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Economics in Two Lessons, Chapter 6

March 22nd, 2018

Thanks to everyone who the first five chapters of my book, Economics in Two Lessons. Now here’s the draft of Chapter 6: The opportunity cost of destruction This is the last part of the book devoted to Lesson 1 Market prices reflect and determine opportunity costs faced by consumers and producers. and the one where I agree mostly with Henry Hazlitt’s Economics in One Lesson. It seems particularly apposite 15 years after the beginning of the Iraq War.

As usual, I welcome comments, criticism and encouragement. I’d appreciate any comments on/ alternative suggestions for the opening quote – it’s not a perfect fit, but the best I could come up with.

The book so far is available
Table of Contents
Chapter 1: What is opportunity cost?
Chapter 2: Markets, opportunity cost and equilibrium
Chapter 3:Time, information and uncertainty
draft of Chapter 4:Lesson 1: Applications.
draft of Chapter 5: Lesson 1 and economic policy.

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

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  1. Smith
    March 22nd, 2018 at 16:30 | #1

    Every act of creation is first an act of destruction.

    Pablo Picasso

  2. John Quiggin
    March 22nd, 2018 at 20:05 | #2


    Nice, but the opposite of what I want to say.

  3. March 23rd, 2018 at 04:44 | #3

    ” … only Kosovo could be regarded as a clear success, and even there the outcome is a weak state bitterly divided between two hostile communities, kept apart by armed peacekeepers..” This suggests an equality between them (as in Northern Ireland) that does not exist. The Serbs in the Mitrovica and other enclaves are a tiny minority, protected indeed from the vengeful Albanian-ethnic Kosovar majority by peacekeepers. (****en.wikipedia.org/wiki/Serbian_enclaves_in_Kosovo) The Mitrovicans are inordinately proud of their luck in bringing down a US stealth jet fighter.

    JQ’s case against war as an engine of technical progress is thought-provoking, though it’s nothing to do with the Hazlitt/Bastiat discussion of the glazier. But, but. War increases the overall volume of R&D in fields of military interest, which are many. It does not seem likely that Colossus say would have been built without the pressing needs of Bletchley Park. More likely, Turing, Newman, Flowers and the rest would have just produced interesting paper ideas for programmable computers. So it’s possible that the volume effect outweighs the diversion of resources (opportunity costs) and short-termism of wartime research.

    This counter-argument assumes that the peacetime volume of R&D is suboptimal. This seems very plausible, because of the high risks, large externalities and, for government-funded research, prejudice, conservatism and myopia. It’s striking that the space programmes of the 1960s required a symbolic US – USSR war to get significant resources.

    The rapid spread of vaccination was certainly helped by its adoption in the armies and navies of the Revolutionary and Napoleonic wars.

  4. Robert Banks
    March 24th, 2018 at 05:31 | #4

    The perspectives about the stimulus to economic activity arising from natural disasters and war always seem to have an air of “making the best of a bad job” about them – your comment about silver lining captures this, but not quite the haste to avoid talking about the negatives which seems to be a common feature – sort of “mustn’t grumble”, or “keep calm and carry on”.

    And the idea that wartime is in some way the greatest spur to creativity, or even more grotesquely, useful creativity (as opposed to useless art, or domestic design etc) effectively implies that the deaths of huge numbers of people is an acceptable cost of inventiveness.

    Extending this point, just what is the opportunity cost of lots of deaths which otherwise would not have occurred – even ordinary people, let alone Harry Bletchley? Its an obscene moral accounting really.

    Nice chapter.

  5. Greg Pius
    March 29th, 2018 at 06:03 | #5

    Picasso was alive at the time of French industrialization. The Eiffel Tower was built, originally as a temporary structure, to showcase French industrial might. At the time it was built the people of Paris fought against it due to the destruction of the city’s old landscape. Yet people, a lot of them locals, now pay to visit this structure. Joseph Schumpeter identified this as creative destruction. In economics we say that the problem of scarcity is the only real long term problem. Anything new, for example Turnball’s Snowy Hydro II, will destroy something old – in this case natural wonders to be flooded and arable land to be covered by dumped rock dug from the earth. Opportunity cost includes the costs of production but not the costs of destruction. These diseconomies or externalities are often not reflected in market prices.

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