A couple of reviews of Economics in Two Lessons have come out, from opposite ends of the political spectrum. The more interesting is Max Sawicky’s in Jacobin.

Sawicky does a great job in summarising the key ideas in the book. His is probably the best review so far for non-economists to get an understanding of the main themes.

Given the Jacobin audience, the key question is “Why should a socialist read a book about markets?” As Sawicky observes, the answer is easy for socialists in the Bernie Sanders mould – I share their views, a fact that is obvious to readers of this blog.

More generally

Quiggin’s deconstruction of Hazlitt’s “Lesson One” provides a lesson in “know your enemy” for anyone left of center. If your only instruction in economics was a principles course, this book provides an essential completion of the basic story.

More generally, Sawicky says

If your hostility to markets runs more deeply, then the mainstream theory elaborated by Quiggin provides a useful challenge.
What becomes deemphasized, when it is not glossed over entirely, is, on the one hand, the proliferation of “externalities” that bind together the interests of ostensibly disparate individuals, and on the other, our capacity (historically demonstrated) to respond effectively on a cooperative, collective level.
Economics as practiced by progressives pursues these insights, but, as I think Quiggin would agree, it has further to go. His “second lesson” is a crucial step in this journey.

I’m very grateful for this review, which gives me food for thought as I think about my next big project.

The view from the right is predictably less favorable. Writing in the Review of Austrian Economics (paywalled), Patrick Newman complains that I have treated Henry Hazlitt, the author of Economics in One Lessons as an advocate of Chicago school neoclassical economics, putting forward the idea that equilibrum market prices equal opportunity costs. This is contrasted with the Austrian approach, which rejects equilibrium thinking. The same criticism was made a while ago by David Gordon and I responded by quoting Hazlitt himself

“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.

Hazlitt was an eclectic thinker rather than an economic theorist, but I think I’m entirely justified in regarding his arguments as being based on equilibrium thinking.

Another review of Economics in Two Lessons has come out. It’s by David Henderson and appears in Regulation, published by the Cato Institute (link to PDF). There’s a blog post with extracts here.

Unsurprisingly, given the source, it’s mainly critical of the analysis, but still has some kind words about the book. This para gives the flavour

Quiggin is a good writer who lays out much of the economics well. His analysis of rent control and price controls in general is a thing of beauty. Along the way, though, he makes small and big mistakes. He also shows by omission that the book, to be complete, badly needs a third lesson, on why government works so badly even when it intervenes in cases where markets work badly.

Tyler Cowen made the same point about a “third lesson” on “government failure” in his brief notice of the book. Of course, I discuss specific failures of government policy, such as rent control and the use of military power to generate economic benefits, both of which are noted by Henderson

The idea of “government failure” isn’t just that governments sometimes get things wrong – that’s true of all kinds of decision. Rather, it’s the claim, central to public choice theory, that government actions are driven by concentrated interest groups, rather than by ideas or broad social classes.

There’s some truth to this idea, as I note when I talk about regulatory capture in the book. But overall, I don’t accept it. In our current situation, we need more government action, not less.

I did an interview about Economics in Two Lessons with Brisbane based economist Gene Tunny. You can listen to it here.

With much of Australia suffering catastrophic fires and the beginning of a new war with Iran, lots of people are thinking about the idea that such disasters are good for the economy, because of the work generated in rebuilding homes, producing war materials and so on.  In my book Economics in Two Lessons, I explain why this is wrong (this is one point where I agree with Henry Hazlitt’s Economics in One Lesson. Here’s a link to  Chapter 6: The opportunity cost of destruction

US President Eisenhower got it right when he said

Every gun that is made, every warship launched, every rocket fired, signifies in the final sense a theft from those who hunger and are not fed, those who are cold and are not clothed.

And the same is true for the destruction visited on us by Morrison, Trump, Murdoch and the rest of the global denial industry. The workers who will be needed to rebuild homes, farms and infrastructure could instead be employed producing useful new things. Those forgone alternatives are the opportunity cost of destruction

Ross Gittins has a very nice piece in the SMH today, with some kind words about Economics in Two Lessons which he recommends as “the best book to introduce you to economics”. Ross says that the crucial concepts in economics are: Opportunity cost (of course!), the Invisible Hand (roughly, my Lesson One), imperfect competition, market failure and externalities (the microeconomic component of my Lesson Two).

His final para gives the lie to those who imagine economists oppose action to save the global enviroment

As for external costs (“negative externalities”), Quiggin notes that the leading British economist Lord Nicholas Stern has described climate change as “the biggest market failure in history”. So now you know why so many of the nation’s economists are appalled by Morrison’s dereliction.

Following the release of Economics in Two Lessons, Sophie Roell of Five Books invited me to do an interview. The Five Books format is that the interviewee (usually an author) nominates the best five books (not including their own) on a given topic. My topic was the Best Books on Learning Economics, with the explanation

these are not textbooks for students studying economics. They’re books for the intelligent, general reader to learn what economics is about—and what the important issues are—without doing any actual [technical] economics.

I’ve picked books by Milton Friedman, Paul Ormerod, Tony Atkinson, Thomas Piketty, and Abhijit Banerjee & Esther Duflo. The interview is here.

Here’s a review of Economics in Two Lessons, by Nikki Dumbrell in the Australian Journal of Agricultural and Resource Economics. It’s the first in an academic journal, and captures all the main points nicely.

Free market economics (or ‘One Lesson Economics’, Hazlitt 1946) refers to the idea that markets, left alone with very minimal intervention, will achieve equilibrium and as such allocate resources to their most valued use. This idea is persistent. Indeed, famous schools of economic thought (and individuals’ careers) are built on this idea. Economics in Two Lessons, by Professor John Quiggin (Distinguished Fellow of the Australasian Agricultural and Resource Economics Society) recognises the importance of One Lesson economics but challenges the completeness of this way of thinking. He draws readers’ attention to where and how markets might be imperfect or might not exist and asks readers to consider how One Lesson economics might perform in these scenarios. The short answer is ‘poorly‘.

To tease out the shortfall of One Lesson economics and the importance of Two Lesson economics, the central theme of the book is opportunity costs. ‘The opportunity cost of anything of value is what you have to give up in order to get it‘ (p.3). The book is divided into two parts: Lesson One and Lesson Two. Each part includes an introduction to the lesson and subsequent chapters with examples. Quiggin summarises Lesson One as ‘market prices reflect and determine opportunity costs faced by consumers and producers’ (p.7). Lesson Two follows and broadens the scope from consumers and producers to society, ‘market prices don’t reflect all the opportunity costs we face as a society’ (p.8). In addition, Lesson Two extends the definition of opportunity costs to say that the opportunity cost of something of value (to you) includes not only what you must give up, but what others must give up as well.

The 70 years between the publication of Hazlitt’s (1946) book and this book has provided a number of real‐world examples for Quiggin to debate the value of One Lesson and Two Lesson economics in a critical analysis of market mechanisms and economic policy. For example, Quiggin draws on the Great Moderation, the Global Financial Crisis, increasing inequality, episodes of mass unemployment (for which most examples are accompanied by empirical evidence from the United States), and multiple forms of pollution such as chlorofluorocarbons linked to ozone depletion and climate change. The book balances this evidence of market failures with history of economic thought to deliver a well‐rounded understanding of the key differences between Lesson One and Lesson Two. It is important to note that the above‐listed examples relate to both microeconomic and macroeconomic issues. Quiggin points out that ‘in standard economics courses, analysis of opportunity costs, and market failure is typically confined to courses on microeconomics. This is a mistake. Lesson Two tells us that market prices don’t reflect all the opportunity costs we face as a society’ (p.152). Lesson Two also emphasises the importance of the opportunity costs of government choices, not just consumer and producer choices.

While opportunity costs are a foundation concept of economics, and an important instrument for Quiggin to illustrate how and why free markets can both succeed and fail, he also shows that it remains a concept difficult to grasp for many economists. For example, a survey of 200 delegates at the 2005 American Economic Association Annual Meeting (Ferraro and Taylor, 2005), drawn on by Quiggin, showed that only 22 per cent were able to correctly identify the opportunity cost of a decision in a hypothetical scenario. The clarity with which Quiggin writes on opportunity costs appears timely.

Another important contribution of this book is to remind readers that markets operate in a social environment. For example, property rights (that form the basis of trade in a market) are a social construct. Therefore, society and governments (not just consumers and producers) are intrinsically involved in the establishment and operation of markets. To forget or ignore this, as is often done by advocates of the free market, is detrimental.

This book has something to offer all new and long‐time students and practitioners of economics. Firstly, Quiggin’s ability to distil jargon and illustrate what can be complex concepts with real‐world examples makes this book accessible and thought‐provoking for all, regardless of any prior economic experience. Secondly, Quiggin recommends much relevant (often seminal) further reading for anyone who wishes to use this book as a launching pad to further discovery. Thirdly, as the earlier example from the 2005 American Economic Association Meeting indicated, many in the profession could use the clarity of economic thought that Quiggin offers. Ultimately, the book provides a framework to think about: (i) the challenges that arise when markets are missing or imperfect; (ii) the role for both market forces and government policy in response to economic problems; and (iii) the consequences (positive and negative) of different responses to economic problems. As we continue to face numerous complex economic problems, I hope to see this book and the ideas within it attract much attention.

I’ve got quite a few events coming up in the next ten days. I’ll be in Adelaide for the Writers Week (program here), appearing at the Pioneer Women’s Memorial Garden, King William Road on Wednesday 4 March at 2pm in conversation with Jane Goodall, on the theme the Common Good. I’ll be signing copies of Economics in Two Lessons.

I’ve fitted in two earlier events on Tuesday 3 March. At 12 noon, I’ll be talking about the economic cost of the bushfire disaster, at the University of Adelaide (Level 6, Faculty of the Professions Building, Pulteney Street). Then at 5:30, I’ll be talking about Economics in Two Lessons to the Economics Society of Australia, Marjoribanks 126 SANTOS Lecture Theatre, Level 1, Nexus Building 10 Pulteney Street, Adelaide, SA 5000

On Monday 9 March, I’ll be back in Brisbane at the Customs House for the launch of The Brisbane Dialogues, an attempt to promote civil discussion across political divides. I’ll be debating North American philosopher Stephen Hicks on the topic (suggested by me) “Postmodernism is a rightwing philosophy”. As long-time readers will recall I was making this point long before Kellyanne Conway brought it to wider attention with the idea of “alternative facts“.

As the author of a book on opportunity cost, I might be expected to be enthusiastic about the idea that trade-offs are always important in economic and policy choices. This idea is summed up in the acryonymic slogan TANSTAAFL (There Ain’t No Such Thing As A Free Lunch). In fact, however, a crucial section of Economics in Two Lessons is devoted to showing that There Is Such A Thing As A Free Lunch. It is only when all free lunches have been taken off the table that we reach a position described, in the standard jargon, as Pareto-optimal[1].

If a policy is not Pareto optimal, it’s possible to find one that is better in every respect. In the jargon, the first policy is dominated by the second.

That observation is relevant in a couple of crucial contexts. Lots of climate deniers want to claim that there is a trade off between reducing carbon emissions, through investment in renewables, and improving the living standards of poor people, by building coal-fired power stations. In reality, renewables are cheaper and more reliable than coal, and millions of poor people living near coal-fired power stations die every year from particulate pollution. Even without considering global heating, coal fired power is a dominated option.

Exactly the same is true in relation to pandemic policy. Any policy which leaves R > 1 (the pandemic keeps spreading) is dominated by stricter policies that ensure R < 1. The first policy will not only lead to continuing deaths, but it can never be relaxed. So, it will entail more economic losses in the longer run. By contrast, once the prevalence of the disease is reduced to zero, the stricter policy can be relaxed (to be slightly more realistic, it may need to be reintroduced on a temporary basis to deal with local outbreaks).

In this context, it’s striking that none of those talking about an R > 1 policy in Australia are prepared to spell out the trade-offs they envisage. That’s because any attempt to do so would expose the bankruptcy of their reasoning.

fn1. I also point out how Pareto’s economic analysis foreshadows his embrace of Fascism.

[Warning: half-formed thoughts ahead]
One of the most striking characteristics of the 21st century economy (divided into goods, human contact services and information) is that even very poor people have access to information-based services that were almost unimaginable 30 years ago. Given free wifi and a second-hand phone, someone lining up at a food bank can blog about the experience, and possibly attract readers all around the world[1]. Or they can entertain themselves with an endless supply of free books, news media, music and videos. That’s great, but it doesn’t change the fact that people in both rich and poor countries are going hungry.

Economics has traditionally been about scarcity. But now we have one part of the economy where scarcity remains dominant, and another, growing part, where it has just about disappeared. That raises a lot of different issues.

First, while we are accustomed to think of things like economic growth and inflation rates as objective facts, they are actually based on index numbers, which are the products of theoretical models. Those models don’t work well when an increasing part of the economy consists of information services that are becoming radically cheaper all the time. As a result, much of the debate about the desirability or otherwise of growth is misconceived.

A positive implication is that we can anticipate improving standards of living, because of ever-increasing access to information services, without economic growth in the 20th century sense of steadily increasing throughput of materials and energy, and correspondingly increasing environmental damage. T

A negative implication is that real incomes (that is, incomes deflated by a consumer price index) can increase, even as basic needs like food and housing become less affordable, because the price of inforamation related services is falling fast. I can’t find much that’s readily accessible on this – pointers would be appreciated. One notable fact is that the proportion of disposable income spent on food, which fell sharply between 1960 and 1998, has remained almost static since then. The price of food seems to have risen a little faster than the CPI over this period.

I haven’t talked yet about human contact services. Scarcity is just as relevant here as in the goods economy. Governments are heavily involved in funding and providing these services, and the quality of services is hard to measure. As a result, the kinds of services people get aren’t determined simply by their capacity to pay.

A question to which I don’t have an answer. Is there some way to exploit the massively increased productivity of information services to allow more, and more equal, provision of basic goods? This question underlies a lot of discussion about Universal Basic Income and similar ideas, but is rarely posed in a satisfactory way, let alone answered.

As you can tell, I’m struggling with some complicated problems here, so any thoughts welcome.

fn1. In the early days of blogging, thehomelessguy [Kevin Barbieux] did exactly this. His most recent site is here.