Economics in Two Lessons, reviewed

The first proper[1] review of Economics in Two Lessons has appeared, in Inside Story. It’s by Richard Holden[2] and really gets the point of the book.

The final paras:

Chapters twelve to sixteen deal with what policymakers should do, and here Quiggin’s passion is evident. Moreover, what comes through perhaps more than anything is a sense of balance. There’s what we might want to do and then there’s what the immutable laws of economics — so neatly laid down in the preceding chapters — will let us do. Whether it’s the distribution of income, full employment, or protecting the environment, constraints exist.

But those constraints offer guidance. Quiggin notes, for instance, that “the best way to help poor people, at home and abroad, is to give them money to spend as they see fit, rather than tying assistance to particular goods and services. In other words, it is better to fix the inequitable allocation of property rights in the first place than to fix the resulting market outcome.” Whatever the topic, the framework disciplines and sharpens the policy thinking.

There is little doubt that Quiggin’s Economics in Two Lessons will be an instant classic and feature on university reading lists around the world. It should also be compulsory reading for policymakers and public commentators, who all too often lack a framework for thinking clearly about the costs and benefits of markets. The good news is that Quiggin has one — and he’s happy to share.

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Coming events

I’ve got quite a few events coming up in the next couple of weeks.

* On 13 and 14 May, I’m running a workshop at the University of Queensland on Epistemic & Personal Transformation:
Dealing with the Unknowable and Unimaginable
. Details here.

* On Thursday 16 May, I’ll be at ANU for the official Australian launch of Economics in Two Lessons.  Details are here. If campaigning permits, Andrew Leigh will say a few words about the book. There will be a launch at Avid Reader in Brisbane in late June (date tbd), and in Sydney and Melbourne a bit later

* On Wednesday 22 May, I’ll be delivering the Keith Hancock lecture for the Academy of the Social Sciences in Australia, at the University of Queensland. Topic is The Future of Work. Details here.

* I’m doing a number of radio interviews related to Economics in Two Lessons. I talked to Radio SER in Sydney yesterday. On Saturday 18 May, at 7:45 am, I’ll talk to Geraldine Doogue on Saturday extra, then on Wednesday 15 May to Steve Austin on ABC Radio Brisbane Drive.

Was Hazlitt an Austrian economist?

Reviews of Economics in Two Lessons are starting to come in. Here’s one, favorable but not rapturous from Diane Coyle. Another, from David Gordon at the Mises Institute is, not surprisingly, more negative.

The main (though not the only) complaint is that I treat Hazlitt as a One Lesson neoclassical economist. More precisely, in relation to opportunity cost “[Quiggin] applies the concept as it is used in neoclassical economics, but Hazlitt was an Austrian and does not use the concept in this way.” In particular, Gordon complains that I invoke “neoclassical equilibrium” a concept rejected by Austrians.

I have a couple of responses to this.

Read More »

My Princeton UP interview on Economics in Two Lessons

You are here: Home / !Post Type / Author Interviews / John Quiggin on Economics in Two Lessons

April 23, 2019

Quiggin_Economics in Two Lessons_S19

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.

Today’s the Day

It’s now April 23 in the US, the official release day for Economics in Two Lessons. That’s nearly eight years after I started work on the book. I think it’s been worth the wait. The painful process has produced something better than I originally planned, with plenty of help from commenters here and elsewhere.

According to Amazon, the book is often bought along with Crashed, by Adam Tooze, which is great company to be in.

[Begin plug] If you’ve read and liked the book as it appeared here, this would be a great time to contribute a quick review [End plug]

Economics in Two Lessons, coming soon

After eight years, Economics in Two Lessons will be officially published in a few days. According to Amazon, it’s now #1 in Hot New Sellers in microeconomics.

https://www.amazon.com.au/gp/new-releases/digital-text/2523939051/ref=zg_bsnr_nav_kinc_4_2523923051

I don’t know exactly what that means, but it sounds good.

I’ll try to follow up with more general news soon, but for now, I’d appreciate anything you could do to spread the word about my book.

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