Economics in Two Lessons, Chapter 8

Thanks to everyone who the first seven chapters of my book-in-progress, Economics in Two Lessons. I’ve tried to think about all of them and respond to as many as possible, but I’m seeking comments from quite a few sources and may have missed some. Feel free to remind me if you think you have a point that’s been overlooked.,

I’ve just posted a draft of Chapter 8:Unemployment. This is one of the most important chapters in the book where I confront a central error in both Hazlitt and Bastiat – the implicit assumption that full employment is the norm in a market economy. So,

The book so far is available
Table of Contents
Introduction.
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
Chapter 7: Property rights, and income distribution

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

9 thoughts on “Economics in Two Lessons, Chapter 8

  1. John, thanks for this outstanding elucidation of social-democratic theory. I’ve largely been looking into left-communism and Bordigism of late, but your materialistic and relevant grasp of contemporary Keynesian economics serves as a fine polemic to Marxists, even if I’m unconvinced by your attempts at rebutting Marx himself, which seem to miss the point.

  2. There was a story in the media late last week that BP said if it drilled for oil in the Great Australian Bight, and there was an oil spill, this would be good for the affected coastal communities because their economies would benefit from all the spending in the clean up. BP’s argument was greeted with derision.

    The narrative in your chapter 8 seems to support the BP argument, substituting oil spill for broken windows (apart from the effect on coastal communities of the oil spill itself).

  3. Typo in the fourth para of the intro. “In an environment of high unemployment” –> “low unemployment, full employment.

    The chapter brings out that underemployment persists in the recovery phase of the trade cycle, but could be sharper on terminology. Either explicitly redefine “recession” to mean “period of significant underemployment”, or look for a new term.

    I miss (hobby-horse) a reference to efficiency wages and equilibrium unemployment. Assuming that this very plausible theory is correct, it means I suppose that your key distinction between private and public opportunity costs holds even at so-called full employment. There are workers willing to work at the prevailing wage, but the employer prefers to pay overtime or bonuses to known good employees to work above-equilibrium hours rather than take the risk of new hires.

    Again, sorry if you already covered this as a micro issue in Part I. The real economy is a fog of partial information, and the Bastiats and Hazlitts can’t get away with just stipulating that a liberal market economy will approximate or tend to competitive equilibrium. As Stiglitz says, incomplete information is part of the human condition, and can’t be assumed away.

  4. James Willoughby raises a good point about “known good employees”. Professor Mitchell did a lot of empirical work on this in the long recession of the 1990s. The Beveridge Curve analysis was a useful addition to the analysis of the twin difficulty of long term unemployment and redundant job seekers. It also helps to explain the paradoxes in frictional unemployment during recessions.

  5. John – you make clear that the economy is in recession (of some depth) as often as it is at or close to, full employment. Which simplistically suggests that the average state of the economy is approximately mid-way between the two. Which in turns makes me wonder whether the relevant indicators of economic activity (such as growth in the quarter, net jobs in the quarter) are normally distributed (and presumably, correlated). And if so, the mean of that distribution must tell us something about the balance of various forms of transaction costs and over- or under-pricing of capital and labour typical of that economy? Which seems to be a sort of opportunity cost of the “settings” of that economy.

    Separately, BP appear to have been using Hazlitt’s glazier example to justify their desire to trash the Great Australian Bight.

  6. John, I note you said in the past “in the long run, public expenditure is paid for by taxes”.

    Must this be true in all situations, for instance if you have low inflation and spare capacity in the “real economy” such as unemployed but job ready workers and underutilised factories, shops etc.. is it not possible that a certain amount of “helicopter money” (run off at the printing press or digitally created and thus not associated with debt) could offer a free lunch?

    The only danger I see is a possible misallocation of resources but without such a policy I doubt we will ever get back to the (genuine) full employment that existed from 1945 to 1970.

    I ask this question from a position of complete naivety because I have no feel for economics. To me its a foreign language.

  7. Thinking further, John advocates giving money directly to the poor as the best form of foreign aid. Is a foreign government handing out a fistful of dollars in a poor community equivalent to helicopter money?

    Is it possible that giving, let’s say, $50 worth of helicopter money each week to the poorest in the community in Australia, such as those on unemployment benefits and various other forms of welfare, would help lift them out of poverty; generate significant economic activity since presumably nearly all he money would be quickly spent but not increase inflation or cause any misallocation of resources, given the spare capacity in the physical economy?

  8. The “discipline” of economics is in so much trouble* it needs to be torn down and started again from first principles. A polymath genius (or several) deeply conversant with philosophy, history, physics, biology, ecology, human behavior, social behavior and complex systems science would be required to rebuild the whole discipline again from scratch in complex system terms as Political Economy or Social Economy embedded in physics and biology. Would it be possible to link so many ideas across so many disciplines into a coherent whole? We now have seven billion brains in a mostly hi-tech, global, social economy system operating in a biosphere system. Can any brain or set of brains can theorize all this complexity, I wonder?

    But… beginning a book on economics at markets? That’s like beginning a novel at the epilogue. It’s even wrong to begin with mere economics if one wants to alert the public to possibilities other than the neoliberal consensus. I think J.Q. (or someone else modern) needs to radically critique economics itself. Start with nothing but physics and philosophy using a complex system science methodology. Work your way up again from scratch.

    For a start I would seriously argue that such a writer would need to first decide the prime ontological question. Would the ideational system for this project be built from monism base, a dualism base or some other position? IMHO, if you didn’t start from a priority monism base (using the relational system basis of modern physics as your philosophical a priori justification) your project would already be in trouble.

    * Note: Modern economics is in trouble at three levels, these being real, formal and moral. It cannot engage properly (successfully and sustainably) with real systems (meaning real physical and biological systems, including humans who are physical and biological beings). It cannot deduce and elaborate its formal systems properly to obtain the required formal and thence real results. It cannot demonstrate an acceptable moral nature. Of course it would take a book-load of good arguments to support these three contentions theoretically. I think the extant outcomes of the current system support these contentions empirically.

  9. I am at least two months late to this discussion! As a classically-trained economist Chapter 8 is the most interesting read.

    I am a little puzzled by the re-interpretation of the glazier’s fallacy. The story only works because the tailor is a miser, and the glazier is not. If this is reversed, and the glazier is a miser and the tailor is not, we would no longer find any reason to applaud the hoodlum who broke the window: indeed we would now blame him twice over, since he is now responsible not just for the shopkeeper’s broken window but also for the tailor’s continued unemployment.

    Since the conclusion of this story depends on the entirely arbitrary assumption that the tailor is a miser and the glazier is not, I do not see how this serves as a convincing illustration of Lesson 2.

    A more convincing version would have an enlightened hoodlum who, upon observing that the tailor is a miser, the glazier’s suit is worn and the glazier is out of work, decides to break the window. It creates a new problem, of course: where are we to find the enlightened hoodlum who knows when to throw the stone and when to hold back? (Or in other words, does the government know exactly how and where to intervene in a way that will reduce the unemployment caused by a recession?)

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