Economics in Two Lessons, reviewed

A couple of reviews of Economics in Two Lessons have come out, from opposite ends of the political spectrum. The more interesting is Max Sawicky’s in Jacobin.

Sawicky does a great job in summarising the key ideas in the book. His is probably the best review so far for non-economists to get an understanding of the main themes.

Given the Jacobin audience, the key question is “Why should a socialist read a book about markets?” As Sawicky observes, the answer is easy for socialists in the Bernie Sanders mould – I share their views, a fact that is obvious to readers of this blog.

More generally

Quiggin’s deconstruction of Hazlitt’s “Lesson One” provides a lesson in “know your enemy” for anyone left of center. If your only instruction in economics was a principles course, this book provides an essential completion of the basic story.

More generally, Sawicky says

If your hostility to markets runs more deeply, then the mainstream theory elaborated by Quiggin provides a useful challenge.
What becomes deemphasized, when it is not glossed over entirely, is, on the one hand, the proliferation of “externalities” that bind together the interests of ostensibly disparate individuals, and on the other, our capacity (historically demonstrated) to respond effectively on a cooperative, collective level.
Economics as practiced by progressives pursues these insights, but, as I think Quiggin would agree, it has further to go. His “second lesson” is a crucial step in this journey.

I’m very grateful for this review, which gives me food for thought as I think about my next big project.

The view from the right is predictably less favorable. Writing in the Review of Austrian Economics (paywalled), Patrick Newman complains that I have treated Henry Hazlitt, the author of Economics in One Lessons as an advocate of Chicago school neoclassical economics, putting forward the idea that equilibrum market prices equal opportunity costs. This is contrasted with the Austrian approach, which rejects equilibrium thinking. The same criticism was made a while ago by David Gordon and I responded by quoting Hazlitt himself

“When production is in equilibrium there tends to be approximately the same profit margin, relative costs and risks considered, in the production of each of the thousands of different commodities and services.

Hazlitt was an eclectic thinker rather than an economic theorist, but I think I’m entirely justified in regarding his arguments as being based on equilibrium thinking.

2 thoughts on “Economics in Two Lessons, reviewed

  1. Perhaps you live on another planet JQ ☺…

    “if there is intelligent life on other planets, in a majority of them they would have discovered correlated equilibrium before Nash equilibrium.” ^1

    From Jacobin review; “and the resulting distribution of output cannot be improved upon,”…

    Or can it? … “but that sometimes result in a more positive societal outcome than any of the Nash equilibria”. Aumann via baez below.^1

    Jacobin; “And he will keep making and trading shoes for candles, until the point where the value of candles he receives exactly offsets the cost to him of making an additional pair of shoes.

    “This blissful outcome is also known as “competitive equilibrium.”

    ^1 “According to Erica Klarreich it’s a useful notion. She even makes it sound revolutionary: “Aumann showed that the set of correlated equilibria can contain more than just combinations of Nash equilibria: it can include forms of play that aren’t Nash equilibria at all, but that sometimes result in a more positive societal outcome than any of the Nash equilibria. For example, in some games in which cooperating would yield a higher total payoff for the players than acting selfishly, the mediator can sometimes beguile players into cooperating by withholding just what advice she’s giving the other players. This finding, Myerson said, was “a bolt from the blue.”

    “(Roger Myerson is an economics professor at the University of Chicago who won a Nobel prize for his work on game theory.)

    “And even though a mediator can give many different kinds of advice, the set of correlated equilibria of a game, which is represented by a collection of linear equations and inequalities, is more mathematically tractable than the set of Nash equilibria. “This other way of thinking about it, the mathematics is so much more beautiful,” Myerson said.

    “While Myerson has called Nash’s vision of game theory “one of the outstanding intellectual advances of the 20th century,” he sees correlated equilibrium as perhaps an even more natural concept than Nash equilibrium. He has opined on numerous occasions that (^1) “if there is intelligent life on other planets, in a majority of them they would have discovered correlated equilibrium before Nash equilibrium.”

    Back to JQ on competitive equilibrium in ein2l …
    “This is where casual presentations of Lesson 1 commonly stop. But the simple story above embodies a lot of assumptions about the way markets work:

    The most important are:”…

    And JQ again:
    “As we shall see this is not the case. Pareto, and followers like Hazlitt, seek to claim unique social desirability for market outcomes by definition rather than demonstration.”

    (I have to admit that as a heuristic the 80/20 I find compelling)

    You have fellow travellers out there in physics JQ, so I am looking forward to “more positive societal outcome than any of the Nash equilibria”.

    The question then is: When?

    My forward sideways brain says that the “the set of correlated equilibria can contain more than just combinations of Nash equilibria” is somewhere to be found in oscillation and synchronization;
    “In a world seemingly filled with chaos, physicists have discovered new forms of synchronization and are learning how to predict and control them. ”

    …”This rich source of information is now being exploited by various procedures—like dynamic causal modelling”…!po=2.50000

    Attention, uncertainty, and free-energy [NOT that ‘free energy’]
    “… try to substantiate this claim using neuronal simulations of directed spatial attention and biased competition. These simulations assume that neuronal activity encodes a probabilistic representation of the world that optimizes free-energy in a Bayesian fashion. Because free-energy bounds surprise or the (negative) log-evidence for internal models of the world, this optimization can be regarded as evidence accumulation or (generalized) predictive coding. ”

    … which all may apply to your research:

    My suggestion – email Feiston to discuss. He sounds very open as he hold court for anyone with a question “Friston walks to the western side of the square, enters a brick and limestone building, and heads to a seminar room on the fourth floor, where anywhere from two to two dozen people might be facing a blank white wall waiting for him. Friston likes to arrive five minutes late, so everyone else is already there.

    “His greeting to the group is liable to be his first substantial utterance of the day, as Friston prefers not to speak with other human beings before noon. (At home, he will have conversed with his wife and three sons via an agreed-upon series of smiles and grunts.) He also rarely meets people one-on-one. Instead, he prefers to hold open meetings like this one, where students, postdocs, and members of the public who desire Friston’s expertise—a category of person that has become almost comically broad in recent years—can seek his knowledge. “He believes that if one person has an idea or a question or project going on, the best way to learn about it is for the whole group to come together, hear the person, and then everybody gets a chance to ask questions and discuss. And so one person’s learning becomes everybody’s learning,” says David Benrimoh, a psychiatry resident at McGill University who studied under Friston for a year. “It’s very unique. As many things are with Karl.”

    Thanks JQ.

  2. “These ideas extend to numerous familiar examples of adaptive or living systems, from single cells to corporations and political parties. In each case, the distinguishing feature seems to be the same: the autopoietic system can anticipate and respond to external fluctuations (‘perception’), and can act in order to bring about sustainable states of affairs (‘action’). This is evocative of the Good Regulator theorem of Conant and Ashby: if we consider input-output machines, with ‘good regulation’ meaning to minimize surprising outputs, then any good regulator of a machine must be in isomorphism with said machine.”

    … “Likely to be important here is the work of Karl Friston on the free energy principle, which says that perception, action, and the Good Regulator theorem are all consequences of an information-theoretic principle of least action. Categorically, it seems we may need a probabilistic logic, such as that supplied by effectus theory.”

    “There are of course many questions for discussion. To give a few:”…

    … which may apply to your research:

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