Economics isn’t as highfalutin’ as the jargon makes it sound

Ross Gittins has a very nice piece in the SMH today, with some kind words about Economics in Two Lessons which he recommends as “the best book to introduce you to economics”. Ross says that the crucial concepts in economics are: Opportunity cost (of course!), the Invisible Hand (roughly, my Lesson One), imperfect competition, market failure and externalities (the microeconomic component of my Lesson Two).

His final para gives the lie to those who imagine economists oppose action to save the global enviroment

As for external costs (“negative externalities”), Quiggin notes that the leading British economist Lord Nicholas Stern has described climate change as “the biggest market failure in history”. So now you know why so many of the nation’s economists are appalled by Morrison’s dereliction.

23 thoughts on “Economics isn’t as highfalutin’ as the jargon makes it sound

  1. It was a nice complimentary piece. Ross Gittins has always impressed me with his key journalism skills – specifically to write in clear and plain English. Your book is an instance of the same virtue.

  2. “The biggest market failure of all time”

    Just one of so many things they have tried to peddle against the common good often fr imbecilic reasons. So many things, unemployment, social and material infrastructure cuts justified for “efficiencies”, “development” as oppositional to environmentalism, so on so on..

  3. “Lord Nicholas Stern”

    The correct reference is ‘Lord Stern.’ It is just wrong, but sadly commonplace, to write Lord First Name Surname. As a senior journalist, Gittins should know better.

  4. As serendipity would have it, I read Gittins piece at a cafe. Then…

    We lost all phone and data here yesterday. My helpful techo in Munbai and I got chatting. Fires, air quality -ha ha. He said he reads a lot of economics. When asked if he had an economics degree he said  no, but indicated he had another degree.

    So I recommemded Gittins article, as and Ein2Lessons.

  5. Smith9. If I ever write to the queen or the gg, I won’t use “Lord Stern”. Or will I? As the salut? Or in body text? Or with address? Electonic comms? Formal report to the House?

    “The most formal style is “The Lord (X)”: for example, Alfred Tennyson, 1st Baron Tennyson, can be referred to as “The Lord Tennyson”, although the most common appellation is “Lord Tennyson”. ” Wikipedia. 

    Nicholas Herbert Stern, Baron Stern of Brentford, Kt CH FRS FBA FAcSS 

    The Right Honourable The Lord Stern of Brentford

    The Lord Stern of Brentford

    What if their were two smiths?

    “the leading British economist The Lord Stern ” makes for a gramatically halting phrase.

  6. “What if their were two smiths?”

    That problem has arisen and there is a long standing solution. The first Smith to become a lord is Lord Smith. Subsequent Lord Smiths are Lord Smith of Oodnadatta, Lord Smith of Gulargambone, and so on.

  7. I read Ross Gittins’ article. The timing is perfect regarding ‘opportunity cost’ as a social cost notion in so far as the drought, bush fires,smoke and water restrictions, which affect so many people directly or indirectly such that the shared environment is valued like a common good by many. It won’t take long, I suspect, until at least a non-negligible number of people notice that their personal opportunity cost is different. Then, without a domestic administered carbon price and some form of border tax on ghg emission embodied in goods as proposed by the EU, the whole argument will start again. Perhaps I am wrong, which I’d like very much, and the momentum generated in favour of thinking of a social opportunity cost is sufficient to sway the government without requiring an election.

  8. It wasn’t so long ago, 10 years or so, when certain libertarian types argued that climate change wasn’t a market failure, it was a market absence.

    It’s a neat way of keeping the market “free”.

  9. According to Hilary Mantel, Cromwell was taken on by Henry VIII when he advised succinctly on how unwise were the king’s desires and his advisers’ plans for making war (on France) without finding another method of filling the royal coffers first. Digging up vast amounts of old buried treasure tucked away all over the land and then confiscating it for the crown was the best method.

    The ‘Cromwells’ of today in fossil fuel powers are no different in advising on digging up all the buried wealth in the land for as long and as fast as possible to be prepared for the coming wars. Has Norway today, for example, done different? What is the difference in patronage between CoAlbo and Smoko here?

  10. I remember that jerk Tim Wilson years ago on ABC local radio in Melbourne ,when he used to work for the IPA, absolutely refusing to concede that anyone should in any way take carbon emissions into account when deciding how to spend their money.

    Ross Gittens once mentioned this blog in a newspaper article about a decade ago – thats how I first came here, after I finally relented and got on the internet it was one of the first things I did. I used to make comments just because I wanted to practice typing (not a good idea !).

  11. Re Ernestine Gross, I would a step further and ponder upon what four or five billion really poor people throughout the world would make of the notion that economics is a closed system within which human needs are met through impersonal mechanisms?

    Ernestine Gross, you made such a definitional set of comments about the ludicrous economics of the LNP government in an era where every resource in a non cornucopic world seems to be trashed for such pointless ends.

    The bushfires, not the slightest attempt to prepare for the inevitable season, as infrastructure cuts were made instead to provide the efficiency dividends that would further gorge TNCs and magnates. From there, the refusal of politics here to acknowledge the true nature of the environment, and even employ it as a pest in case it challenged that right to engorgement or the governments right to exist as defender of low thinking elevated to meanness as a virtue. It was only ever a pest when its finite nature was cited as means for not protecting it, under when oligarchs regarded it as any thing but a pest.

    It was good of Ross Gittins to mention the length of string argument as to the mathematification of economics, not seeing the forest for the trees is it possible the most wrong things possible are being measured for the worst possible reasons?

    Smith 9, are you also an example of the cupidity of others in the communications industries that side track from the real?

  12. There are a whole group of people who, when unable properly refute a thoughtful and reasonable argument, resort to tearing down the source over some perceived minor error.

    Bruce Pascoe is currently going through this and now Ross Gittins, apparently for improper use of a title, despite such usage being supported by Debrett’s.

  13. Richard Flanagan has gone the full court press in the New York Times. comparing Scott Morrison to Vidkun Quisling and having this to say about Siemens

    “After notoriously profiteering from the genocide of Europe’s Jews, the company is now is willing to profiteer from the omnicide of Australia.”

    I don’t think you can get a bigger externality than omnicide..

  14. Paul Walter, I don’t recall having said that economics is a closed system. I recall having identified a theoretical model from the early 1950 and a research program, which followed from it. These theoretical models are mathematical representations of ‘an economy’ as a closed system regarding natural resources. By the late 1980s or 1990s (depending on the the type of publication that is counted) research program resulted in the generic inefficiency result when markets are incomplete (missing markets). The last time I looked, in this type of literature people consider two types of market failure, seriously imperfect competition and missing markets.

    Funny how policies are at times out of sink with the research results. At the time when the generic inefficiency results were published (missing markets being the big thing), policies focused on ‘economic growth’ by increasing competition (imperfect competition being the big thing), making the negative externality problem regarding the environment bigger.

    “… what four or five billion really poor people throughout the world would make of the notion that economics is a closed system within which human needs are met through impersonal mechanisms?”

    It seems to me the problem encountered by these people and a lot more who are not quite as poor, is a different notion of ‘closed system’, namely to be locked out from the benefits, if any. Oddly, if there wouldn’t be this aversion to theoretical models written in the language of mathematics, these people could be given a powerful argument against the actual economic system, promoted as it is on ‘freedom of choice’ and market economics. The theoretical models in question (no government at all) have a very strong assumption on the wealth distribution to ensure nobody is being locked out and every body has ‘freedom of choice’.

    IMHO, the mathematical theoretical models are helpful in finding approaches to solutions to actual socio-ecological-economic problems (eg financial transaction tax, CO2 pricing, ….) However, they are not sufficient to implement policies. A narrative is required. It is the latter where the notion of opportunity cost may have traction, IMHO, and Ross Gittins is doing a wonderful job in communicating economic ideas to the public. Again only IMHO, there are not many economists like John Quiggin, who have the technical background and the writing skills and the clout within the profession to promote economics as a serious subject area rather than a fig leave for special interest groups.

  15. I want a better world, but Chicken & Chips might make me happy, for about ten minutes.
    The market is brilliant at providing C&C at an affordable price and terrible at delivering at me
    a happier world.
    The market is essentially a religion:
    If you do what the market/religion/God says, you can be happy.
    But if the market ever delivered happiness, true happiness, we wouldn’t need it anymore.
    Lots of guff, of course, about market or government interference destroying markets or doing this or that, which is plain humbug.
    When you have democracy everyone gets a say about what the market is, when you don’t, only a few people, self-appointed, do.
    Which is going to deliver you the better outcome? Go on, take a guess.

    Any conscious answer you come up with and put into words or action is interfering with the free market.

  16. What democracy is that where everyone gets a say? Ancient Athens, if free, if male? A say in what?

    Democracy here and now is where you can change the governing party, but not the governing policy of those moneyed vested interests who get most of the final say. The market floor/flaw of democracy now is where dollars can vote, and not necessarily citizen voters’ dollars either.

  17. “What democracy is that where everyone gets a say?”
    The one that we don’t have, have never had, but which we need to work for.
    The one in which ordinary people elect a person from within their own ranks, to implement their policies.
    This is the opposite of what we have, yet is clearly possible.
    Capitalism, at least as really exists, is a political system pretending to be an economic system, which does not allow democracy.
    The only way to modify State Capitalism, unless you want a revolution or forcible shift, is through government, a la an increase in democracy.
    That requires an increase of faith in democracy or ‘ordinary human beings’.
    I think it also requires a corresponding decrease in the faith in and religion of free markets, the power of dollars, whatever you call it.

  18. I agree with Lord ‘Nick’ Stern and Professor Quiggin that climate change represent the biggest market failure in history, but I do think the type of market failure has changed in the last 20 years. Back then the market failure was almost entirely about not pricing externalities. Now, because the cost of renewables has dropped so dramatically the inadequate pricing of externalities is no longer such an issue -especially in Australia. Now the market failure to be dealt with is more in other areas. So in the electricity sector, renewables are the cheapest way to provide electricity. Why then are we not seeing renewables going through the roof even more rapidly than they are now? And for almost all households some solar panels on the roof would save money and be an excellent investment. Why then do we not have almost all households with solar panels? The reason these things are not happening is because of multiple market failures including state protected private monopolies, wrong pricing of the cost of capital, inertia, inadequate information etc etc. So in the electricity sector the focus should not be on appropriately pricing externalities but on addressing the other market failures.

    In other parts of the system, putting a price on externalities is still relevant, but even there eg the gas industry, there are lots of other market failures.

    And for electric cars (declaration. I have one), the economics of electric cars would be much more favourable if the pricing of power for electric cars took account of the benefits electric cars can contribute to stabilising the frequency of electric power in a context where renewables are providing a greater proportion of the power.

    So, I think our policies on tackling climate change need to be quite different to what we were proposing 20 years ago, because the ball game has changed.

  19. Grateful for the elaboration, Ernestine Gross. What a difference, a didactic response, I don’t feel threatened but glad for the clarification that identifies and magnifies what is at the core of my generalisation. What Ernestine says identifies not just that a flaw may exist but what component is that component that maybe “shot”.
    The problem is not in the maths, but the reactive nature of people who can’t, don’t, won’t understand through mindset and a sad lack of vision as to can be the meaning of life..”price of everything, value of nothing”, at this rather primitive time in evolution.

  20. The Bank of International Settlements Green Swan report has a useful translation of a folk saying into the language of economics.

    “you can’t eat money” becomes “limited substitutability between natural capital and other forms of capital”.

    I don’t know whether to laugh or cry.

    Click to access othp31.pdf

  21. The other one I’ve seen far too often is the translation from mother into academia. “What if everyone did that” becomes “Kants Universal Imperative” or something even worse (“the first form of” etc). And people accuse postmodernists of wilful obfuscation…

  22. “you can’t eat money” becomes “limited substitutability between natural capital and other forms of capital”.
    “You can’t eat money”: It depends what serves as ‘money’.

    “Limited substitutability” includes no substitutability, some substitutability, ….. but not complete substituteability.

    “natural capital and other forms of capital”: Land (natural capital) that is inhabitable at time t becomes uninhabitable at time t+k due to sea level rises unless there is enough other forms of capital to build a levee high enough and strong enough to keep the water out (some places in the Netherlands are inhabited several metres below sea level). This is an example of substitut\ability of natural capital and other forms of capital (human capital and machinery). But there are limits to this substitutability, more so in some cases than in others.

    I would say the expression ‘you can’t eat money’ is a very special example of the concept of ‘limited substitutability’ but the converse is not true.

    (I don’t like the word capital being attached to nature and humans and physical men and women made things such as machines and financial securities (financial capital) Using the word capital for human created objects such as machines and buildings and for financial capital had caused enough confusions in economics in years past. A well defined concept should not require a qualifier).

    As for the BIS publication, which Moz of Y…., kindly linked to, it seems to me to be noteworthy that the central theme of this publication concerns the three important and interlinked contemporary economic problems:
    1. Environmental degradation of which ghg emissions resulting in human induced global warming is the most pressing issue.
    2. Income and wealth concentration within countries and across countries
    3. Financial system stability.

    I believe there is a rather large number of economists world wide who have reached this conclusion for quite some time. However, it takes time for institutions to produce something that can be translated into many languages and is explicitly substantiated rather than resting on the more or less private analysis in individuals’ heads.

    So far I could not find an analysis in the BIS publication of how the enormous debt generation of the financial system, particularly since the 1980s, has been at least an important factor regarding item 1 and 2 in the above list.

    If I understand correctly, the BIS takes item 1 as exogenous for the purpose of risk analysis for item 3.

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