Economics in Two Lessons, Chapter 7

Thanks to everyone who the first six chapters of my book, Economics in Two Lessons. That brings us to the end of Lesson 1: Market prices reflect and determine opportunity costs faced by consumers and producers.

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

I’ll start with a brief intro and then the draft of Chapter 7: Property rights, and income distribution

As usual, I welcome comments, criticism and encouragement.

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
Chapter 4:Lesson 1: Applications.
Chapter 5: Lesson 1 and economic policy.
Chapter 6: The opportunity cost of destruction

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

24 thoughts on “Economics in Two Lessons, Chapter 7

  1. Your articles have been coming too thick and fast for this mere mortal. But I would offer today an interesting book on externalities which is what I take Lesson 2 as considering among other things and you might way to scan and even touch on?

    SPASH, C. L. 2017. Routledge Handbook of Ecological Economics: Nature and Society, Taylor & Francis.

    Its a symposium volume with about 50 papers from various sources ranging from marxists to ecofeminists to social ecologists to quasi mainstream economists. Among other things it indicates ecological economics is a dogs breakfast currently which you may well agree with and have as a basis for not yet taking the field too seriously yet.

  2. Are you planning to include a discussion of Marxism and ‘self-ownership’ anywhere in this book? You’ve previously identified the interesting parallel with Nozick’s libertarianism.

  3. @Newtownian
    Thanks for this recommendation. I’ll take a look, and maybe cite some of the papers as further reading.

    @Tim Dymond
    Thanks for this point also. Space is too limited for a full discussion, but I’ll mention it in the further reading for this chapter.

  4. John – a couple of thoughts prompted by this chapter:

    a) your point that a particular set or distribution of property rights is just one among many possible ones, triggered thought about evolutionary trajectories (ie in nature, but can apply in economics too I think). Any extant species or set of species exists arising from whatever existed before, which basically means what genetic variation was contained in the gene pool of that species, what external forces it was exposed to (others species, climate etc) and how it responded to them. So one can think of a particular starting set of property rights (amount and distribution of some set of resources) as not only a starting point, but as having a set of opportunity costs associated with it. And from that, one could in-principle ask “how is the distribution of resources evolving from that starting point, and would it be in our interests to modify the distribution of property rights, not only for some immediate purpose such as reducing inequality, but also because it would alter the path which this society can take economically and otherwise into the future. It almost doesn’t matter whether property rights are natural or not (even though they are not), as much as what are the immediate and future consequences of the set of property rights we inhabit, and what options are open to us if we want to change them?
    b) on power laws, I think the assumption that because they are ubiquitous and therefore “natural” or unavoidable or somehow just, is an example of the naturalist fallacy writ and exploited large. Power laws almost automatically arise from even completely random outcomes of decisions or actions, all you need is some correlation between the outcome of one action or decision taken by a player or actor, and any subsequent action or decision. Having such processes completely unfettered or unregulated will not only lead to power law distributions, but is simply a choice about how opportunity costs – in this case of things like what economic or other power allows you to do – are treated.
    c) I wonder whether it is possible to imagine, or describe, or aspire to, a situation where the distribution of opportunity costs is in some way optimised? One such might be that the variance of opportunity costs is minimised, which might be different from one where the average opportunity cost was minimised.

    And a quick comment re Newtonian’s “dogs’ breakfast”, can’t the problem of how to define externalities be treated as a sort of risk of opportunity cost challenge. Something like “I don’t know whether the cost of trashing the Amazon is infinite, huge or very large, but what are the costs of getting that choice wrong?”. Presumably exponential towards infinite.

    I hope this is not unclear – the combination of an excellent sandwich and the brainfood in Chapter 7 has been most stimulating for me.

  5. PrQ.

    Very enjoyable reading.

    Not sure about the comment “As with the Laws of Thermodynamics and Motion, the Second Theorem is more interesting than the first.” Agreed, entropy is more interesting than work and heat, but what exactly is so much more interesting about Newtons’ second law than his first. Conservation of momentum is as interesting as force and acceleration, IMHO.

  6. John Maynard Keynes warned economists that the momentum of an economy cannot be frozen in time. Booming economies will continue on past the point of no return unless the “macroeconomic brakes” are not applied. So too for the recessed economy. Economic momentum in a free market situation ceteris paribus follows the rules of physics. But the friction generated by applying the brakes is usually impacting on people’s welfare. So economics has more potential to damage lives.

  7. This chapter reminds me of something Aboriginal activist Gary Foley once said said (I think it was him, could be wrong though), which was everybody owns property in Australia is guilty of receiving stolen goods, just as if they bought a stolen VCR in a pub. (Buying and selling stolen VCRs in pubs used to be quite a thing.)

    It would be nice if someone could work out what proportions of wealth are earned by individual effort, choosing one’s parents carefully, exploiting or at least relying on others and pure luck.

  8. @Smith

    In a trivial sense, it’s all luck. If we were born 10000 years ago, we would have been poor with probability 100 per cent.

  9. @Plaasmatron I agree with Plasmatron. The Laws of Thermodynamics form a coherent unity. The level of interest would surely depend on the particular theme that the reader is studying at the time. It may be valid to claim that the Second Law has implications that are more interesting for the current purpose.

  10. @Smith
    It has been authoritatively reported many times that a large proportion of the wealthy in Australia have gained their fortunes from inheritance, from stock-market speculation, from mining or from property development. Wealth from stock-market speculation is really gambling and bears little relation to effort or skill. Wealth from mining and property development primarily comes from cashing in windfall property rights allocated by governments below their true cost. “True cost” can be approximated by reference to what earnings would be if confined to a reasonable return on labour and capital, without windfall.

  11. Prof John: the chapter reads well. A few minor points come to mind.

    I don’t think it’s entirely correct (page 6) that control over resources is “most completely realised in freehold ownership of land”. In the Australian states, a freehold owner with rare exceptions has no rights to the minerals or petroleum. Also, a wide range of official functionaries are entitled to gain access to the land without the owner’s consent. Also, town planning restricts what the owner can build on the property. Et cetera. I would think that ownership of gold bars would be an example of a more complete degree of ownership.

    On page 6, you have correctly described the origin of property, in grants by a king or government (or, in a traditional village, the elders whose rights derived from custom). (Hazlitt’s implicit claim “that there is a natural distribution of private property rights” is indeed nonsense. Surely Hazlitt’s claim is blown out of the water by the existence of intellectual property, by which governments create property out of nothing, or even radio spectrum). However, this insight is reflected in only a woolly way at the end of the first paragraph under heading 7.1.

    Rights of possession over property are allocated by governments using tenure-related mechanisms (land titles, patents, spectrum licences). But the rights that are inherent in the title are then moderated by regulatory mechanisms such as taxation, workplace safety rules, land clearing restrictions and town planning. Property rights is a loose term, a loose resultant of the instruments of both tenure and regulation.

    Turning to page 8, I suggest that it is confusing to include a job position within the definition of property. Also, to include the right of a member of the community to receive welfare benefits as property is stretching the term beyond usefulness and beyond the scope of a possessory tenure that is granted by a king or government.

  12. I think you could use some short examples to unpack the term “property”. Most people probably start with the idea of ownership of personal possessions and shade out from there. Lawyers usefully think in terms of bundles of rights. I have full rights in my shoes, less in my car, less in my house, even less in land, not too many at all in shares. At various times people, offices, jobs, tolls, usage rights in commons, fishing quotas and much more have been properties – valued in money, bought, sold and so on. Casting property as rights of use might make it easier to see it as socially defined.

  13. From the intro:
    “To begin with, there is nothing special about the particular market equilibrium we observe at
    any given time.”

    Purist niggles only. First, the section is not quite clear on the distinction between equilibria in models and in the real world. The non-uniqueness proposition wrt property rights holds for both. Second, do we ever observe market equilibria? The economy changes from day to day. Adjustment to price and quality changes and to new information is not instantaneous outside of some financial and commodities markets. In some markets like labour the economy may never fully adjust at all (nominal wage rigidity). The real competitive economy is at best a quasi-equilibrium, with manageable quantities of unsold goods, unfilled jobs, unexploited IP and so on.
    Apologies if this was already covered in Part I.

  14. Does anyone have any information on what the post-2020 economic policy context will be?

    Rudd had the 2020 summit but I can’t remember any major economic arguments from that summit.

    The neoliberal/economic rationalist policy arguments basically went on for at least 5 years in the 80s before we had roughly 25 years of neoliberalism from 1990 to 2015. Similarly the welfare state beforehand was pretty much justified in rational public policy debates, is my understanding at least (not being born at the time).

    If we are looking at economics for the post-2020 era : what are the major policy ideas?

    Will it just be a continuation of neoliberalism? I honestly don’t think the post Cold War economic settings worked very well, its been one recession or financial crisis after another since 1990. !990s recession. Asian financial crisis. Dot Com Boom and Bust. GFC.

    If its not neoliberalism, there doesn’t seem to be an overwhelming consensus on what economic settings should replace neoliberalism from, say, 2020 to 2070.

    At Uni people talk about stuff like Steady State economics or environmental economics, but I can’t see that getting much traction in the mainstream press. And neither major political party seems to be putting forward any bit economic policy ideas, despite the GFC and its effects still being felt.

  15. Pareto has given us a convenient term. If you are going to comment on his political positions, in a book called ‘Economics in two lessons’, isn’t it also appropriate to mention that he was initially an engineer, highly adept at mathematics, who tried to establish what he saw as some ‘hard science’ in sociology/economics?

  16. @ZM
    ZM, For a lead, I would look to “sustainability” or in economics term, ecological economics as the arena in which the next generation of economic ideas will play out. The laws of science are non-negotiable and the bounds that they set are being breached on many fronts. I predict that within a small number of years, energy, climate change, water supply, land degradation, city planning and growth, fisheries and like subjects will mightily focus the attention of our political leaders, but there is no solution available within orthodox economics.

  17. @Geoff Edwards

    Yes I think you’re right, the environmental issues seem to becoming more widely accepted in the economics and policy making sphere. My impression from Melbourne Uni is that policy makers in the sustainability area (not greenies, serious policy people), are expecting a kind of two stream solution, where the more well off people are in a technologically advanced position using smart technology to reduce environmental impacts, while the less well off people are sort of expected to be like hippies and go back to simple living. But I haven’t found anything more specific than just kind of picking the gist of that up. I’ve been doing urban planning and that has a two stream sort of solution too for infrastructure and services provision, where the population will be expected to be more concentrated in cities and specific towns that are well connected, while other towns won’t get services and infrastructure as they become too expensive to provide widely, sort of like what’s being talked about with Aboriginal remote communities now. Brendan Gleeson has written a bit about that in his work.

  18. @ZM
    Thanks, ZM, for taking the trouble to reply. A few comments in response.

    The “serious policy people” who assume that the mass of low income people will passively accept living like hippies while watching the wealthy enjoy their gated communities are dreaming. They are also dreaming if they imagine that the future will look like the present, only with some tweaking. The scale of environmental change that is bearing upon us will sweep away many of the foundations of business as usual. The depth of the environmental problems and the fundamental changes needed to transition our society to a new, as yet unknown state are well exposed in the science literature and the sustainability literature (e.g. Dovers, Denniss, Beder, Diesendorf, Richard Sanders), have been for 40 years, but are largely neglected in the economics literature, including environmental economics (neoclassical with a tweak). Our host Prof John is a rare voice.

    In my view the profession of urban planning overall is broken, although I don’t make that claim about the Melbourne Sustainable Society Institute specifically. Most of the profession are stuck in a relativist mode (successful planning is what manages to squeeze through the procedural hurdles) and also are largely ignorant of environmental science (possibly excepting flood levels). Brendan Gleeson, who is conscious of inequality and is also literate in peak petroleum, is a rare voice.

  19. Hi John

    I realise you are trying to make this not too technical, but could I suggest that following the section on Pareto “optimality” might be a good place to include a brief section about Kaldor-Hicks? This is a more practical, and policy-useful, concept. eg

    “An alternative way of thinking in welfare economics about redistribution of resources was developed in the 1930s by economists Nicholas Kaldor and John Hicks. In summary, they suggested that if it were possible to introduce a change in the state of the world such that those who gained had sufficient surplus benefit to fully compensate all of the losers, and this could be achieved practically, it would lead to a net increase in welfare. In practice, this has been a more practical concept in public policy making, and is the basis (usually unrecognised or unacknowledged) for many decisions taken by governments that affect the distribution of property rights or allocation of resources.

    Satisfaction of Kaldor-Hicks criteria almost inevitably involves a role for the state, because without some kind of enforcement mechanism it is doubtful that beneficiaries of a redistribution will voluntarily choose to share their gains. The transfers involved can be either direct or indirect, via the taxation system.”

    I have grossly over-simplified, you will be able to correct the words!

    Also, would it be helpful for the introductory section to describe in more detail how property rights are created? On reading it, I felt you jumped straight in without explaining what determines that something is a property right.

    hope this is of use

    stephen bartos

  20. Hi John

    Harry Moseley in chapter 6 should be Henry Moseley ***

  21. Thanks for all these useful comments. I’m taking account of them as I edit the chapter.

  22. @Geoff Edwards
    If the ‘Two Lessons’ are to direct our attention to opportunity costs, then there are solutions available from conventional economics (I am not sure about the distinction of ‘orthodox’). For example, Colin W Clark (NOT to be confused with Colin G Clark) has given us elegant analyses in what he terms ‘bioeconomics’, and, closer to home, Quentin Grafton has lead thought-provoking analysis of water supply; again with implications for opportunity cost.

  23. @Ian Kirkegaard
    Thanks, Ian. My post was not intended to entirely dismiss conventional/orthodox economics, which has many useful insights to contribute to policy. However, the scientist in me remains sceptical of any sub-discipline that ignores the biophysical limits to economic activity, especially, the limits to continuous economic growth.Those limits are in plain sight now and will shape policy and markets with increasing urgency as the human footprint on natural resources intensifies.

  24. @Geoff Edwards

    I don’t think the policy makers intend to say directly to people you have to be in the low technology group. I am pretty sure they just intend to make people feel guilty about the environment so they want to take personal action, and then try to popularise simple living, like how the hippie phenomena was fashionable in the 60s and 70s. Also some people will be priced out of the Smart Technology group, the technology is expensive. A lot of people on low income find it hard to buy white goods and entertainment systems and cars and things as it is now.

    John Quiggin is quite rare, as well as caring about environmental issues, he makes his work accessible by publishing in the media and blogging.

    Brendan Gleeson I am not so sure about. He started his career writing about subjugated populations in the history of urban planning etc, but in the last decade he has taken a strangely more authoritarian turn.

    In Lifeboat Cities from 2010 he writes about a feud he had with Mark Latham, saying Latham accused him of peddling ideas about False Consciousness, and that “perhaps nothing inspires animus like an ideology rescued from the fires of disenchantment. George Orwell’s 1984 concludes with a teary Winston finally realising that he loves Big Brother. This is of course at the end of a long and spurning road. It is just so for others with capitalism, that blank prairie of human possibility; at the end of the day it is still a place to pull the creaking wagons up to, to water the weary horses, to let the children run free again…. but neoliberals never really told us what this ‘go no further’ place looked like. But now, Eureka, Mark Latham has found it. It is a shopping mall in Western Sydney.”

    His basic idea is for a more authoritarian state that he calls the Guardian State like something out of Plato. This is supposed to take over in a transitional period until some unspecified new political economic development that is more permanent. This would redefine the pursuit of “freedom” as a “restrained and greatly transformed market.” First there would be a centralised economic architecture, the Australia Plan, and then some time after the need for the Guardian State has passed this would be decentralised but not privatised. Although he gives no time frame for this. And in this new economy to decouple material use from economic growth there would be more service and care work that don’t use materials as much as manufacturing. And he also talks about Civil Rights being enforced, but the Rights of Consumption being constrained in a rationing style.

    Then in his most recent work, A Dangerous Transition To Hope, in Urban Sustainability Transitions: Australian Cases- International Perspectives (2018), he argues that democracy should be suspended all together for this Guardian State:

    “One of the dark natalities to emerge in this path is that democracy, greatest of modern political virtues, may be inhibited temporarily to ensure its survival.”

    This is an idea I have heard quite a bit at Melbourne Uni in the climate change discussion, although this is the most strongly put argument I have read yet. Gleeson is alert to the dangers posed by this and to avoid warlordism says “It is urgent that the terms of transitional authority be defined and instated before raw power is given a chance to determine them.” But exactly what that means is hard to understand, he describes the Guardian State as a post-capitalist State: “If we accept with many others that climate change is unmanageable under capitalism, then it follows that recovery from climate change and response to it will require an end to modern capitalism, in a radical and contingent transition. The Guardian State is a post-capitalist response…. the Predator State that has protected and advanced the (il)logic of laissez faire in the face of contradiction and opposition would give way to a Guardian State that commits to collective welfare in a time of shared endangerment.”

    I think the wartime mobilisation response to climate change is a good idea, as I have often written here in my comments, but I think Gleeson’s approach goes way too far and is much more authoritarian than anywhere I would want to live.

    Then there is his paper Coming Through Slaughter, which is very interesting, but I won’t sum it up, as this comment is already too long.

    So I think Brendan Gleeson has really become too authoritarian in his thinking for my liking, despite his early work on subjugated histories.

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