.

Economists are frequently criticised for assuming (as they mostly do) that the wants of consumers are limitless. Why, it is reasonably asked, can we not learn to be satisfied with what we have?

One field in which the assumption of limitless wants seems plausible is that of health care. New and improved treatments are being developed all the time, offering us longer and healthier lives, and cures for previously entreatment ailments and disabilities. Whatever we might think about consumption in general, few of us are so stoical that we would willingly choose to accept death or disability if it can be prevented or cured by medical treatment.

The problem is that, while the range of potentially beneficial treatments is effectively limitless, the resources available to the health care system are not. In a simple market system, this problem resolves itself automatically; those willing and able to pay for health care services receive them, and those who are unwilling or unable do not.

As we have already seen, however, markets in health care do not work well. For this reason, they have been replaced by a mixture of public provision and insurance. Both for public health services and insurers the problem then arises: which health services should be funded?

The general idea may be seen by an example. Consider a hospital which finds that it has a small amount of additional money that can be allocated either to the orthopaedic ward, where it would fund additional knee reconstructions, or to the emergency ward, where it would increase the survival chances of patients involved in car crashes.

The opportunity cost in this example is clear. The opportunity cost of improving the mobility of orthopaedic patients is that fewer emergency patients will survive. The patients involved may or may not be the same people (since car crashes are a common cause of severe injuries requiring orthopaedic surgery). T

There is no simple way of making this choice. Obviously, saving a life is of greater significance than a knee replacement, but the opportunity cost trade-off is unlikely to be one for one.

There are various ways in which the trade-off may be assessed. Some methods rely on the expertise of doctors. These face the problem that, being human, most doctors regard the conditions treated by their own speciality as being more significant than those treated by others.

Another approach is to rely on the expressed preferences of potential patients. In the example above, we might ask people who are not currently in need of a specific treatment to make judgements of the general form “I would (or would not) prefer a treatment yielding 20 years of additional life with full mobility to one yielding 25 years of additional life with a requirement to use crutches to move about”. [A formal version of this approach, using the concept of Quality Adjusted Life Years or QALYs is sometimes used. This approach and its strengths and limitations will be discussed in an Optional Extra section]

Judgements about the relative benefits of alternative outcomes may be translated into medical decisions in various ways. The simplest is to specify a list of treatments approved for funding. An alternative, referred to as case mix or activity-based funding relies on providing a specified payment for each kind of treatment, based both on the cost of provision and the requirement that benefits should exceed costs.

These price-based approaches can provide useful signals when hospitals or other health care providers are making treatment decisions in combination with their own judgments about what policies are most consistent with a mission of providing care. The price paid for an activity provides an indication of the social benefit perceived by the government. However, given a sufficient surplus, providers can choose to provide services that they judge to be desirable, even though they are funded at less than the cost of provision.

As with other price-based policies however, activity-based funding models are vulnerable to exploitation in a system dominated by profit motives. Profit motives are obviously dominant when services are provided by for-profit corporations. The may also dominate when resource constraints are so tight that a non-profit provider has no alternative but to maximise returns by providing only those services with a price sufficient to cover the opportunity cost of provision.

In these cases, various forms of cost-shifting may emerge. For example, doctors funded on an activity-based model may attempt to divert ‘unprofitable’ patients to the emergency wards of public hospitals rather than spending the time necessary to treat them. Similarly, it may be cheaper, from the provider’s perspective, to give a patient a prescription (the cost of which is borne elsewhere in the system) rather than to spend the time necessary to treat the underlying condition.

Ultimately, given scarce resources and effectively unbounded wants, some form of rationing is inevitable. The opportunity cost approach makes explicit the fact that, for any given level of resources, providing one kind of medical treatment comes at the expense of the alternative treatments that are not provided.

No approach is perfect, but reliance on markets and incentives is likely to lead to highly unsatisfactory outcomes. The best options involve a combination of explicit policy judgements on the general value of particular treatments and reliance on the expertise and commitment of medical professionals to provide the best possible treatment within the constraints of those policies.

I’m working on the environmental policy chapter of my book-in-progress, Economics in Two Lessons, which is a reply to Hazlitt’s Economics in One Lesson, which in turn is a repackaging of Bastiat’s What Is Seen and What Is Not Seen. Hazlitt was aware of the difficulties posed for laissez-faire by pollution, and chose to avoid the issue. But, on Googling Bastiat + pollution, I came across a remarkable package in which Bastiat anticipates the climate change debate and takes the denialist side in advancee.

Suppose that a professor of chemistry were to say: “The world is threatened by a great catastrophe; God has not taken proper precautions. I have analyzed the air that comes from human lungs, and I have come to the conclusion that it is not fit to breathe; so that, by calculating the volume of the atmosphere, I can predict the day when it will be entirely polluted, and when mankind will die of consumption, unless it adopts an artificial mode of respiration of my invention.”

Another professor steps forward and says: “No, mankind will not perish thus. It is true that the air that has already served to sustain animal life is vitiated for that purpose; but it is fit for plant life, and what plants exhale is favorable to human respiration. An incomplete study has induced some to think that God made a mistake; a more exact inquiry shows a harmonious design in His handiwork. Men can continue to breathe as Nature willed it.”

What should we say if the first professor overwhelmed the second with abuse, saying: “You are a chemist with a cold, hard, dried-up heart; you preach the horrible doctrine of laissez faire; you do not love mankind, since you demonstrate the uselessness of my respiratory apparatus.”

This is the sum and substance of our quarrel with the socialists. Both they and we desire harmony. They seek it in the innumerable schemes that they want the law to impose on men; we find it in the nature of men and things.

Bastiat gets the problem (carbon dioxide + methane) right, though not the primary sources (burning fossil fuels and burping cows) or the way they damage us.

What’s striking, though, is his a priori faith that everything will be OK because of Divine Providence, whicn ensures that human activity tends towards harmony. If that fails, and a laissez-faire economy does in fact produce unsustainable pollution, his whole case collapses.

Of course, it’s possible to salvage a version of laissez-faire in the way suggested by Coase, using newly created property rights. But this requires the admission that property rights are a socially constructed set of rules, enforced by coercion, rather than a category inherent in the natural relationship between people and things. It’s precisely this admission that propertarians have been unwilling/unable to make, and why they still rely on magical thinking like that displayed by Bastiat.

Thanks to everyone who the first seven chapters of my book-in-progress, Economics in Two Lessons. I’ve tried to think about all of them and respond to as many as possible, but I’m seeking comments from quite a few sources and may have missed some. Feel free to remind me if you think you have a point that’s been overlooked.,

I’ve just posted a draft of Chapter 8:Unemployment. This is one of the most important chapters in the book where I confront a central error in both Hazlitt and Bastiat – the implicit assumption that full employment is the norm in a market economy. So,

The book so far is available
Table of Contents
Introduction.
Chapter 1: What is opportunity cost?
Chapter 2: Markets, opportunity cost and equilibrium
Chapter 3:Time, information and uncertainty
Chapter 4:Lesson 1: Applications.
Chapter 5: Lesson 1 and economic policy.
Chapter 6: The opportunity cost of destruction
Chapter 7: Property rights, and income distribution

Feel free to make further comments on these chapters if you wish.

Thanks to everyone who the first eight chapters of my book-in-progress, Economics in Two Lessons. I’ve found the comments on Chapter 8 valuable, but haven’t yet found time to edit in response to them. Soon, I hope!

In the meantime, I’ve posted a draft of Chapter 9: Market Failure. Comments, criticism and praise are welcome.

The book so far is available
Table of Contents
Introduction.
Chapter 1: What is opportunity cost?
Chapter 2: Markets, opportunity cost and equilibrium
Chapter 3:Time, information and uncertainty
Chapter 4:Lesson 1: Applications.
Chapter 5: Lesson 1 and economic policy.
Chapter 6: The opportunity cost of destruction
Chapter 7: Property rights, and income distribution
Chapter 8:Unemployment

Thanks to everyone who commented on the first nine chapters of my book-in-progress, Economics in Two Lessons.

Here’s a draft of Chapter 10: Market failure -Externalities and pollution. Comments, criticism and praise are welcome.

The book so far is available
Table of Contents
Introduction.
Chapter 1: What is opportunity cost?
Chapter 2: Markets, opportunity cost and equilibrium
Chapter 3:Time, information and uncertainty
Chapter 4:Lesson 1: Applications.
Chapter 5: Lesson 1 and economic policy.
Chapter 6: The opportunity cost of destruction
Chapter 7: Property rights, and income distribution
Chapter 8:Unemployment
Chapter 9: Market Failure

Feel free to make further comments on these chapters if you wish.

Thanks to everyone who commented on the first ten chapters of my book-in-progress, Economics in Two Lessons.

Here’s a draft of Chapter 11: Market failure: Information, uncertainty and financial markets
. Comments, criticism and praise are welcome.

Earlier draft chapters are available. These aren’t final versions, as I am now editing the entire manuscript, but you can read them to see where the book is coming from.

Table of Contents
Introduction.
Chapter 1: What is opportunity cost?
Chapter 2: Markets, opportunity cost and equilibrium
Chapter 3:Time, information and uncertainty
Chapter 4:Lesson 1: Applications.
Chapter 5: Lesson 1 and economic policy.
Chapter 6: The opportunity cost of destruction
Chapter 7: Property rights, and income distribution
Chapter 8:Unemployment
Chapter 9: Market Failure
Chapter 10: Market failure -Externalities and pollution.

Feel free to make further comments on these chapters if you wish.

Thanks to everyone who commented on the first twelve chapters of my book-in-progress, <em>Economics in Two Lessons</em>.

Here’s a draft of Chapter 13 on Redistribution

Comments, criticism and praise are welcome.

<!–more–>

Earlier draft chapters are available. These aren’t final versions, as I am now editing the entire manuscript, but you can read them to see where the book is coming from.

<a href=”https://www.dropbox.com/s/ilqwwru858rihrl/QuigginTwoLessonsDraftTOC.pdf?dl=0″>Table of Contents</a>
<a href=”https://www.dropbox.com/s/d8x2dp5sbxi70er/QuigginTwoLessonsIntroductionRevised.pdf?dl=0″>Introduction</a&gt;.
<a href=”https://www.dropbox.com/s/ao6s4jaejbrzap1/QuigginChapter1Revised.pdf?dl=0″>Chapter 1: What is opportunity cost?</a>
<a href=”https://www.dropbox.com/s/r1k8iqcpeboosbh/QuigginChapter2Revised.pdf?dl=0″>Chapter 2: Markets, opportunity cost and equilibrium</a>
<a href=”https://www.dropbox.com/s/x4umnbwj4kmihd6/QuigginChapter3Revised.pdf?dl=0″>Chapter 3:Time, information and uncertainty
</a><a href=”https://www.dropbox.com/s/s2fkdwmbmje6fdo/QuigginChapter4Draft.pdf?dl=0″>Chapter 4:Lesson 1: Applications</a>.
<a href=”https://www.dropbox.com/s/pmml30mkozzj9j5/QuigginChapter5Draft.pdf?dl=0″>Chapter 5: Lesson 1 and economic policy</a>.
<a href=”https://www.dropbox.com/s/44bvl01adcv2fte/QuigginChapter6Draft.pdf?dl=0″>Chapter 6: The opportunity cost of destruction</a>
<a href=”https://www.dropbox.com/s/23d7veamse5wnde/QuigginChapter7Draft.pdf?dl=0″>Chapter 7: Property rights, and income distribution</a>
<a href=”https://www.dropbox.com/s/eoc19utnfhvtk47/QuigginChapter8Draft.pdf?dl=0″>Chapter 8:Unemployment</a>
<a href=”https://www.dropbox.com/s/ovvuu5kzgc7f33t/QuigginChapter9Draft.pdf?dl=0″>Chapter 9: Market Failure</a>
<a href=”https://www.dropbox.com/s/00menn8garip6y3/QuigginChapter10Draft.pdf?dl=0″>Chapter 10: Market failure -Externalities and pollution.</a>

<a href=”https://www.dropbox.com/s/7815grsyp24nfuf/QuigginChapter%2011%20%20Market%20failure.pdf?dl=0″>Chapter 11: Market failure: Information, uncertainty and financial markets</a>

<a href=”https://www.dropbox.com/s/seojgihd4mrkcrq/QuigginChapter%2012Draft.pdf?dl=0″>Chapter 12 on Predistribution</a>

Feel free to make further comments on these chapters if you wish.

My long-running book-in-progress, Economics in Two Lessons is nearly done. I have a nearly complete manuscript, and am hoping for news from the publisher soon. Thanks to everyone who commented on the first 13 chapters.

Here’s a draft of Chapter 14: Policy for full employment. Two more chapters to come after this

Comments, criticism and praise are welcome.

Earlier draft chapters are available. These aren’t final versions, as I am now editing the entire manuscript, but you can read them to see where the book is coming from.

Table of Contents
Introduction.
Chapter 1: What is opportunity cost?
Chapter 2: Markets, opportunity cost and equilibrium
Chapter 3:Time, information and uncertainty
Chapter 4:Lesson 1: Applications.
Chapter 5: Lesson 1 and economic policy.
Chapter 6: The opportunity cost of destruction
Chapter 7: Property rights, and income distribution
Chapter 8:Unemployment
Chapter 9: Market Failure
Chapter 10: Market failure -Externalities and pollution.

Chapter 11: Market failure: Information, uncertainty and financial markets

Chapter 12 on Predistribution

Chapter 13 on Redistribution

Feel free to make further comments on these chapters if you wish.

My long-running book-in-progress, Economics in Two Lessons is nearly done. Thanks to everyone who commented on the first 14 chapters.

Here’s a draft of Chapter 15: Monopoly and the Mixed Economy. Only one more chapter to come after this

Comments, criticism and praise are welcome.

Earlier draft chapters are available. These aren’t final versions, as I am now editing the entire manuscript, but you can read them to see where the book is coming from.

Table of Contents
Introduction.
Chapter 1: What is opportunity cost?
Chapter 2: Markets, opportunity cost and equilibrium
Chapter 3:Time, information and uncertainty
Chapter 4:Lesson 1: Applications.
Chapter 5: Lesson 1 and economic policy.
Chapter 6: The opportunity cost of destruction
Chapter 7: Property rights, and income distribution
Chapter 8:Unemployment
Chapter 9: Market Failure
Chapter 10: Market failure -Externalities and pollution.

Chapter 11: Market failure: Information, uncertainty and financial markets

Chapter 12 on Predistribution

Chapter 13 on Redistribution

Chapter 14: Policy for full employment.

Feel free to make further comments on these chapters if you wish.

Nearly seven years after I started work, here’s the final draft chapter from my book-in-progress, Economics in Two Lessons. Thanks to everyone who commented on the first 15 chapters and encouraged me in the project as a whole.

I’ve had quite a few amusing snarks on Twitter to the effect that 16 chapters and 90 000 words is an awful lot for just two lessons.  That’s true and yet there are even more topics I wanted to cover. In particular, I wrote quite a bit on health and education but have had to omit most of it for space reasons. Still, if anyone wants to point out critical omissions, now’s the time.

Comments, criticism and praise are welcome. I’m also on the lookout for telling graphs, insightful illustrations and apt quotations.

Earlier draft chapters are available. These aren’t final versions, as I am now editing the entire manuscript, but you can read them to see where the book is coming from.

Table of Contents
Introduction.
Chapter 1: What is opportunity cost?
Chapter 2: Markets, opportunity cost and equilibrium
Chapter 3:Time, information and uncertainty
Chapter 4:Lesson 1: Applications.
Chapter 5: Lesson 1 and economic policy.
Chapter 6: The opportunity cost of destruction
Chapter 7: Property rights, and income distribution
Chapter 8:Unemployment
Chapter 9: Market Failure
Chapter 10: Market failure -Externalities and pollution.

Chapter 11: Market failure: Information, uncertainty and financial markets

Chapter 12 on Predistribution

Chapter 13 on Redistribution

Chapter 14: Policy for full employment

Chapter 15: Monopoly and the Mixed Economy.

Feel free to make further comments on these chapters if you wish.

I’m going to leave these draft chapters online for the moment, but my publisher has asked that they be taken down once the manuscript is approved and the book goes to press. The final version should be available in print and online form at a modest “trade” price, rather than that of an academic text.

… least for me. Princeton University Press has agreed to publish my book, Economics in Two Lessons: Why Markets Work and Why they can Fail so Badly. I’ve been working on it for seven years, but it’s finally done. It should be published in the first half of 2019.

Stay tuned for news on a possible Australian edition.

Nearly seven years after I started, I’ve finally submitted the manuscript of Economics in Two Lessons to Princeton University Press. There’s still a lot of work to be done in turning it into a published book, and some changes are still needed, but this is as close to a milestone as I’m going to get.

Over the fold are the Acknowledgements. As I mention, I’m sure to have omitted someone, so if you have contributed comments and your name is missing, please point this out. Also, if there’s anyone commenting under a pseudonym who’d like me to use their real name, or vice versa, I’ll be happy to make the change.

The idea for this book was suggested to me back in 2011 by Seth Ditchik, my publisher at Princeton University Press, encouraged by PUP Director Peter Dougherty. Like many books, it was a long time in the writing, so long that both Seth and Peter had moved on by the time I finally had my ideas straight. Sarah Caro, who picked up the project in 2016, gave me the encouragement and prodding I needed to turn my scrappy draft into a final manuscript. I thank Seth, Peter and Sarah for making this book happen.

I thank Roger Backhouse and another anonymous reader for PUP for their enthusiastic reaction to the book and useful suggestions for improvements. I also received valuable comments and positive feedback from academic colleagues including Max Corden, Simon Grant, Raja Junankar, Jacob Hacker and Flavio Menezes.

In addition to these traditional sources of feedback, I posted excerpts from the book on my blog johnquiggin.com and on the academic group blog crookedtimber.org. I got so many useful responses in different media, some under pseudonyms, that I am sure to miss some. Undeterred by this, I will thank ‘Anarcho’, ‘Anarcissie’, Rob Banks, Stephen Bartos, Jim Birch, Graeme Bird, Mark Brady, ‘ccc’, ‘CDT’, ’DCA”, ‘Cervantes’, Harry Clarke, Paul Davis, Tim Dymond, ‘Equalitus’, Kenny Easwaran, Geoff Edwards, Mike Furlan, Mike Haines, Christian Haesemeyer, Nicholas Haines, Nigel Harden, H. Horan, Sebastian Holsclaw, Hugo, ‘Ikonoclast’, ’J-D’, ‘Keshav’ Ian Kirkegaard, ‘LFC’, Peter Ludemann, Greg McKenzie, Robert Merkel, Zoe Mithen, ‘Nastywoman’ Mark Nelson, ‘Newtownian’, Peter T, ‘Plasmaatron’, Philip, Greg Pius, Quentin Reynolds, ‘Richie Rich’, David Richardson, G.B. Robinson, ‘Sandwichman’, Matthew Smedberg, Scott P.,Simon, Smith, ‘stostosto’, ‘Tabasco’, Val, Robert Vienneau, Bruce Wilder and James Wimberley, with apologies to those I’ve inevitably left out.

Special thanks go to three readers. My longstanding colleague David Adamson, gave me comments on all the chapters. Mike Huben read and commented in detail on all the chapters and also pointed me to useful links on his Critiques of Libertarianism site http://critiques.us/index.php?title=Critiques_Of_Libertarianism. Most of all, my beloved wife and colleague Nancy Wallace brought both her training as an editor and her skills as a critical reader to bear on the book, catching lots of errors and never letting me get away with a sloppy argument. Without her love and support, I could never have finished this book.

The publication date for my new book, Economics in Two Lessons, is set for May 2019. Until then, I’m putting extracts up on a Facebook page I’ve set up. Here’s the first one, part of the Introduction.