On the Facebook page, another extract from my book Economics in Two Lessons, due out next year.

That’s the latest post on the Facebook Page for my forthcoming book, Economics in Two Lessons

The latest extract from my forthcoming book, Economics in Two Lessons

’ve just sent the final manuscript of Economics in Two Lessons back to Princeton University Press. I’ll have to correct the proofs, but apart from that, my work here is done.

US publication is currently scheduled for May 2019, hopefully with an Australian edition to follow. I’ve set up a Facebook page (see below) and have been posting extracts regularly.

Economics in Two Lessons Facebook Page: https://www.facebook.com/EconomicsInTwoLessons/?modal=admin_todo_tour

This story about the four-hour abalone fishing season in WA is reminiscent of a number of similar cases discussed in my soon-to-be-published book, Economics in Two Lessons (extract over the fold). However, it turns out to be something of a special case: a recreational fishery where economising on effort isn’t really relevant, and where the activity is culturally significant, mainly for people of Asian background. In these circumstances, a short season, with open access, makes good sense.

Extract from Economics in Two Lessons

Fisheries provide another example of the importance of opportunity costs, and what prices and markets can tell us about them.

The proverbial advice ‘there’s plenty more fish in the sea’ reflected what seemed, until modern times, to be an inexhaustible abundance. The vastness of the oceans, the proverbial difficulty of catching fish and the reproductive capacity of most fish species made it seem that, no matter how many fish might be caught in one season, there would be just as many to catch in the next.

The industrialization of fishing in the late 19th century changed all that. Steam powered vessels could travel further, and were independent of wind and currents. The development of factory ships allowed catches to be processed on board, so that voyages could be longer. These were followed in the 20th century by new trawling techniques, longline fishing, electronic navigation, radar and sonar systems. Catch rates soared and then, predictably, crashed.

With the slow reproduction rates typical of mammals, and the misfortune of being valuable sources of lighting oil, whales were among the first species to be hunted to the edge of extinction. The right whale (supposedly so-called because it was the ‘right’ whale to catch) was almost extinct by the 1930s, with the result that hunting right whales was banned worldwide in 1937. Even so, nearly 70 years later both the North Atlantic and North Pacific right whales are critically endangered, with populations still in the hundreds.

Fish species soon followed. The decline of the Atlantic northwest cod fishery was typical. Catches rose steadily over the first half of the 20th century, reaching a peak in the 1960s. Then came a sharp decline, as stocks crashed. This decline did not, at least initially, produce a decline in fishing effort. Rather, efforts were intensified in an attempt to maintain declining incomes.

By 1992, catches had fallen almost to zero, and it was estimated that only 1 per cent of the original stock remained. The Canadian government imposed a moratorium, originally intended to be temporary. As with the right whales however, the damage was too severe to be remedied by a temporary respite. More than twenty years later the moratorium is still in place. There are some limited signs of recovery in fish populations, but the resumption of commercial fishing is still a long way off. The same story has been repeated in fisheries all around the world with minor variations.

Thinking in terms of opportunity cost makes the reason clear. If a landowner fells a tree and sells the timber, the opportunity cost includes the return that might have been gained by letting the tree grow for another year. But catching a fish has no such opportunity cost for the fisher. Left in the sea, it might have grown and reproduced, increasing future catches. But for any individual fisher, thinking about whether to cast the net one more time, fish that are not caught now are gone forever.

Some other fisher might catch them in the future, but that is not part of the individual’s opportunity cost. The opportunity cost for an individual fisher includes the time and effort spent fishing, the cost of boats, fuel, nets and so forth, but not the impact on the fishing stock.

In these circumstances, once technology advances far enough to permit it, overfishing is virtually inevitable. A wide range of responses has been tried in an attempt to prevent overfishing: the number of boats in a fishery has been limited, the gear they can use has been restricted, and allowable fishing seasons have been shortened.

These measures have almost invariably proved ineffective. If the number of boats is limited, fishers buy bigger boats. If gear restrictions are imposed, new types of gear are developed to evade them.

If the open season is limited, effort is increased, and boats put to sea in good weather or bad, with the result that overfishing continues. The response is commonly to shorten the season still further. As Laurence White of New York University’s Stern School of Business observes:

these input limitations — especially the limits on the number of calendar days for fishing — have led to “fishing derbies” or “races for the fish”, in which fishermen try feverishly to maximize the amount of fish harvesting that they can accomplish within the limited time period available to them.
The contraction of the Alaska halibut season is a “poster child” for this process. From an open season of over 150 days in the early 1970s, the season length shrank to only 47 days by 1977 and then collapsed to an average of only 2-3 days per year between 1980 and 1994. Similarly, the collapse of the surf clam fishery in the Mid-Atlantic region caused a progressive shortening of allowable fishing time until, in 1990, a surf clam vessel was permitted to fish only 6 hours every other week.

Even this is not the most extreme case. The spawn of Alaska herring is highly valued for its use in sushi. During the harvesting season in 2017, fishers took three hours and 20 minutes to catch half the year’s quota. A second opening lasting only 15 minutes exhausted the rest. Some fishers who had trouble starting their boats missed the entire event.

Today I sent off the corrected proofs of Economics in Two Lessons to the publishers, Princeton University Press. They won’t look at it until New Year, but it doesn’t matter. The book is done, and I can sit down to Christmas dinner with the family knowing it’s off my hands.

That’s the headline given to my latest piece in Inside Story

Here’s the opening para

Two hundred years after the birth of Karl Marx and fifty years after the last Western upsurge of revolutionary ferment in 1968, the term “monopoly capitalism” might seem like a relic of outmoded enthusiasms. But economists are increasingly coming to the view that monopolies, and associated market failures, have never been a bigger problem.

and the conclusion

The problems of monopoly and inequality may seem so large as to defy any response. But we faced similar problems when capitalism first emerged, and Western countries came up with the responses that created the broad-based prosperity of the mid twentieth century. The internet, in particular, has the potential to enhance freedom and equality rather than facilitate corporate exploitation. The missing ingredient, so far, has been the political will.

I’ve just published a piece in Aeon (an excellent and free online magazine) drawing on the analysis in my (about to be published) book Economics in Two Lessons. I make the case that carbon pricing, whether through a tax of an emissions trading scheme, is the most cost-effective way to stabilize the global climate. Moreover, it’s straightforward to offset any adverse effects on low-income earners, displaced workers and others.

That raises the obvious question: if carbon pricing is so good, why is it so hard to implement, compared to less efficient alternatives like mandatory renewable targets. One factor, which I discuss, is that the creation of property rights over previously open-access resources creates obvious, and often powerful losers.

I was limited by space, so I couldn’t discuss the more puzzling problem of why regulations are more politically salable than prices even in the absence of income effects.

I’ve just heard from Princeton University Press that Economics in Two Lessons will be translated into Chinese. The publisher is  Ginkgo (Beijing) which has had some big successes with recent translations.

Apparently, the book was well received at the London Book Fair, which is a trade event focusing on deals like this, so there may be more translations coming.

PUP has offered me the option, when the translation is prepared, to look at a sample. If there are any readers of this blog who are also readers of Chinese (it will be in Simplified not Traditional characters), I’d welcome an informal evaluation

The concept of opportunity cost “The opportunity cost of anything of value is what you must give up so that you can have it.” is the central theme of my book Economics in Two Lessons, due out in the US on 19 April and hopefully in Australia soon after that. My central claim is that two lessons based on opportunity cost and their relationship to market prices provide a framework within which almost any problem in economic policy can usefully be considered.

That’s not the way economics is usually taught (opportunity cost gets a brief nod before the focus moves on to supply and demand). So, I was impressed to see Bill Shorten use the term in relation to climate change inaction. Not only that but he used it correctly! Here’s Bill, quoted in the SMH

Opposition Leader Bill Shorten defended the new policy by urging voters to consider the cost of inaction on climate change, saying “There is a huge opportunity cost when we don’t take action,”

Perhaps I shouldn’t be surprised. Labor’s Shadow Assistant Treasurer is Andrew Leigh, a fine economist who has had nice things to say about my book. And Labor has been listening to Richard Holden, who is, I think, the brightest young economist we have right now.

Surprising or not, it’s great to see a return of economic literacy to public debate, after years dominated by vapid slogans.

Two big pieces of news for me today. This morning I got the first physical copy of my book Economics in Two Lessons.

Then, I got the news that, for the first time in my career, I’ve had an article accepted in Econometrica, the top theoretical journal in economics. It’s full of arcane maths, drawing heavily on the expertise of my co-author Ani Guerdjikova, but the key implication is simple. If people aren’t equally good at predicting movements in asset prices, restrictions on the set of assets available to them may improve economic welfare. This undermines the general presumption that financial deregulation will be beneficial.

All in all, a good day!

Economics in Two Lessons is coming out in the US next week. That gives me an excuse to share some of the nice things people have said about it. I’m particularly pleased with this one from Jacob Hacker, whose own work I admire very much.

With apologies to Isaiah Berlin, Quiggin is a foxy hedgehog: He knows two big things, and these twin lessons—about the virtues and limits of markets—sustain a pioneering, persuasive, and even passionate case for democracy and the mixed economy. Make room for two lessons in your mind, and on your bookshelf.”—Jacob S. Hacker, coauthor of American Amnesia: How the War on Government Led Us to Forget What Made America Prosper

After eight years, Economics in Two Lessons will be officially published in a few days. According to Amazon, it’s now #1 in Hot New Sellers in microeconomics.

https://www.amazon.com.au/gp/new-releases/digital-text/2523939051/ref=zg_bsnr_nav_kinc_4_2523923051

I don’t know exactly what that means, but it sounds good.

I’ll try to follow up with more general news soon, but for now, I’d appreciate anything you could do to spread the word about my book.

I

It’s now April 23 in the US, the official release day for Economics in Two Lessons. That’s nearly eight years after I started work on the book. I think it’s been worth the wait. The painful process has produced something better than I originally planned, with plenty of help from commenters here and elsewhere.

According to Amazon, the book is often bought along with Crashed, by Adam Tooze, which is great company to be in.

[Begin plug] If you’ve read and liked the book as it appeared here, this would be a great time to contribute a quick review [End plug]

Economics In Two Lessonsis now available in Australia from Footprint books.

You are here: Home / !Post Type / Author Interviews / John Quiggin on Economics in Two Lessons

April 23, 2019

Since 1946, Henry Hazlitt’s bestselling Economics in One Lesson has popularized the belief that economics can be boiled down to one simple lesson: market prices represent the true cost of everything. But one-lesson economics tells only half the story. It can explain why markets often work so well, but it can’t explain why they often fail so badly—or what we should do when they stumble. As Nobel Prize–winning economist Paul Samuelson quipped, “When someone preaches ‘Economics in one lesson,’ I advise: Go back for the second lesson.” In Economics in Two Lessons, John Quiggin teaches both lessons, offering a masterful introduction to the key ideas behind the successes—and failures—of free markets. Here, he explains why two-lesson economics means giving up the dogmatism of laissez-faire as well as the reflexive assumption that any economic problem can be solved by government action.

How did you come to write this book?

The idea was to offer a progressive response to Henry Hazlitt’s Economics in One Lesson, a free-market tract that remains in print seventy years after its initial publication. I originally intended it to focus on microeconomic ‘market failures’ like monopoly and air pollution. However, perhaps because the title claimed so much, the project grew to encompass the whole of economics, including macroeconomic issues such as unemployment and the business cycle, and the fundamental question: Who gets what?

What  is the core idea of the book ?

The core idea of the book is the concept of opportunity cost, which I define as follows:

The opportunity cost of anything of value is what you must give up so that you can have it.

Opportunity cost applies at the social level as well.

The social opportunity cost of anything of value is what you and others must give up so that you can have it.

Sometimes but not always, individual and social opportunity cost align as a result of what Adam Smith called the ‘invisible hand’ of the market. The core of economic policy is to determine when social and private opportunity costs differ, and what can be done about it. At least in a qualitative sense, most of the issues in economic policy can be understood with anapplication of opportunity cost reasoning. The technical analysis that forms the basis of most economics courses is only needed if you want to obtain quantitative estimates.

What is the ‘first lesson’ ?

Hazlitt doesn’t spell out his ‘one lesson’ properly, saying only that it is necessary to trace all the economic effects of any act of policy all the way to their conclusions, rather than relying on immediate benefits and surface appearances. This is a restatement of the title of Hazlitt’s main inspiration, Bastiat’s classic nineteenth-century work ‘That which is seen, and unseen’. Hazlitt implicitly assumes that once all the consequences of any act or policy are taken into account, the opportunity costs of government action to change economic outcomes always exceed the benefits.

The central idea underlying the claim made by Bastiat and Hazlitt is that market prices tell us everything we need to know about opportunity costs. This isn’t always true, but the kernel of truth is embodied in Lesson One, as I call it.

Lesson One: Market prices reflect and determine opportunity costs faced by consumers and producers.

The first part of the book shows why Lesson One is so important, and gives applications to a wide range of issues.

So what is Lesson Two ?

Economists have long known that, under conditions of ‘market failure’, market prices may not reflect opportunity costs, and that in these circumstances there is a case for government action to yield improved outcomes. The classic examples include air pollution and other ‘externalities’, monopoly and the exercise of market power, information problems and public goods such as scientific research. This leads directly to my Lesson Two.

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

I originally planned a book in which Lesson Two would have been all about market failure; that book would have been finished much sooner. As I worked on the book, though, I felt dissatisfied. I started to think more about the problems of unemployment and growing inequality, and realised that these were both examples of Lesson Two.

In a recession or depression, markets, and particularly labor markets, don’t properly match supply and demand. This means that prices, and particularly wages reflect or determine opportunity costs.  Looking hard at the data, I concluded that a market economy is in recession, in this sense, as often as not.

As regards the distribution of income and wealth, the market outcome depends on the system of property rights from which it is derived.  The choices that determine property rights are subject to the logic of opportunity costs just as much as the choices made within a market setting by firms and households. Over recent decades, changes to property rights of all kinds have consistently driven society in the direction of greater inequality.

So, we need Economics in Two Lessons.

Are there really only two lessons, or are there many?

The ‘two lessons’ set out the principles for reasoning about prices and opportunity cost. Any number of implications can be drawn about specific economic issues. Among the lessons drawn in the book are:

* There is such a thing as a free lunch.
* If you want to help poor people, give them money.
* There is no ‘silver lining’ to the destruction caused by war and natural disasters.
* Advertising generally makes us worse off.
* A carbon price would be the best response to climate change (but it’s unlikely to happen any time soon).

There’s plenty more in the book, and plenty more yet to be written.

Reviews of Economics in Two Lessons are starting to come in. Here’s one, favorable but not rapturous from Diane Coyle. Another, from David Gordon at the Mises Institute is, not surprisingly, more negative.

The main (though not the only) complaint is that I treat Hazlitt as a One Lesson neoclassical economist. More precisely, in relation to opportunity cost “[Quiggin] applies the concept as it is used in neoclassical economics, but Hazlitt was an Austrian and does not use the concept in this way.” In particular, Gordon complains that I invoke “neoclassical equilibrium” a concept rejected by Austrians.

I have a couple of responses to this.

First, for the topics Hazlitt discusses, and those in my treatment of Lesson 1, there’s no obvious difference between the Austrian and neoclassical views. Both rely on the idea that market prices reflect opportunity cost, and that failure to recognise this leads to mistaken government interventions.

Here’s a piece quoted by Gordon as representative of Hazlitt’s approach

“Yet it ought to be clear that a minimum wage law is, at best, a limited weapon for combating the evil of low wages, and that the possible good to be achieved by such a law can exceed the possible harm only in proportion as its aims are modest. The more ambitious such a law is, the larger the number of workers it attempts to cover, and the more it attempts to raise their wages, the more likely are its harmful effects to exceed its good effects.”

There’s nothing here, as far as I can see that couldn’t have been written by an orthodox neoclassical economist like, say, Milton Friedman.

In terms of the history of economic thought, I don’t think Gordon is right in his characterization of Hazlitt as rejecting neoclassical economics. Here’s a long piece written in the early 1970s in defence of capitalism (which was then at a low point in terms of public confidence. Hazlitt observes that

“When production is in equilibrium there tends to be approximately the same profit margin, relative costs and risks considered, in the production of each of the thousands of different commodities and services.

and proceeds to give a thoroughly neoclassical discussion of how equilibrium is reached. Later he endorses JB Clark’s marginal productivity ethics, a position too neoclassical even for many in the Chicago school. He uses “entrepreneur” as a synonym for “capitalist”, and doesn’t even give nod to Austrian ideas about creative destruction and the like.

Doubtless, you could find quotes from Hazlitt that are more Austrian in their flavor. He wasn’t an economic theorist, primarily concerned with consistency, but a journalist and advocate, making arguments for free markets, and drawing on a variety of sources to do so.

I’ve done my best to be fair to Hazlitt, and point out where he was right as well as where he was wrong. Despite that, the Mises Institute tweet linking to Gordon’s review described my book as a “hit piece”. I hope readers, including those who agree with Hazlitt more than me, will make up their own minds about this.

Separately, I had a run-in with some Mises fans on Twitter over my passing observation that, while not themselves fascists, Mises and Hayek allied themselves with fascists (Dollfuss and Pinochet respectively) against social democrats. The discussion was an exercise in talking past one another – the Mises fans quoted passage after passage in which Mises criticised fascists, while I quoted passages where he said that, nevertheless, they were a force for good in the 1920s and 1930s.

I’ve got quite a few events coming up in the next couple of weeks.

* On 13 and 14 May, I’m running a workshop at the University of Queensland on Epistemic & Personal Transformation:
Dealing with the Unknowable and Unimaginable. Details here.

* On Thursday 16 May, I’ll be at ANU for the official Australian launch of Economics in Two Lessons.  Details are here. If campaigning permits, Andrew Leigh will say a few words about the book. There will be a launch at Avid Reader in Brisbane in late June (date tbd), and in Sydney and Melbourne a bit later

* On Wednesday 22 May, I’ll be delivering the Keith Hancock lecture for the Academy of the Social Sciences in Australia, at the University of Queensland. Topic is The Future of Work. Details here.

* I’m doing a number of radio interviews related to Economics in Two Lessons. I talked to Radio SER in Sydney yesterday. On Saturday 18 May, at 7:45 am, I’ll talk to Geraldine Doogue on Saturday extra, then on Wednesday 15 May to Steve Austin on ABC Radio Brisbane Drive.

The first proper[1] review of Economics in Two Lessons has appeared, in Inside Story. It’s by Richard Holden[2] and really gets the point of the book.

The final paras:

Chapters twelve to sixteen deal with what policymakers should do, and here Quiggin’s passion is evident. Moreover, what comes through perhaps more than anything is a sense of balance. There’s what we might want to do and then there’s what the immutable laws of economics — so neatly laid down in the preceding chapters — will let us do. Whether it’s the distribution of income, full employment, or protecting the environment, constraints exist.

But those constraints offer guidance. Quiggin notes, for instance, that “the best way to help poor people, at home and abroad, is to give them money to spend as they see fit, rather than tying assistance to particular goods and services. In other words, it is better to fix the inequitable allocation of property rights in the first place than to fix the resulting market outcome.” Whatever the topic, the framework disciplines and sharpens the policy thinking.

There is little doubt that Quiggin’s Economics in Two Lessons will be an instant classic and feature on university reading lists around the world. It should also be compulsory reading for policymakers and public commentators, who all too often lack a framework for thinking clearly about the costs and benefits of markets. The good news is that Quiggin has one — and he’s happy to share.

It’s certainly encouraging to get such a nice review first time. Fingers crossed for the next one.

fn1. There have been some brief notices in blogs, and a few critical responses from the Mises Institute, not really addressing anything in the book

fn2. Disclosure: we are friendly colleagues in the economics profession, and have discussed working together on joint research projects.

Two big book events for Economics in Two Lessons coming up this week. On Tuesday, I’ll be at Avid Reader in Brisbane, talking to Paul Barclay. On Thursday, it’s Gleebooks in Sydney, talking to Peter Martin.