I’ve been promising for a long time to write a new book, framed as a reply to a free-market tract Economics in One Lesson by Henry Hazlitt, published in 1946, but still in print and popular among free market advocates. Its popularity reflects the fact that it’s a reworking of Bastiat’s “What is Seen and What is Not Seen”, still one of the best statements of the case for free markets.
Bastiat’s argument is implicitly based on the concept of opportunity cost but, since the term wasn’t coined until 1914, he doesn’t use it. Neither, more surprisingly, does Hazlitt. Once this is made explicit, Hazlitt’s rather ponderous, and misleading statement of his “One Lesson”
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
can be boiled down to the much simpler statement “Market prices reflect opportunity cost”. In important respects, this is true, particularly when we consider the problem from the perspective of choices about how to allocate an individual, family or government budget. With fixed aggregate levels of public expenditure, for example, more money for the military means less for schools, and vice versa.
There are plenty of other questions about private and public decisions for which Hazlitt’s One Lesson is useful. Another example is the well-supported finding that the best way to fight poverty is to give money to poor people. This is unsurprising given that poor people themselves will usually have a much better idea of the opportunity costs they face than will those seeking to help them.
But as a general statement, Hazlitt’s One Lesson is false, which is why my working title is Economics in Two Lessons”. Lesson Two is “Market prices do not reflect all the opportunity costs we face as a society”
To someone trained in mainstream economics, as I have been, the immediate examples of this Lesson are “market failures”, such as externality, monopoly and information asymmetries. I originally planned my book to focus on these market failures, making it a somewhat idiosyncratic take on what is usually called public economics. But I kept feeling that I was missing out too much that was important: unemployment, income distribution and many other issues.
After struggling with this for a long while, I reached the conclusion that a framing in terms of opportunity cost worked to deal with the issues with which I was most concerned, and allowed for a more fundamental critique of the free market position. My central point is that, before we even consider whether a set of market prices is subject to market failures in the usual sense), it is necessary to consider
* The allocation of property rights, broadly defined to include rights to pensions and social security, obligations to pay tax and so on, and the opportunity costs associated with alternative allocations
* Whether the market outcome is a full employment equilibrium or a recession/depression. In the second case (very common, as I will argue), markets don’t properly match supply and demand, so that prices and particularly wages do not determine opportunity costs in general.
My recent posts about the nature of property reflect some of my thinking on the first point, and I’ll soon be posting about the second also. As with Zombie Economics, though less systematically, I’m planning to put up draft extracts from the book for comment and criticism.