Competitive equilibrium (excerpt from Economics in Two Lessons)

John Quiggin45 Comments

I’m now coming up to (what I hope will be) the most challenging part of my book-in-progress, Economics in Two Lessons. The core theoretical point the first part of the book (Lesson 1) is that, under a set of ideal assumptions, competitive equilibrium prices both reflect and determine the opportunity costs faced by consumers and produces. This means that there is no way to rearrange consumption to make someone better off unless someone else is made worse off. (I’ve already mentioned my reasons for avoiding the term “Pareto-optimal” in this context.

What I’m trying to do here is to spell out the logic underlying these results in a way that foreshadows the discussion of market failure and income distribution, in Lesson 2, but still shows the power of market mechanisms. I’ll probably need a few goes at this, and this is my first try. Critical comments on everything from the underlying theory to editorial nitpicks are welcome. Sincere praise is also welcome of course, but constructive criticism is best of all.
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After Melos

John Quiggin27 Comments

I’m sure I’m not the only person who’s been thinking about the words Thucydides assigns to the Athenians in the Melian dialogue

The strong do as they will and the weak suffer what they must

And I knew the immediate context. Militarily powerful Athenians demanded that the inhabitants of neutral Melos surrender their city and pay tribute. When the Melians refused, Athens invaded, slaughtered the men and enslaved the women and children.

I didn’t however, have any broader context in which to place this episode, even though the information is readily available on Wikipedia for example, which is my source here (apologies in advance to any actual experts for inaccuracies). The story begins with the formation of the Delian League, an expression of Greek unity in the war against Persia. The Athenians used the League to supplant Sparta as the hegemon of Greece, and then to oppress the other members, leading to a series of attempted defections. In Thucydides words

Of all the causes of defection, that connected with arrears of tribute and vessels, and with failure of service, was the chief; for the Athenians were very severe and exacting, and made themselves offensive by applying the screw of necessity

Eventually, this policy lead to the outbreak of war with the Spartan-led Pelopennesian League (this war was Thucydides’ subject). The war on Melos took place during a brief period of peace about half way through the war. The war ended with Athens being utterly defeated. Only the mercy of the Spartans prevented the Athenians sharing the fate they had meted out to the Melians a decade earlier, as Sparta’s allies demanded.

Rather than extract analogies to current events, I’d like to observe that the historical setting suggests a very different reading of the dialogue to that commonly seen today. In most of the contemporary discussions I’ve read, the Athenian side of the dialogue is presented as embodying the remorseless logic of power politics. But in the light of the outcome (well known to his intended readers), it seems to me Thucydides is better read as showing the Athenians as subject to the kind of hubris that demands, and inevitably receives, punishment. By contrast, while the Melians made a bad bet in resisting, their arguments are entirely sound, and should have been convincing to a rational hegemon.

Those whom the gods wish to destroy, they first make mad.

Bluffed

John Quiggin111 Comments

Obviously, my analysis of the Greek debt crisis was wrong. My crucial error was the assumption that, having held the referendum and being faced with an unacceptable offer, Tsipras would choose exit from the euro rather than capitulation. Judging by this interview with Varoufakis (H/T Chris), that’s what Tsipras thought too, until, too late, Varoufakis told him it couldn’t be done. Certainly Tsipras’ actions were consistent with that interpretation.

Syriza has clearly been beaten. But I doubt that the outcome will work well for the other side in the long run. (Nearly) everyone understands that the debt can’t ultimately be repaid. But the German voting public hasn’t been told that. A deal that had some kind of quasi-automatic mechanism for writing down the outstanding balance (for example, by multiplying up the proceeds from asset sales) might have got around this problem. As it is, an explicit writedown will be needed at some point, presumably after Syriza has been forced out of office. That will be incredibly unpopular in Germany, while making clear to everyone else the locus of sovereignty in the post-crisis EU.

Update Commenters generally disagree with my take on the Varoufakis interview. I’m not wedded to it. The crucial point is that exit from the euro is extremely difficult, and that this fact will be used to punish any eurozone country that tries to resist the controlling powers.

TISATAAFL

John Quiggin32 Comments

Another excerpt from my book-in-progress, Economics in Two Lessons. To recap, the Two Lessons are

Lesson 1: Market prices reflect and determine opportunity costs faced by consumers and producers.
Lesson 2: Market prices don’t reflect all the opportunity costs we face as a society.

In this section, I’m working on Lesson 1, leading up to the point (my restatement of what’s usually called the First Fundamental Theorem of Welfare Economics) that an ideal competitive equilibrium is one in which there are no unexploited potential gains from technical improvements or mutually beneficial exchange. For reasons I’ve spelt out already I don’t want to use the term “Pareto-optimal” to talk about this. I also want to confine “efficient” to its normal meaning of “technically efficient” and avoid the common economist practice of extending this to cover various definitions of “market efficiency”. So, I’m talking about “free lunches” or, more formally, benefits with no opportunity cost.

In Lesson 2, I’ll be looking, among other things, at the Second Welfare Theorem, which says any outcome with no free lunches corresponds to a particular initial allocation of property rights, broadly defined to include taxation obligations and entitlements of all kinds.

Now please comment, criticise and hopefully enjoy

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Balancing the books

John Quiggin43 Comments

I’ve been at the Australian Conference of Economists for the last few days. Today we had presentations from the Queensland Treasurer, Curtis Pitt, who is about to bring down his first budget, and from Commonwealth Treasury Secretary, John Fraser.

Curtis Pitt’s big announcement was a rearrangement of debt and equity in Government Owned Corporations, increasing their borrowing and transferring the resulting equity to the general government balance sheet. The result is a $4 billion reduction in general government debt, part of a program to bring the debt/revenue ratio down to around 70 per cent.

A transfer like this doesn’t make any difference to the state’s net financial position. Bu it makes the point that publicly owned assets are assets, not liabilities, and the fact that we own them makes the state’s position stronger. As long as the higher gearing ratio is commercially sensible and the debt can be serviced out of GOC earnings, there’s no reason not to use this to improve measures of general government debt.

Privatisation also makes no difference to the net position, assuming assets are sold at their value in continued public ownership, and the proceeds are used to pay down debt. However, the StrongChoices plan put by the LNP at the last election, would have dissipated around half of the sale proceeds on pork-barrel projects (to be delivered only if the LNP won the seat in question). So, compared to the alternative, Labor’s management is fiscally responsible.

The only measure that is unaffected by balance sheet reshuffles (at least if it is correctly measured) is net worth, and the only way to increase net worth is for income (revenue and asset earnings) to exceed expenditure.

John Fraser’s performance was as expected, which is to say, deeply disappointing. As a colleague sitting at our table remarked, he came across as a politician not a Treasury secretary. Fraser repeated the Henry Review’s criticism of stamp duties and the case for not taxing mobile capital. But when I asked if that meant he supported land taxes, he squibbed the question, waffling on about what a great group of officials he was working with in the states.

Sandpit

John Quiggin18 Comments

A new sandpit for long side discussions, idees fixes and so on. Unless directly responding to the OP, all discussions of nuclear power, MMT and conspiracy theories should be directed to sandpits (or, if none is open, message boards).

Backing down on Greece’s debt is the safest, most rational option

John Quiggin160 Comments

I wrote this for The Guardian and Crooked Timber in response to the Greek referendum result.

Lots of people have raised the suggestion of applying game theory to the the Greek debt crisis. I haven’t attempted this, reflecting my general scepticism about game theory in the absence of a well-defined strategy space. But now the Greek government and public have made, what is, in effect, a final move. In view of the No vote, Syriza can’t accept a deal that doesn’t include an explicit debt write-off or one that obviously crosses its stated red lines. Within those parameters, its clearly eager for a face-saving compromise.

For the other side (effectively the Troika and the German government), since Syriza’s move has already been made, the problem has now been reduced to one of decision under uncertainty, which is something I am comfortable with. More precisely, it’s a choice between a “safe” option, with an outcome that is fairly predictable, and a “risky” option where the outcome is uncertain.
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Locke and the Declaration (crosspost from Crooked Timber)

John Quiggin2 Comments

I didn’t take part in the book event on Danielle Allen Our Declaration, except as a commenter. But, as it happened, I converged on some of the central questions by a different route. For some time now, I’ve been writing critically about John Locke and his propertarian theory of liberalism. Increasingly, I’ve come to the view that Locke is best seen as an American rather than an English political theorist, even though he was an absentee owner rather than an American resident.

Further, while his writings appear liberal if interpreted in the English context, and if attention is focused on the passages where he is seeking to diminish the power of the English monarchy, his crucial contributions to the theory of propertarian liberalism are his justifications of expropriation and enslavement in the American context. The combination of the two made him the ideal theorist for those who wanted a Declaration of Independence that justified rebellion against the British monarchy, in combination with rule by a slave-owning aristocracy in the newly independent country.

James Wilson’s contribution to the Daniel Ellen seminar, The Declaration of Independence isn’t egalitarian enough explores many of the issues, as does Gabriel Winant.

I’ve made a start to spelling out the arguments in a piece for Jacobin magazine, entitled John Locke Against Freedom, which has given rise to some interesting discussions on Facebook, Twitter etc. Chris Bertram has raised some effective criticisms, and hopefully will spell them out in more detail later on. A couple of notable points, with partial responses

* I’ve overstated the extent to which Locke’s influence was confined to the American context, although it remains clear that his political theory mattered more in that context than in England

* Even if Locke himself advocated and benefited from expropriation and slavery, it’s not obvious (as I assert) that his theory of classical liberalism necessarily entails these things. I plan to spell out the argument in more detail soon.