Market prices, opportunity costs, and all the other realities a society has to deal with. Notes on ‘Economics in Two Lessons’


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Here is the speech Nicholas Gruen delivered at the 19 July launch of John Quiggin’s new book, ‘Economics in Two Lessons’. The extract picks up after Gruen’s outlining of the career of ‘Australia’s most overachieving economist’.

I’m not much of a fan of the endless KPIs into which academic life has descended (and which constitutes an important reason why I’m not an academic). I hate the reductive gravity to which they subjected pretty much everything in their path. Academics’ KPIs enable their performance to be judged by people completely ignorant of their work. What could possibly go wrong?

Still, to paraphrase Groucho Marx, in John’s case, I’ll make an exception, as his KPIs have been achieved whilst actually addressing useful questions rather than disciplinary arcana. John’s been placed in the top 5% economists in the world according to IDEAS/RePEc and two Federation Fellowships from the Australian Research Council.

I don’t really believe a word of this.

The dark, dirty secret is that these accomplishments were mostly established when John wore a big, black beard that had people wondering who he really was – and why he looked so much like Captain Haddock from the Tin-Tin cartoon books. It’s not the kind of thing one is thanked for if one is launching a a book, obviously. But this is an existential matter for anyone who still clings, however quixotically, however much it offends the Nietzschean verities, to the idea that he’s still part of the reality based community.

To speak truth to a poster-boy of our KPI-riddled academic community, behind that beard he could have been any number of people – all at once.

Since he’s cut his beard off, his pace may not have slackened but I thought I’d get used to his unbearded face very quickly. However, John lives in Queensland and I live in Melbourne. So I’m afraid I don’t really recognise him. It’s not the chin I used to know. So for me anyway, until I see that beard back, I think of him as the economist formerly known as John Quiggin.

Anyway, not content with the five books he’s already published:

  • Work for All
  • Great Expectations
  • Taxing Times
  • Uncertainty, Production, Choice, and Agency: The State-Contingent Approach
  • Zombie Economics…

…John’s written another book – which on my reckoning is the economist formerly known as John Quiggin’s second unbearded book.

What’s the message of the book?

I can explain that by telling you a story.

I was once at a lunch following the launch of Nugget Coombs’ last book at which an acolyte was on my left and Nugget was on my right. The acolyte said that economics was far too complex and technical for her to understand. I responded that economics might look complex, but that it’s all based on one idea. Nugget, who, like surprisingly many economists towards the end of their days is despairing of their profession, leant across to her and said: “Yes, and it’s wrong!”

The idea I was thinking of is the idea of opportunity cost. Which is a simple but sometimes subtle idea. And John doesn’t think it’s wrong. He thinks it’s right.

It’s just that he thinks it hasn’t been taken seriously enough.

How to assess opportunity cost

Henry Hazlitt’s Economics in One Lesson states the lesson thus:

“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

This is actually code for ‘the market’. Like a lot of economic rhetoricians (some of whom were fine economic theorists too), having called for a thorough investigation of all the impacts of policies, Hazlitt then proceeds to out-source this Herculean intellectual task to the market. Hazlitt is trying to put one over on us – something he no doubt accomplished in the traditional way of the ideologue, but putting one over on himself.

Quiggin reformulates Lesson One as thus:

“Market prices reflect and determine opportunity costs faced by consumers and producers.”

Reducing the ambitions of Hazlitt’s initial goal to this reductive dreck is the thing that Nugget Coombs had lost patience with all those years ago. So, John proposes a second lesson as a corrective.

Lesson Two:

“Market prices don’t reflect all the opportunity costs we face as a society.”

Quite.

Let me name some of the things that I like about this.

  • It’s simple and parsimonious
  • It’s not based on an elaborate model of the way the economy works, but on a simple principle that works whatever one’s model of how the economy works (within reason) and it’s been at the heart of economics since Adam Smith. If people face the true costs and benefits of their actions, they’re likely to be the best judge of them.
  • I like the way the economist formerly impersonating Captain Haddock has used this singular idea of opportunity cost and taken it as far as he could so that he cleans up all manner of puzzles, not by invoking the ‘government clause’ – Lesson Two – but by explaining how markets can be made to work better. He reels off lots of triumphs of market economics, but makes sure we don’t lose track of the finer points, where problems and puzzles remain.
    • Yes, airline deregulation worked better than what went before, but left us with some things that we’ll need lesson two for.
    • No, price-regulating competitive markets will probably end in disaster, including in the area of rent control, where John references a quip my father was fond of, originated by Swedish economist Assar Lindbeck: “rent control appears to be the most efficient technique presently known to destroy a city – except for bombing”.
  • Then, he shows how the notion of opportunity cost shouldn’t just be the underpinning of microeconomics, and provides a bridge between it and macroeconomics. For when there’s slack in the economy, all kinds of divergences open up between the opportunity costs of labour from unemployed workers’ point of view and their employer. That’s what justifies government action from outside the market sector to alleviate the divergence by targeting full-employment.
  • I also like the terminology of ‘one lesson’ and ‘two lesson’ economists. I have a particular dislike of tendentious labels like ‘market fundamentalist’. It’s the arguments that should do the work, not the name-calling. Still, in the context of this book, the author has his revenge because after he’s been through it all and you don’t want to be a ‘one lesson’ economist.
  • John’s popular books always have interesting bits of disciplinary history that I’m glad I read about. I knew of Pareto’s patrician values, but not that he ended up supporting Mussolini.
  • Friedrich von Wieser, the Austrian economist who coined the term ‘opportunity cost’ (‘Opportunitätskosten’ in German) along with the equally notable term ‘marginal utility’. But his elaborations of these ideas brought him to the same commonsensical conclusions about the different usefulness of money to poor and rich people that English economics had arrived at – courtesy of scholars like Marshall and Pigou – by the turn of the 20th Century. Still, he put this humdrum insight, still struggling for recognition in today’s economic and policy discourse, in an arresting way:

It is … the distribution of wealth that decides what will be produced, and leads to a consumer of a more anti-economic variety: a consumer wastes on unnecessary, guilty enjoyment that could have served to heal the wounds of poverty.

What a pity that, in opening up valuable new vistas, Wieser’s students Mises and Hayek paid so little attention to such a commonsensical idea.

  • I hadn’t thought of using the geometric mean to measure per capita economic wellbeing, but it’s a good idea. And yes, John was right, we’ve all forgotten what a geometric mean is – or at least I had.
  • On page 69, John outlines a puzzle in which you get a free ticket to an Eric Clapton concert and can buy a ticket to a Bob Dylan concert on the same night for $40 which you value at $50. You’re asked what the opportunity cost of this is. It’s striking that, typically, economists don’t know the answer: Just another illustration of how economists are (sadly) taught to think of their discipline as nothing much more than the application of various techniques that get flashed in our work like we flash our credit cards at the counter, rather than being in accordance with the fundamental ideas from which the discipline is built. A disciplined unmoored from its intellectual foundations is a tragedy, but John’s book shows us that it’s a farce as well, given how simple those foundations are. As Keynes put it pithily, economics is an “easy subject at which very few excel!”
  • Finally, I was mentioning this launch to a friend and colleague who sent me his favourite sentences from the book. “Whatever happens to Bitcoin, we must not lose sight of a more fundamental, and more worrisome, development. A financial product with a purely arbitrary value has been successfully introduced in the world’s most sophisticated financial markets.” Indeed.

The book doesn’t break any new ground in a disciplinary sense, because it’s intended as a general introduction to economics for the interested public, rather like another excellent book by John Kay. If you liked John Kay’s The Truth about Markets, you’ll like Economics in Two Lessons.

I thought I’d leave you with the thought that ran through my mind as I read this book. I wanted another lesson. I’m currently in the process of writing my own sixth book – well OK it’s my first book and I don’t have a publisher, so I probably shouldn’t get ahead of myself. But a central idea in it is this:

“The complementarity of the private and the shared, of competition and collaboration, exists not only at the level of the whole economy – where it’s represented by ‘the market’ and ‘the government’ – but at every level in our society and economy. Indeed, it inhabits all our social institutions right down to every conversation.”

Why am I telling you this? Because, although I’m not getting paid for this, there’s still no such thing as a free launch.

So, buy as many copies of John’s book as you can afford, but remember, there’ll be another book coming out some time later, and you’ll want to buy at least one copy of it. Just think of John as Bob Dylan and me as Eric Clapton, each coming with our own opportunity cost.

I’ll be watching sales of this book carefully. With the sellout 1946 edition of Economics in One Lesson now superseded by Economics in Two Lessons, keep an eye out and a small place in your budget for Economics in Three Lessons.

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