You are here: Home / !Post Type / Author Interviews / John Quiggin on Economics in Two Lessons
April 23, 2019
Since 1946, Henry Hazlitt’s bestselling Economics in One Lesson has popularized the belief that economics can be boiled down to one simple lesson: market prices represent the true cost of everything. But one-lesson economics tells only half the story. It can explain why markets often work so well, but it can’t explain why they often fail so badly—or what we should do when they stumble. As Nobel Prize–winning economist Paul Samuelson quipped, “When someone preaches ‘Economics in one lesson,’ I advise: Go back for the second lesson.” In Economics in Two Lessons, John Quiggin teaches both lessons, offering a masterful introduction to the key ideas behind the successes—and failures—of free markets. Here, he explains why two-lesson economics means giving up the dogmatism of laissez-faire as well as the reflexive assumption that any economic problem can be solved by government action.
How did you come to write this book?
The idea was to offer a progressive response to Henry Hazlitt’s Economics in One Lesson, a free-market tract that remains in print seventy years after its initial publication. I originally intended it to focus on microeconomic ‘market failures’ like monopoly and air pollution. However, perhaps because the title claimed so much, the project grew to encompass the whole of economics, including macroeconomic issues such as unemployment and the business cycle, and the fundamental question: Who gets what?
What is the core idea of the book ?
The core idea of the book is the concept of opportunity cost, which I define as follows:
The opportunity cost of anything of value is what you must give up so that you can have it.
Opportunity cost applies at the social level as well.
The social opportunity cost of anything of value is what you and others must give up so that you can have it.
Sometimes but not always, individual and social opportunity cost align as a result of what Adam Smith called the ‘invisible hand’ of the market. The core of economic policy is to determine when social and private opportunity costs differ, and what can be done about it. At least in a qualitative sense, most of the issues in economic policy can be understood with anapplication of opportunity cost reasoning. The technical analysis that forms the basis of most economics courses is only needed if you want to obtain quantitative estimates.
What is the ‘first lesson’ ?
Hazlitt doesn’t spell out his ‘one lesson’ properly, saying only that it is necessary to trace all the economic effects of any act of policy all the way to their conclusions, rather than relying on immediate benefits and surface appearances. This is a restatement of the title of Hazlitt’s main inspiration, Bastiat’s classic nineteenth-century work ‘That which is seen, and unseen’. Hazlitt implicitly assumes that once all the consequences of any act or policy are taken into account, the opportunity costs of government action to change economic outcomes always exceed the benefits.
The central idea underlying the claim made by Bastiat and Hazlitt is that market prices tell us everything we need to know about opportunity costs. This isn’t always true, but the kernel of truth is embodied in Lesson One, as I call it.
Lesson One: Market prices reflect and determine opportunity costs faced by consumers and producers.
The first part of the book shows why Lesson One is so important, and gives applications to a wide range of issues.
So what is Lesson Two ?
Economists have long known that, under conditions of ‘market failure’, market prices may not reflect opportunity costs, and that in these circumstances there is a case for government action to yield improved outcomes. The classic examples include air pollution and other ‘externalities’, monopoly and the exercise of market power, information problems and public goods such as scientific research. This leads directly to my Lesson Two.
Lesson Two: Market prices don’t reflect all the opportunity costs we face as a society.
I originally planned a book in which Lesson Two would have been all about market failure; that book would have been finished much sooner. As I worked on the book, though, I felt dissatisfied. I started to think more about the problems of unemployment and growing inequality, and realised that these were both examples of Lesson Two.
In a recession or depression, markets, and particularly labor markets, don’t properly match supply and demand. This means that prices, and particularly wages reflect or determine opportunity costs. Looking hard at the data, I concluded that a market economy is in recession, in this sense, as often as not.
As regards the distribution of income and wealth, the market outcome depends on the system of property rights from which it is derived. The choices that determine property rights are subject to the logic of opportunity costs just as much as the choices made within a market setting by firms and households. Over recent decades, changes to property rights of all kinds have consistently driven society in the direction of greater inequality.
So, we need Economics in Two Lessons.
Are there really only two lessons, or are there many?
The ‘two lessons’ set out the principles for reasoning about prices and opportunity cost. Any number of implications can be drawn about specific economic issues. Among the lessons drawn in the book are:
* There is such a thing as a free lunch.
* If you want to help poor people, give them money.
* There is no ‘silver lining’ to the destruction caused by war and natural disasters.
* Advertising generally makes us worse off.
* A carbon price would be the best response to climate change (but it’s unlikely to happen any time soon).
There’s plenty more in the book, and plenty more yet to be written.
John Quiggin 
“If you want to help poor people, give them money”
Does this mean, for example, that governments should help poor people into housing by giving them rent subsidies they can use in the private market, rather than building public housing ?
Or that governments should subsidise private health insurance for poor people rather than putting money into the public health system?
Just asking.
Sounds like a wonderfully excellent book. I kind of wish I had paid more attention to the drafts that appeared here, but then there were episodes of She-Ra Princess of Power to watch.
Smith9: From a government perspective, calculate the cost per person housed (for equivalent quality of public housing) and go with whatever is cheaper. I suspect that building public housing would be cheaper but doing the maths would be useful.
I have ordered the book. I am hoping to see both an honest discussion of government failure, especially acknowledging the socialist calculation debate, and the presentation of opportunity cost found in Buchanan’s Cost and Chioce
@4 I cite Hayek at length on information and the price mechanism, and note the link to the socialist calculation debate. I also mention Demsetz on government failure. (For whatever reason, I’ve never got much out of Buchanan). Beyond these explicit mentions, the whole point of the book is to explain why the mixed economy works better than either an unfettered market or comprehensive planning.
@1 Y The alternatives you suggest involve tying support to a particular kind of spending but allowing private providers to get it, probably the worst of all worlds (see, for example, VET FEE-HELP as well as your own example of private health insurance), If you want to help poor people out of poverty, give them money. Public housing and public health are justified by failures in housing and health markets, not (primarily) as tools for income redistribution.
Smith
“Does this mean, for example, that governments should help poor people into housing by giving them rent subsidies they can use in the private market, rather than building public housing ?
Or that governments should subsidise private health insurance for poor people rather than putting money into the public health system?”
Is there any reason why a goverment couldn’t do both, depending on what would work best for the poor person trying to work out how to get ahead?
@Julie Thomas
I think so, but one of the lessons from Economics in Two Lessons is “if you want to help poor people, give them money”.
This implies, at very least, that giving them money is better, and it might imply that that is all you should do because you shouldn’t be paternalistic by giving poor people things, like housing, you should just give them the cash and let them spend it on whatever they want – big screen TVs, holidays in Bali, whatever. It’s the kind of thing David Leyonjhelm would say.
There can never be a “Great Instauration” of economics – meaning a complete renovation and renewal of the discipline – until it overcomes its founding fallacy. The founding fallacy of classical economics (and of Marxism as a classical offshoot) takes the form of an invalid real-nominal bifurcation. Any money measure of costs is not a measure of real costs. It is not even a reasonable proxy measure of all or even some real costs, for extensive reasons. (I have changed and firmed up my stance on this latter issue relatively recently).
Money is instead a non-measure (of the real) which is implemented after a fallacious real-nominal bifurcation has been completed by secular rituals finally taking mathematicized form. These secular rituals commence with the axiomatization of certain moral philosophy prescriptions related to rights to property and income. They are then instituted as laws backed by violence (usually by the state monopoly on violence) while also being instantiated in human minds as enculterated obedience, primarily by means of harnessing greed, fear and shame. Money compares the non-comparable. Money is made the measure of everything when in fact it measures nothing and equates nothing, except itself to itself.
http://www.capitalaspower.com/2015/05/performing-the-real-nominal-bifurcation/
The notion of “opportunity cost” can be useful provided it is confined to an analysis of real costs. I mean “real costs” very strictly. Thus the real opportunity cost of building costly elite sports stadiums (especially but not only with public subsidy assistance) is the building of less schools and less well-equipped schools. The real cost of building soft-drink factories is a higher incidence of dental caries and diabetes plus the real cost of having less dental surgeries and less dental care. The real resources (real materials, real fuels, real labors physical and mental) to build elite sporting venues and soft-drink factories theoretically could have been channeled into more schools, more dental surgeries and so on. This is true albeit there are clearly transition and other problems in re-tooling and re-skilling a society from building sports stadiums to building schools, from building soft-drink factories and their distribution networks to building dental surgeries and staffing them.
Where I have a fundamental objection to the use of the opportunity cost concept is when any attempt is made to reduce opportunity cost calculations to money calculations. Severe errors and absurdities are then introduced. I’ve commented on this issue before. Without have having read “Economics in Two Lessons” in full, I cannot say whether or not J.Q. has made this founding error, so I suspend judgement at this point.
I also recommend people read this 22 page paper to get a handle on these issues.
“Capital accumulation: fiction and reality” – Shimshon Bichler and Jonathan Nitzan.
Bichler and Nitzan specifically address the issue of real capital versus financial (or fictitious) capital. However, their point is wider as is made clear by their other writings. Their point also bears on the whole issue of the real-nominal bifurcation in classical, neoclassical and Marxist economics.
One of my predictions is that our subjection to the false secular religion of mainstream economics will not be broken until the foundational fallacies and illusory promises of mainstream economics are fully refuted and dispelled. The hope that these illusions might be dispelled broadly by intellectual and philosophical analyses followed by dissemination and education seems quite a forlorn hope now. Rather, it seems a real demonstration is required by the real forces of nature to human kind. These demonstrations will follow naturally and inevitably from the real forces of physics, chemistry and biology: the arena of fundamental laws.
Our point in history is now too late. The collapse of the real economy from real limits is now too close for anything else to occur. Rather, those who predict disaster (correctly as will most likely turn out to be the real result) will gain an empirical truth warrant for their theories, if some human society remains at all to assess such matters. It is at that point that such theorists must seize the moral philosophical high ground and assist human kind to take a new direction. Of course, one would hope that the real events of extensive real disasters do not prove to be necessary to teach the essential lesson of the fundamentally flawed and unrealistic nature of mainstream economics. But that, as I said above, seems a forlorn hope now.
“This implies, at very least, that giving them money is better, and it might imply that that is all you should do because you shouldn’t be paternalistic by giving poor people things, like housing, you should just give them the cash and let them spend it on whatever they want – big screen TVs, holidays in Bali, whatever. It’s the kind of thing David Leyonjhelm would say.”
It should never be a disincentive to work as discussed here:
https://www.abc.net.au/news/2018-05-01/finland-universal-basic-income-welfare-reform/9709798
But I like the idea of giving the poor more money from time to time as a stimulus tool. It’s probably the most direct and fairest way of injecting stimulus into the real (working) economy.
https://www.theconversation.com/informal-and-illegal-housing-on-the-rise-as-our-cities-fail-to-offer-affordable-places-to-live-116065
empty dwellings here in the west can be see all over the place with a simple bike ride.
pick a suburb, any suburb.
i wonder how many are being kept empty for the write-off against other dwellings as an investment strategy.
Even in the middle of the collapse when starvation is widespread across the planet but not so widespread that the mainstream media has ceased to function to powers that be will be denying that they were at fault. They will be spreading BS a mile high to shift the blame where it does not truely belong, though the finger pointing might be at those or at factors that had a role to play. These other people or factors were will not be the decisive role. Obviously those that were decisive in causing THE problem will have the motive and the means to try to obscure what really happened.
OOPs typo alert as usual.
@May.
Whilst not in Sydney, I now leave my 3 investment properties empty. It simply is. It worth opening them up to tenants. Over therapist 10 years, I have rented them to over 20 tenants. Only 2, and I stress 2, treated the properties with any respect. They are all extremely well maintained, as much a function of my own neuroticism asanything else, but the level of sheer disregard and frankly disgusting treatment of my property means that I now refuse to put them up for rent. Carpets urinated on, dog crap left to stink in various places, food left to rot in cupboards, wooden floor boards gouged, walls with holes that are the same shape as boots, gardens destroyed. (And to make it worse the real estate agents that I employed sent through fraudulent report)
There is a good reason for so many properties standing vacant. A good proportion of the population needs to take a long hard look at itself.
@anonymous: the real lesson might be to avoid buying properties to engage in speculation and negative gearing etc.
I simply put my money into my super, ensure it is suitably invested, and leave it at that, while I draw my “pension”.
My mum always told me that if you’re gonna buy an investment property to rent out, get one in a nice area that’ll attract the kind of people who’ll look after it. That might mean consolidating your options into 1 property instead of 2 or 3… but… alas… If you offer something in a rough area at a bargain price, then you can often expect less than ideal tenants. Apologies for the stereotyping, but realities are what they are.
Anonymous are you in this category; JQ above: “There is such a thing as a free lunch.”.
Why can’t you find a say older woman as a tenent long term? Sterotypes abound.
I once owned 3 investment properties which all happened to be vacant just prior to chrismas. Yes renting is problematic from a Land Lord’s pov.
All were within a tight geographical area. From homeless stats I calculated there were 42 homeless families in the catchment for local Anglicare. I offered them for free for 6 weeks on condition Anglicare cover any damage. The offer was treated as poison and rejected straight off the bat. Local Anglican minister was pontious pilot like- “Anglicare has nothing to do with me. And no thanks”.
“We” fear loss more than gain.
JQ I’d bet you haven’t thought of Ein2L as comic books. Have you?
Who knew…
“The New York Fed’s Educational Comic Books are an engaging classroom resource for teachers to use in their social studies and economics lessons.
“Created for students at the middle school, high school, and introductory college levels, the series can help stimulate their curiosity and raise their awareness of careers in economics and finance. In addition, lesson plans created for each comic book meet national and state standards for New York, New Jersey, and Connecticut.
https://www.newyorkfed.org/outreach-and-education/comic-books
Earlier I mentioned She-Ra Princess of Power and that may have come across as flippant, but:
1. It was a comment on opportunity cost.
2. She-Ra and the Princesses of Power is one of the greatest works of art ever created.
3. I am not suggesting She-Ra Princess of Power is better than the book, it’s just for me, in the margin, at that particular time, it was.
maybe She-Ra and the Princesses of Power could do a hunt around for tenants that don’t pee on the floor,have a dog, waste food (that’s a hard one,apparently about 25% of food purchased in this country is wasted) gouge floors, kick walls and are abysmal gardeners.
they must exist and at least you would get them off the streets.
also don’t, really don’t ask people on the humanitarian front line to do it for you.
they already have enough on their plate.
JQ, may I pay my compliments. The idea of the book is clever, IMHO. The 19th century ideas, as captured in Hazlitt’s book, have been re-introduced in the public mind during the latter part of the 20th century. The success of this ‘going back to the future’ may be seen as the crux of the problems caused by what is now termed neo-liberalism. By using a similar method to that used by Henry Hazlitt’s 1946 book, Economics in One Lesson, you manage to get across major insights from economic research since the 1950s. And, to complete the elegance of the approach, you preserve and make explicit the bits of 19th century economic theoretical arguments that have survived so far in the professional economic research literature, thus demonstrating the meaning of progressive (!)
I am not a fan of the notion of ‘opportunity cost’, as I have indicated earlier on. My reservations follow from the definition: “The opportunity cost of anything of value is what you must give up so that you can have it.”. My reading is “The opportunity cost of anything of value is ? the value of ? what you must give up so that you can have it. .(Identical question for the social opportunity cost, except that the question has more bite.) But, I realise my dissatisfaction is of no consequence in the contemporary context. To illustrate:
It seems to become obvious to almost everybody, that the “Friday for Future” demonstrations by young people is an explicit demand for all things that are necessary for their future survival in a natural environment not too different from that of their childhood or that of their parents. They challenge their elders how they value the opportunities available to the currently young in the future in relation to what they value now. They challenge their elders to show how they value their children.
If one were to write the “Friday for Future” movement is consistent with the assumption that young individuals’ preferences over all things that are necessary for their future survival in an environment not too different from that of their childhood are strictly convex – a theoretically more satisfactory treatment of ‘value’ in some sense – then nobody would want to read on.
Your book is very timely.