Economics in Two Lessons

by John Quiggin on May 16, 2015

I’ve been promising for a long time to write a new book, framed as a reply to a free-market tract Economics in One Lesson by Henry Hazlitt, published in 1946, but still in print and popular among free market advocates. Its popularity reflects the fact that it’s a reworking of Bastiat’s “What is Seen and What is Not Seen”, still one of the best statements of the case for free markets.

Bastiat’s argument is implicitly based on the concept of opportunity cost but, since the term wasn’t coined until 1914, he doesn’t use it. Neither, more surprisingly, does Hazlitt. Once this is made explicit, Hazlitt’s rather ponderous, and misleading statement of his “One Lesson”

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.
can be boiled down to the much simpler statement “Market prices reflect opportunity cost”. In important respects, this is true, particularly when we consider the problem from the perspective of choices about how to allocate an individual, family or government budget. With fixed aggregate levels of public expenditure, for example, more money for the military means less for schools, and vice versa.

There are plenty of other questions about private and public decisions for which Hazlitt’s One Lesson is useful. Another example is the well-supported finding that the best way to fight poverty is to give money to poor people. This is unsurprising given that poor people themselves will usually have a much better idea of the opportunity costs they face than will those seeking to help them.

But as a general statement, Hazlitt’s One Lesson is false, which is why my working title is Economics in Two Lessons”. Lesson Two is “Market prices do not reflect all the opportunity costs we face as a society”

To someone trained in mainstream economics, as I have been, the immediate examples of this Lesson are “market failures”, such as externality, monopoly and information asymmetries. I originally planned my book to focus on these market failures, making it a somewhat idiosyncratic take on what is usually called public economics. But I kept feeling that I was missing out too much that was important: unemployment, income distribution and many other issues.

After struggling with this for a long while, I reached the conclusion that a framing in terms of opportunity cost worked to deal with the issues with which I was most concerned, and allowed for a more fundamental critique of the free market position. My central point is that, before we even consider whether a set of market prices is subject to market failures in the usual sense), it is necessary to consider

  • The allocation of property rights, broadly defined to include rights to pensions and social security, obligations to pay tax and so on, and the opportunity costs associated with alternative allocations
  • Whether the market outcome is a full employment equilibrium or a recession/depression. In the second case (very common, as I will argue), markets don’t properly match supply and demand, so that prices and particularly wages do not determine opportunity costs in general.

My recent posts about the nature of property reflect some of my thinking on the first point, and I’ll soon be posting about the second also. As with Zombie Economics, though less systematically, I’m planning to put up draft extracts from the book for comment and criticism.

{ 72 comments }

1

Nicholas Gruen 05.16.15 at 5:13 am

Sounds like a good project John, Best of luck with it.

Reminds me of a lunch I had after Nugget Coombs launched his last book prophetically entitled “The return of scarcity”. I was on a corner of the table with Nugget on my right and a somewhat ditzy acolyte on my left. She said to me “I’ve never been able to understand economics. It’s so technical”. I said something like “that’s just the window dressing. There’s only one idea in economics”. Nugget leant across and said “Yes, and it’s wrong”.

2

Nicholas Gruen 05.16.15 at 5:19 am

More seriously, I think there’s a wider area which is not covered even by your impatience with the constraint of talking about ‘market failure’. The quality of social capital is clearly of great importance in economic outcomes. As Adam Smith suggested in the Theory of Moral Sentiments. If you’re trying to tackle poverty that’s a pretty major issue – and also something that’s unfortunately glossed over when you say “the best way to fight poverty is to give money to poor people”. Which people? As individuals or a community? Micro-lending and the Australian Centre for Social Innovation’s experience in building Family by Family suggests at least groups of people.

3

david 05.16.15 at 5:54 am

I think Delong’s 2003 “dialogue” (reposted here) is illuminating, albeit only for the student who already appreciates some of the subtleties of welfare functions.

Once you talk about allocation issues, it’s also appropriate to conceptualize many political disputes as disguised pecuniary externalities that occur in the absence of a complete market in contingent securities. Even formally capturing the concept of a pecuniary externality alone punches a hole in the Bastatian intuition.

I advise against the second bit (on general macro disequilibrium) mostly because you won’t sound remotely exciting next to whatever Steve Keen can concoct. What’s the point of motivating a buy-in on most of an orthodox macro?

4

Sandwichman 05.16.15 at 5:56 am

Hazlitt was also hostile toward “growthmanship,” which he lumped together indiscriminately with Keynes’s analysis. His position throws light on aspects of contemporary austerity policy that are frequently overlooked. In the 1950s, several of Hazlitt’s Newsweek columns criticized the “fetish” of economic growth. The following is a good example:

Rates of Growth

August 25, 1958

Is it true, as we are now so frequently told, that Communist Russia’s economic “rate of growth” is faster than ours, or that we cannot survive unless we increase our own “rate of growth”? There are at least five main reasons why rate-of-growth comparisons are untrustworthy.

1—In the midst of daily glib comparisons of national income and particularly “gross national product,” or GNP, it may come as a shock to many to learn that these figures are in large part arbitrary. It is impossible to compare the national income of Russia with that of the U.S. We do not know whether the Communists are telling the truth about specific output figures. Even if they were, their figures would have little comparative meaning. They have no true market prices, but only arbitrary government prices and wages. The production of specific goods is not determined by consumer demand. The comparative purchasing power of the inconvertible paper ruble and the U.S. dollar can only be guessed at.

2—It would take a book to describe all the arbitrary judgments and guesses that enter into even our own national income figures. They measure only the values that pass through the market. When a man marries his cook, for example, the money value of her services disappears from the national-income accounts. Inflation constantly changes the value of the dollar in terms of which everything else is measured.

The President’s last annual Economic Report boasted in its opening paragraph that the nation’s output of goods and services in 1957 totaled $434 billion, “5 percent larger than in the preceding year.” Only later in the report were we explicitly told that “four-fifths of this increase was accounted for by rising prices,” and that therefore “in physical terms, the increase was only about 1 percent.” This July, however, all nationalincome estimates were revised again. It seems the government statisticians now think our GNP in 1957 was not $434 billion but $440 billion and that our 1956 GNP was not $415 billion but $419 billion. Yet in “1957 prices” our 1956 GNP was $435 billion.

3—It may be thought that we can make meaningful comparisons between the Russian economy and our such as pure metals in ingot form, this may be possible. But in most things there are enormous qualitative differences that never get into quantitative statistics. Not how much clothing but what kind of clothing; not how many square feet of housing but what kind of housing; not how much food in bulk but in nutrition, variety, flavor, and quality is what counts for economic welfare. Even in military weapons, quality may be the decisive factor.

4—Prof. G. Warren Nutter has pointed out that there is “a long-run tendency . . . for the industrial growth rates to slow down, or retard, as the level of production gets higher.” There are several basic explanations of this. One has to do with a trick of percentage figures. Another has to do with a physical satiety point in human needs. If only one family in a country has a bathtub, and the next year 50 families get one, the rate of growth is 5,000 percent. But when everybody has a bathtub net growth stops. This principle applies to houses, automobiles, radios, television sets, and so on.

5—Here we come to a more subtle point. Larger crops often have a smaller total dollar value than smaller crops. (Hence crop-restriction schemes.) But this merely illustrates a wider principle. Economists have pointed out since the time of Adam Smith that it is not “value-in-use,” but scarcity, that determines “value-in-exchange,” or money price. Water is an indispensable commodity that ordinarily commands no price at all. If more and more things became plentiful (except dollars), the national income, as measured in dollars, might begin to fall. If we could imagine a situation in which everything we could wish for was in as adequate supply as air and water, we might have no (monetary) national income at all!

Let’s stop making a fetish of national income statistics and percentage rates of growth.

5

david 05.16.15 at 6:40 am

railing against capital-accumulation-oriented growth in 1958 would appear to be self-discrediting, unless you have some particular objection to washing machines and plastics in the home

6

Nicholas Gruen 05.16.15 at 7:02 am

david,

Adam Smith made similar points in the eighteenth century. It’s a mainstream story, even if each generation underestimates the extent to which what is now seen as a luxury will be seen as a necessity or, failing that, highly desirable. Like a washing machine.

7

Matt 05.16.15 at 7:30 am

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.

A discipline that could actually do this would be called something science fictional like “psychohistory.” The straightforward reading implies a task so difficult that I question the wisdom of taking it even as an aspiration.

But it works with the right conception of “tracing the consequences”! You take stock templates of standard consequences, say “minimum wages actually hurt workers”, and you just place any new act or policy on top of that template and trace over it to get the same shape repeated all the time. Ta-da, now you can trace the consequences for all acts and groups, no specialist knowledge of particulars required.

8

david 05.16.15 at 7:39 am

No – Hazlitt was writing in an era where the mainstream was Keynesian and his specific attacks (e.g., on the use of physical output measures, by which he is referring to the steel production of which the USSR was so proud) must be understood in that frame. His railing against national accounting arose in a context where the USSR seemed to be doing very well indeed – if not better than the rich US, then certainly well enough to be alluring for key Cold War allies, and Hazlitt very much believed that social democracy was a mere halfway house to Soviet communism.

9

Bruce Wilder 05.16.15 at 8:32 am

Opportunity cost or uncertainty?

10

Robespierre 05.16.15 at 9:31 am

I’d add a third: willingness to pay – dependent on ability to pay -, and therefore price, is not a good measure of utility. If I can afford to pay more for my third meal than a penny-less man is able to give for his first, I will get fat and he will go hungry.

11

reason 05.16.15 at 12:14 pm

And where is opportunity cost to FUTURE generations of using non-renewable resources now?

12

reason 05.16.15 at 12:31 pm

As Robespierre points out, this is a bit besides the point. The critical point is opportunity cost for WHOM?

13

stevenjohnson 05.16.15 at 1:47 pm

Sandwichman@4 I believe what Hazlitt was driving at, in suitably disguised form, was the the key issue was the amount of profit, and for whom? There is no economic crisis until the wrong people lose money. There are no market failures if the right people are making money. I’m not sure that Quiggin, God bless him, understands anything about Hazlitt if he doesn’t get that. Also, I should think that reminding people of Hazlitt’s Time Will Run Back wouldn’t be a more potent critique. The comparison between his dream world and reality should be quite enlightening.

But on second thought, I apologize for an ungenerous slight to Quiggin. Hayek’s Road to Serfdom, refuted by decades of nations traveling that road without ever gettting to serfdom, hasn’t damaged his reputation in the slightest.

14

stevenjohnson 05.16.15 at 1:49 pm

That should have been “would be,” not “wouldn’t be a more potent critique.” My proof reading skill are radically diminished by a box around the text.

15

William Timberman 05.16.15 at 2:23 pm

Matt @ 7

A discipline that could actually do this would be called something science fictional like “psychohistory.”

Or Red Plenty. If we had fast enough computers, and big enough data to funnel into them, might central planning not actually become viable? Before the post-J. Edgar red-baiters come after me, though, let me hasten to add that I offer the following only as a thought experiment:

Could we not explore, as Francis Spufford almost did, the possibility of dispensing with price signals in favor of NSA’ing or Googling up every last little bit of everyone’s daily choices and see what that contributed to our analysis of opportunity costs? What would our fancy-schmancy heuristic algorithms in the current state of their sophistication have to tell us, I wonder. What more might we expect of them in the future? And finally, what, if anything, does this imply for prospective careers in policy wonkery?

16

Peter Dorman 05.16.15 at 3:55 pm

John’s zombie book did a lot of good, and I’m looking forward to his two lessons, although I’m afraid the second lesson is going to proliferate into many parts and subparts. It’s hard to be concise and punchy if you want to take a more realistic view of things.

To make matters worse, I think he is leaving out important parts of the critique of free market fundamentalism. I’ve argued for a long time that the original sin of the market fetish is the assumption that there is no interaction, cultural, technological, ecological or of any other sort, outside the marketplace. Assuming a world in which the whole is never more (or less) than the sum of its parts underlies the assumption of a single equilibrium in every market and in the system as a whole. You would need this, for instance, to attach any normative significance to the opportunity cost implications of market prices. Of course, the assumption is rarely made explicitly, and most people, including economics textbook authors, who promote the utilitarian case for free markets are unaware that such an assumption is required. This argument is logically prior to all the others about market failure: market failures are neither necessary nor sufficient for the interaction effects that give rise to multiple equilibria.

I’ve thought that this point deserves a whole book in itself, and if I ever get the time for it, it’s on my to do list. But I’d be very happy if JQ wrote it instead. Someone should do it.

As for the book that JQ actually wants to write, I’m happy to hear that he will point out that the allocation of rights—property rights, social insurance rights, institutional rights (e.g. whether or not a society has employment at will)—are also prior to market outcomes. This is one reason, even before we get empirical, for rejecting the argument that equity and “efficiency” are always at loggerheads.

17

Daniel 05.16.15 at 4:01 pm

Could we not explore, as Francis Spufford almost did, the possibility of dispensing with price signals in favor of NSA’ing or Googling up every last little bit of everyone’s daily choices and see what that contributed to our analysis of opportunity costs?

Basically no, for quite profound mathematical reasons which Kantorovich himself set out, and regularly got himself and his colleagues into trouble for not dressing the fact up in sufficiently Soviet language.

18

Daniel 05.16.15 at 4:03 pm

(Note that doing away with the price mechanism is a very much more radical step than just having a centrally planned economy. It would mean radically reducing the amount of feedback to the planners from the consumers at the end of the chain.)

19

anon 05.16.15 at 4:42 pm

The allocation of property rights, broadly defined to include rights to pensions and social security, obligations to pay tax and so on, and the opportunity costs associated with alternative allocations

That is a very radical proposition. Certainly the legal system in US/UK/EU treat the property rights of the wealthy far more seriously than those of the poor.

20

Bruce Wilder 05.16.15 at 4:54 pm

We could stop lying about how we use the price mechanism. We could stop lying about having a “market economy” and about supposedly not-having a command-and-control economy. We could stop lying about whether markets, actual and metaphorical, are “self-regulating”.

The thing about “opportunity cost”, which other commenters have already pointed out, is that it only makes sense when we know enough. Mostly, we do not know enough, and our future or alternative choices are lost in a fog of uncertainty. Hazlitt, to state the obvious, was not an economist, but a hack journalist, whose mission in life was feeding complacency to reactionaries. “Market economy” is Cold War propaganda, not science.

We can imagine a pure market economy, but to make that exercise work out in logical, deductive reasoning, we have to resolve away uncertainty, and the resulting palace of the mind is deeply unrealistic, presenting sharp and remarkable contrasts to the actual features of the institutional economy. That contrast could be a rich source of information and knowledge, if economists would take their heads out of their derrieres long enough to look at the actual economy. If the first lesson is to think logically about consequences within a presumed system, my second lesson would be to acknowledge the role of uncertainty, and to look and to see.

There’s an elaborate argument about how we need prices to reveal preferences, and it is not entirely wrong, but the deeper need is to de-couple the system. All the computers in Google’s fantastic network are not enough to resolve the answer to every detailed question to a point. We simply do not know a great deal more than we do know. And, consequently, we need the system to be loosely coupled. Prices and money let us do that in a way that, nevertheless, allows people to strive (and we do need striving).

The thing is that the de-coupled system is not a “market system” seeking equilibrium, and cannot be. In our actual economy, in our conditions of limited knowledge, we make sunk-cost investments and commitments routinely and all of our deals and exchanges are contingent. The result is that there are few actual markets in our market economy, and most of our administered and metaphoric markets do not clear in price. That’s just an observable fact. If you wilfully fail to observe it, and fail to draw appropriate implications, you are probably an economist.

21

geo 05.16.15 at 5:00 pm

Daniel @18: Note that doing away with the price mechanism … would mean radically reducing the amount of feedback to the planners from the consumers at the end of the chain.

For a different view, see Michael Albert and Robin Hahnel’s Quiet Revolution in Welfare Economics, The Political Economy of Participatory Economics, and Looking Forward: Participatory Economics for the Twenty-First Century. (For a review of Looking Backward, see http://www.georgescialabba.net/mtgs/1992/03/looking-forward-participatory/print/.)

Daniel, would love to hear whether you know Albert and Hahnel’s work and if so, what you think of it.

22

Daniel 05.16.15 at 5:06 pm

Have heard of it, but tbh, have always instinctively shied away from it because lots of parecon people on mailing lists I was on in the 00s were not the best advertisement. I didn’t think it involved getting rid of price mechanisms though?

23

MPAVictoria 05.16.15 at 5:16 pm

“I’d add a third: willingness to pay – dependent on ability to pay -, and therefore price, is not a good measure of utility. If I can afford to pay more for my third meal than a penny-less man is able to give for his first, I will get fat and he will go hungry.”

100% right, 0% wrong.

24

The Raven 05.16.15 at 5:29 pm

William Timberman@15, Daniel@17,18: Solutions in special cases are possible, though clearly not in the general case. In problems of comparable computational difficulty, special case solutions are often of value. So the answer might be sometimes, in some cases.

The biggest problem with interpreting and applying surveillance data to the task that I can see is that surveillance data is often erroneous; we often don’t know what people will decide until they do decide, and there is a huge amount of blither posted online.

25

Sandwichman 05.16.15 at 5:39 pm

Economics in one lesson word: CULT

26

geo 05.16.15 at 5:42 pm

Daniel @22: Yes, leftists aren’t always the best advertisements for left-wing ideas.

As I remember, A&H proposed using twenty-first century information technology (unspecified, but not science-fiction-sounding — Albert was something of a computer geek) to compile a rough inventory of resources and thus of a range of possible outputs, and then to ask consumers, in a series of around seven iterations, each of which incorporated the results of the previous ones, to choose a personal/household consumption schedule. They estimated the whole process would take around as much time as filling out the average person’s income tax.

27

Sandwichman 05.16.15 at 5:45 pm

Again, J. A. Hobson on opportunity cost: “It reminds one of the famous definition of sugar as ‘the stuff which makes tea nasty when you don’t put any in.’”

28

Cosma Shalizi 05.16.15 at 5:58 pm

I’m going to regret this, but…

15, 21, 26: In a word, no. In more words, this and this. On “parecon” specifically, I refer you to David Schweickart.

(This is not to dispute the importance of what Bruce Wilder says in 20.)

29

Watson Ladd 05.16.15 at 6:07 pm

People seem to be completely ignoring what Bastiat, Constant, and Hayek actually believed. They were absolutely aware of civil society, that is the realm of human behavior outside politics. And from this perspective, the technocratic reordering of society is absolutely not on the table, being a restriction of the domain of freedom.

Of course, it’s easy to look at Hayek and say “we didn’t become serfs” in the European welfare state. But I doubt that the 1960’s protesters would have shared that assessment. Likewise, one can defend transfer payments in the abstract, or the need for regulation, but in practice the results are often far worse: consider the ignominious history of the ICC.

30

William Timberman 05.16.15 at 6:23 pm

I do realize that my comment @ 15 would have been more suitable for one of the Ken MacLeod threads, perhaps Cosma Shalizi’s ruminations about possible, actual historical antecedents of the True Knowledge, rather than here, where real economists are discussing actual, honest-to-God economics. The truth is, I couldn’t resist the irony. If, after all the money thrown down various ratholes by the control freaks at Google FaceBook and Amazon and the NSA, we still can’t figure out how much toothpaste to produce, how in hell can we (they) assume that it’s even remotely possible to manage the whole of human society. (Once more unto the breach, dear friends — a few more data farms here and there, Moore’s law kept going for just a few more years, etc., etc. — surveillance drones, water cannons, and SWAT teams if things other than prices get sticky….)

As an intrepid defender of die Gedanken sind frei, I’m inclined to assert that it doesn’t matter if you know my income down to the penny, have a record of everything I buy, where I am every minute of the day, what books I read, and every word I tweet to my friends, you still don’t know me. In fact, you still don’t know enough about me to be certain that you’re safe from eruptions from below.

Or, as Bruce Wilder puts it:

We can imagine a pure market economy, but to make that exercise work out in logical, deductive reasoning, we have to resolve away uncertainty, and the resulting palace of the mind is deeply unrealistic, presenting sharp and remarkable contrasts to the actual features of the institutional economy.

An furthermore, as he says here and elsewhere, market-clearing prices are something of a myth. Producers and marketers are always reduced to casting their bread upon the waters. Are their results really better for knowing a lot more now then they used to before computers and big data? Recent history suggests not, although it doesn’t seem likely that faulty price signaling should be blamed for the mess we’ve been in since 2008.

31

ingrid robeyns 05.16.15 at 6:31 pm

After the 2008 crisis/collapse, even libertarians like Loren Lomasky are able to see the limits to what Hayek argued for:
http://philpapers.org/rec/LOMLAL

And Daniel Hausman argued here that externalities (or: spill-overs of transactions between some people on third parties) are the rule, not the exception:
http://philpapers.org/rec/HAUWJA

John, you might find lots of relevant and interesting pieces in the philosophy of economics. Depending on whom your audience is, it may be helpful (or not) to take these on board. Either way I’m really looking forward to your blog post series!

32

bob mcmanus 05.16.15 at 6:45 pm

Fun! Here is a price theory for you

I will take Wilder a step further with two quotes from Frederick Lordon, radical Spinozist (with a soupcon of Bourdieu):

“Spinoza is very insistent on this point. Value and meaning do not reside in things but are produced by the desiring forces that seize them: ‘We neither strive, nor will, neither want, nor desire anything because we judge it to be good; on the contrary, we judge something to be good because we strive for it, will it, want it, and desire it.’”

and:

“It is precisely the deployment of this variety that life under the master-desire precludes, as the condition of the dominated produces the contraction of the domain of desire and its opportunities for joy. The distinctive feature of domination is thus to rivet the dominated to minor objects of desire, in any case those deemed so by the dominators, who keep the other objects for themselves. With joy rather than fear – this is no doubt how the dominators govern most effectively; but they delimit the joys strictly, rigorously selecting the objects of desire that will be offered. Determining the distribution of the desirable is therefore perhaps domination’s most characteristic effect, and also the most general

Symbolic violence consists then properly speaking in the production of a double imaginary, the imaginary of fulfilment, which makes the humble joys to which the dominated are assigned appear sufficient, and the imaginary of powerlessness, which convinces them to renounce any greater ones to which they might aspire. ‘For whatever man imagines he cannot do, he necessarily imagines; and he is so disposed by this imagination that he really cannot do what he imagines he cannot do.’

It follows that most of the opportunities for social joy are differential – to possess what others will not have – and the actions of reserving (to oneself, or to one’s ‘class’) and keeping away (the others) are social domination’s most characteristic gestures. But in order to be fully successful, the distributive operation of domination must meet an additional requirement; it must reserve certain objects of desire to the dominators, and make the dominated recognise them as desirable, but with a decisive provision: desirable in general, but not for them.

Left to diffuse and impersonal mechanisms, the social division of desire, working through the mechanism set forth in Ethics, III, 49, makes individuals experience the arbitrariness of their assignations as necessity, as a fatum without a god, which therefore deserves love, or at least less hatred than if one imagined it the result of a free cause. The great movement of imaginary social production assumes the task of providing justifications for the arbitrary made necessary. And from the time of the Greeks, these justifications have always fallen conspicuously inside the triangle of birth, wealth, and competence. ” End quotes

In a hierarchical capitalist society, prices (and all values) in no way reveal preferences; prices are the social constructivist means to create, maintain, and demonstrate differentials of status, power, and freedom.

33

bob mcmanus 05.16.15 at 7:02 pm

So, “panem and circenses” were cheap for plebes, and villas in Capri unimaginable, even though many more resources were spent for the former, entirely as a structuring of social desire.

Lordon thinks much Marx can and must be discarded, but LTV and surplus value etc were never objective, as if objective values are imaginable, but always socially necessary and socially determined, and labor can still create value just even more directly, as social construction.

34

geo 05.16.15 at 7:04 pm

Cosma @28 : Schweickart’s critique of Parecon is plausible and forceful. I’m not ready yet to sign up for a “balanced job complex” or to fill out my five or seven itemized consumption requests. But I think Schweickart does overlook the opportunity costs (handy term, that) of price regulation through markets, even regulated ones. In his footnote 13, for example, he explains that in the real world

Farmers overplant. Supply exceeds demand. Grain prices fall. Farmers cut back production. Demand exceeds supply. Prices soar. Farmers overplant, etc. Markets are useful, not because they bring supply and demand into alignment over time, but because provide useful information to producers as to the direction of the imbalance and effective motivation to producers to act on this information.

Albert might reply that the magnitude of suffering entailed by the sequence described in the first half of this paragraph is so colossal that it justifies a really great amount of inconvenience to avoid it, as his scheme supposedly does. Or that a society that can dispense with most of the insurance, advertising, security, high-end luxury, and other useless but profitable industries would save enough resources to make skimping on one’s consumption request unnecessary.

Also, Schweickart’s footnote 17 ascribes an “obsessive egalitarianism” to Parecon. Again, not entirely off the mark, but A&H certainly make allowances (whether adequately or not) for different needs, talents, and inclinations.

35

rootl_e 05.16.15 at 7:33 pm

People seem to be completely ignoring what Bastiat, Constant, and Hayek actually believed. They were absolutely aware of civil society, that is the realm of human behavior outside politics. And from this perspective, the technocratic reordering of society is absolutely not on the table, being a restriction of the domain of freedom.

Hayek describes the era of Combination Acts, Irish Famine, Opium War, cotton slavery, and massive imperial conquest as an expansion of the domain of freedom. The British state sponsored opium factories in Bengal, tax farming, and then narcotics dealing backed by artillery in China were not “technocratic interference”, apparently, just as secret police raping prisoners to death in Chile were not. The respect people grant Hayek’s criminal theories is grossly unmerited.

36

bob mcmanus 05.16.15 at 7:37 pm

So re LTV, diamonds are more expensive than water because they “contain” the metric fuckton of labor DeBoers put into creating social desire.

Prices are the language of social domination.

Just to show I’m aware…

Silly Bob, what about cobalt? How we gonna know how much cobalt to mine and distribute next month without price signals?

Well shit, guess we’re stuck now and forever. Heck of a mess we’ve created.

37

Bruce Wilder 05.16.15 at 7:41 pm

WT @ 30: honest-to-God economics

A contradiction in terms.

The Corey Robin take on Hazlitt, I presume without knowing, would include the standard archetype of reactionary thinking, that uncertainty should be resolved by faith in god, in this case the market-god, if only to avoid the inconvenience of re-considering the legitimacy of current practice and its consequences.

I suppose I shouldn’t rant, as I did above, but I do get exasperated sometimes by the trance-like grip neoclassical economics seems to have on even the minds of well-meaning people. Hazlitt, like any polemicist, isn’t actually trying to spin out a Euclidean geometry of economics like Paul Samuelson, but he’s taking advantage of the seductive potential of that powerful system of thought, and the fact that the system is the master of many minds, and not so many minds are masters of that system. Keynes said politicians were often the slaves of dead scribblers, but the scribblers also know this.

38

Sandwichman 05.16.15 at 8:01 pm

@32

Lordon: “But in order to be fully successful, the distributive operation of domination must meet an additional requirement; it must reserve certain objects of desire to the dominators, and make the dominated recognise them as desirable, but with a decisive provision: desirable in general, but not for them.”

mcmanus: “In a hierarchical capitalist society, prices (and all values) in no way reveal preferences; prices are the social constructivist means to create, maintain, and demonstrate differentials of status, power, and freedom.”

Fun, indeed!

39

William Timberman 05.16.15 at 8:16 pm

BW @ 36

Irony on my part again, I’m afraid. Sometimes I prefer Veblen’s rapier to Marx’s grim pugilism. I’m not without a certain respect for economists who do the kind of work that ought to make the world a better place, even when it doesn’t seem to. I do wonder, though, given the non-sequiturs I see all around me, how they can be so damned sure of themselves.

40

John Quiggin 05.16.15 at 11:35 pm

Responding to Robespierre @10, that’s the whole point of beginning the analysis with the allocation of property rights. That’s what determines ability to pay.

41

Val 05.17.15 at 12:08 am

Hazlitt via Sandwichman above
“2—It would take a book to describe all the arbitrary judgments and guesses that enter into even our own national income figures. They measure only the values that pass through the market. When a man marries his cook, for example, the money value of her services disappears from the national-income accounts. “

We have moved from an era when dominant class men were explicitly sexist in their expression, but within those confines could admit that there was work in the domestic and subsistence sphere, to an era where man are no longer explicitly sexist, but seem to pretend ‘non-market’ work doesn’t even exist.

No matter how many times I reference Marilyn Waring here, doesn’t seem to make any difference. The basic fact that the “market” depends on the non-market (similar to ‘we live in a society, not an economy’), doesn’t seem to get acknowledged, even in a critique of free market economics. Unless it is being done in such arcane economic language that I can’t even understand it?

42

Val 05.17.15 at 12:31 am

” ‘we live in a society, not an economy’ ” oops strike that, should be:

We live in an ecology, of which society and economy are only part. Hard to get your head around this thinking like a planet stuff.

43

john c. halasz 05.17.15 at 12:45 am

Well, I’ll have a go at this.

The problems with conceiving an economy as a pure system of interconnected markets and transactions which optimize “welfare” through the self-regulating tendency of all markets to clear simultaneously with respect to each other via nominal price signals are legion.

For one thing, it is a purely mathematical construct, assuming the simultaneous determination of all price/quantity relations as clearing at equilibrium sheerly by assumption, with no rude empirics involved. But that is not any actual account of nominal price formation or “discovery” and explaining nominal prices by means of nominal prices is tautologically empty. Nor are all markets simply the same, in structure and function: labor “markets” are not the same as markets in ordinary consumption goods, which are not the same as markets for capital goods, which are not the same as markets in financial assets. These different sectors don’t somehow all resolve into each other with perfect optimality without remainder.

The oddity of the notion of “opportunity costs” has already been noted. Unless there is a competing bid on some market, it’s entirely counterfactual. Yes, human agents or agencies do face trade-offs (or dilemmas or conflicts), and must make decisions or choices under constraints. But what warrants the assumption that they would all converge into some unique overall equilibrium solution, as if there were some giant calculating machine, called “markets”, which “solves” the problem independent from the actual choices and calculations of agents? IOW isn’t there something of “affirming the consequent” there, with whatever result simply being positivistically identified with forgone opportunities? How much actually explanatory “force” is thereby obtained?

But perhaps the problem with defining meaningfully opportunity costs goes make to the incoherence of the neo-classical conception of “utility”, as something completely psychological or subjective (thus idealistic), hence unobjectifiable, unknowable and unmeasurable and, in the end, undefinable, (since anything can be fitted into a preference function, from altruism, to suicide to Maoism, while, for mathematical tractability, “interpersonal comparisons of utility” are forbidden).

But it’s a well-known result that individual utility preference can’t be reliably aggregated anyway, and the “representative agent”, Mr.Market as Gosplan super-planner, is not just a violation of the rules, but abstracts from the very differences between agents and sectors that would be a key part of an actual explanation. And then again, who would be the counterparty for that infinite realm of contingent financial contracts, (assuming such a thing could be coherently conceived)? The same guy who’s proffering the invisible hand, no doubt.

And the whole assumption of “perfectly competitive markets” as the basis of the formalized axiomatics is itself a weird logical inversion. Not only does it fail to account for profits, but it treats “market failures” as rare exceptions, (when Stiglitz using the same axiomatic methods has demonstrated that they are pervasive throughout the system, with the only question being whether they are “constrained Pareto-optimal”, i.e. whether the remedy might be worse than the ill, though Stiglitz also holds to the same logical inversion in his undermining), when if they are not rare, then they are not exceptions (and when such “failures” might well be deliberately engineered by interested parties). Most of all, such a founding “logical” assumption serves to facilitate the smuggling of unacknowledged biases into supposedly purely “positive” analysis.

This is not to say that (partial) equilibriating tendencies of markets are of no account and don’t provide important coordinating and adjustment “mechanisms”. (And any proposed alternatives, as functional equivalents, would have to prove at least as effective in achieving those results). It is just to question why such tendencies should be assumed to result in a total and static general equilibrium, as assumed to be optimal, rather than imparting dynamics to the overall system, without guaranteeing any unique, nor “final” static equilibrium, ( let alone, that any state of the aggregate economy is optimally “efficient”,- which term begs the question of efficient or economizing with respect to what,- and thereby should be left to its own devices).

But the biggest deficiency of the whole approach is the effort to collapse production systems and organizations into “as if” markets. Solow already “discovered” this, when he ran the then GE models and found that they scarcely accounted for recorded growth rates. (He then took the “growth residual” and re-labeled it “technical change”, without any further explanation, thereby converting a negative result into a positive finding eo ipso, scarcely a legitimate “scientific” procedure). “Markets” might stimulate and promulgate technical and organizational innovations, for better or for worse, but they don’t produce, nor account for them. Because, in the standard econ 101 account, “economics” only concerns “allocative efficiency”, the allocation of “scarce” means to alternative ends, (in the midst of relative plenty, and instrumentally, without regard to any ends), and disregards mere “technical efficiency”, as the province of mere scientists and engineers, purchasable at-will. Yet that would be actually what accounts for “growth” and “efficiency”. Since production systems “determine” the base-line of any expanded (or alternative or transformed) re-production of the overall economic system, and such reproduction schemas impart the actual dynamics of the systems. And production systems, whether market-mediated or not, have their own constraints and dynamics, which are imposed on market transactions, whether based on any market or not. Beyond any “property rights” or any individual choices. “Primordially”, i.e. beneath the level of intentionality.

Yet it is precisely at that level of collective institutionalization, where the crucial “decisions” lie, (pun or syntactic confusion?). Far below the level of “opportunity costs”, there is the issue of basic technological and organization selection, which is reified in standard economics. What projectively constructed ends are we hoping to achieve? (Which is a question tabooed by the pervasive positivist-instrumentalist configuration of the discipline). If like me, you think that the gathering climate, natural resource, environmental-ecological crises, would require major transformations, technologically and organizationally, as well as distributively, of basic capital stocks and infrastructure, both on the production and on the usage/consumption sides, to allow for a sustainable and renewable energy and resource system, then these are the crucial questions, which the representation of the economy as based on “markets” and the inertial tendencies of such economies won’t adequately address. The “linear” extrapolations of such a system of thinking are likely to prove meaningless, if not grossly erroneous, (counting on resources and substitutions that just won’t be available). Do “we” want a system of transport based on continual and wasteful production of private automobiles and petroleum or a rebuilding of public mass transit systems? Do “we” want an electrical generation system based on thermal methods of generation, nukes and fossil fuels, or a more efficient one based on renewable and sustainable energy production? And how would such a transformation/transition be mediated/accomplished? It seems that standard analysis might have little to offer to address such questions. Aside from false assurances and re-enforcements of the status quo, including unacknowledged relations of wealth and power.

At that point, the superficial analysis and “justification” of costs-and-benefits just won’t do. Rather than the recognition and allocation of losses, (together with the re-definition of both wealth and “welfare” or qualitative well-being). M. Friedman’s take on “sunk costs”, basically that they should be ignored as an matter of analysis, then becomes not just economically, but more broadly, bizarre. Because most of human life is about “sunk costs” and losses, together with their “allocations and attributions”. Because neither “we”, nor the social and natural world in which we operate and dwell are solid and substantial entities.

44

John Quiggin 05.17.15 at 12:57 am

@43 Agreed. The problem is to get (as many of possible of) these points into language that makes sense to my target audience (roughly speaking, intelligent and well-disposed non-economists), and actually engages with policy issues.

45

John Quiggin 05.17.15 at 1:03 am

@41 Val, I’ve covered this point many times, for example

https://theconversation.com/theres-more-to-good-policy-than-increasing-gdp-7867

46

ZM 05.17.15 at 1:26 am

John Quiggin,

“The allocation of property rights, broadly defined to include rights to pensions and social security, obligations to pay tax and so on, and the opportunity costs associated with alternative allocations”

I disagree with this broad definition of property rights. I think it is better codified as a “mutual obligation” like the Howard government phrased it here in Australia.

The adult people are citizens of Australia since they can vote and they are also subjects of the crown which is responsible for the laws with help of the parliament etc. All the money and land and so on are vested ultimately in the crown hence the crown on the back of the money – but the crown has obligations to the subjects – sometimes these are in conflict or the crown is beholden to parliament and does not meets its obligations eg. Property ownership and the acts of enclosures hurting the common people when they were not citizens and had no parliamentary representation due to being unenfranchised; or climate change now.

In something I was reading on public trust law the epigraphs were chosen to show tension in the legal system’s approach to water rights which are on the one hand held as commons and also vested in the crown or bought by farmers

“As long ago as the Institute of Justinian, running waters, like the air and the sea, were res communes – things common to all and property of none” United States v Gerlach Live Stock Co. 1950

“The real title, of course, must be vested in some person” Smith v Andrews 1891

So there is some conflict (opportunity costs? I find Hazlitt’s phrasing easier to read) and as I already mentioned there is also native title etc in colonised countries that adds another element – costs of destroying culture is also not reflected in market prices

http://youtu.be/vgfQAZaqKsY

47

anon 05.17.15 at 6:02 am

48

Bruce Wilder 05.17.15 at 6:21 am

john c. halasz @ 43

Sunk cost investment that changes opportunity cost (and if it didn’t, why would anyone do it?) is where economics drives off into the existential void.

49

c 05.17.15 at 9:40 am

“The allocation of property rights, broadly defined to include rights to pensions and social security, obligations to pay tax and so on, and the opportunity costs associated with alternative allocations”

That is right but doesn’t seem to go far enough. Other legal rights also likely have a large impact since they constrain power, interactions and abilities of different actors in the social system. The extreme example is of course slavery where some humans are considered property. But even in a (minimally) democratic context legal rights regarding privacy, speech, assembly and so on likely have big effects on individuals economic behaviours.

50

ZM 05.17.15 at 11:02 am

bob mcmanus,

“So re LTV, diamonds are more expensive than water because they “contain” the metric fuckton of labor DeBoers put into creating social desire.
Prices are the language of social domination.”

A geologist friend explained to me that in terms of their atomic make up diamonds are actually unusual and thus precious because the atoms are fused together which is very uncommon.

John Quiggin,

If your book is going to deal with law as well as theory, another thing you might want to include if you have not already is Roman jurisprudence differentiating ownership from possession – so with the Uncle Tom’s Cabin example Uncle Tom would possess the house but not own it. Apparently most European legal systems derive from Roman jurisprudence (which is still taught to law students) but with language/cultural adaptations since the decline of the Roman Empire. Apologies if someone already mentioned this.

51

Keith 05.17.15 at 1:26 pm

Except that surely writers like Adam Smith are fully aware that all opportunity costs are NOT incorporated in prices and cannot be.

Contemporary neo liberalism or conservatism is unhistorical as it ignores the qualifications made by Smith or JS Mill about negative externality. People like Hazlitt are propagandists not real economists.

52

stevenjohnson 05.17.15 at 2:49 pm

I’m afraid I’m still pretty sure that the Hazlitts and those who admire them will persist in using opportunity costs in the same fashion. The notion of opportunity cost seems to be fairly tractable in theory if it is reduced to profits foregone by capitalists. That is the concern after all.

As for the wise words of Bruce Wilder and Cosma Shalizi about the impossibility of a valid economic epistemology (to date at least,) I’m not quite sure I understand. Is the business cycle an illusion? Or is it the result of noneconomic factors, like ideology?

53

Main Street Muse 05.17.15 at 3:09 pm

I am not an economist. I do not understand how economic models work. We do not price products in accordance with the true costs.

As an example, Duke Energy is a Fortune 500 company that has paid out large sums to shareholders for years. They’ve reported substantial profits over the years. In those same years, they failed to maintain coal ash ponds to prevent catastrophic environmental disasters. In 2014, there was a massive spill into the Dan River – a spill that could have been avoided with proper maintenance. The environmental impact is huge – and not accounted for in the price of energy – until now – Duke Energy wants to pass on the costs of the cleanup to consumers. How does economic theory explain this?

Also as another example, McDonald’s & WalMart corporations are profitable (McD’s is struggling lately, but only lately) – and yet, these companies pay many employees so little that they rely on public subsidies like SNAP to survive. This is a way to privatize profit and socialize the costs of employment. Again, how does economic theory explain this behavior?

54

William Timberman 05.17.15 at 3:09 pm

Thought occasioned by the comments of Bruce Wilder and john c. halasz (needless to say, any perversities of interpretation are entirely my own):

If a commercial or governmental enterprise has the necessary resources, or can attain them, it’s simply less stressful for those in the driver’s seat to manage demand than to identify it, and, by ignoring externalities, to reduce the complexity of their decision-making processes. This requires an asymmetry of information — the less those outside the planning process know about the plan, the simpler it is to implement. Hence what seem on the surface to be oversized investments in advertising, propaganda, and media consolidation become the norm. And — pace bob mcmanus — this needn’t imply any ideological agenda other than the survival of the enterprise itself, although if there is one, so much the worse for civilians.

The amount of systemic inertia built up as our management schools come to teach these principles as a matter of efficiency, or competitiveness, or whatever, is considerable, and sunk costs can only increase that inertia — the pain threshold for writing off what already exists, and for the time being seems to be ticking along more or less nicely, almost guarantees it. (British Petroleum, anyone? The F-35? The Euro?)

At this point, it seems appropriate to bring the so-called democratic deficit into the discussion. The people, the civilians, as I call them — those who aren’t managers, at any rate — experience first-hand the caprices of the institutions which claim to be running things, and the consequences, and since the invention of television, they’ve also endured decades of what amounts to intellectual and political suffocation in the name of the status quo. It should therefore come as no surprise that rejection of the status quo as often as not manifests itself in uprisings like Golden Dawn in Greece, UKIP in the UK or the Tea Party in the U.S. What Brad DeLong has identified for us as the left neo-liberals are appalled, and they should be, as forestalling exactly this sort of disruption was, in a sense, the founding principle of neo-liberalism. I don’t suppose they envisioned their mission as a defense of the indefensible, but that seems to be what it’s become.

Management and democracy may not necessarily be antithetical, but that appears to be the trend. If so, it seems pretty clear that we’ve badly misunderstood the political part of political economy, and that the defense of the status quo has become untenable. What we do instead is confusing a lot of people — Brad DeLong, despite his credentials, and his smarts, will just have to get in line with the rest of us.

55

Metatone 05.17.15 at 6:33 pm

This may or may not be useful JQ, but I’ve been musing lately on how to express some of the cultural peculiarities of economics in a language that non-experts can understand.

One thing that keeps coming back to me as an important issue/statement is something like:

Assume our aim is to generate as much “wealth” as possible.
The one thing that we can lose by not using it is human labour and ingenuity.
Each hour that passes while someone who would like to work is unemployed is something truly lost, something that cannot be retrieved. If we conceive of a nation – then the resource we seem to waste most of and most often is just those hours of labour and ingenuity.
This seems unreflected in a mainstream economics that seems ever more comfortable with ongoing unemployment…

56

bob mcmanus 05.17.15 at 8:21 pm

Nameschecked, let me see let me see, finished the Lordon moved on to Franco Moretti reading Crusoe, Conrad and the library, and feeling slightly sympatico for the nonce with the Sandwichman…but I’ll just paraphrase. Opportunity costs? Sunk costs?

The three top values of the bourgeoisie are:

a) industry: the work ethic, habitual hard work, steady, calm, repeated, less energy but for longer, work, utility

b) comfort: freedom from want and renunciation of luxury, excess, waste

c) efficiency: thrift, waste not want not, maximizing the use of tools (we are tools of minimax productivity? are we?) and resources without unused capacity, externalities unaddressed, sunkcosts unredeemed, opportunities overlooked.

These are the hidden values of liberal capitalism and its bourgeois economists that must be extracted from the cold equations, revealed, mocked, and overthrown in order to achieve a free and equal society of slackers, wastrels, and dillettantes. We need more William Blake, Nietzsche, and Oscar Wilde in our economic discourse.

57

bob mcmanus 05.17.15 at 8:32 pm

Those who have followed (the?) Sandwichman will understand the harmony.

I have no problem with unemployment or underemployment, actually sounds like a great idea, as long as the unemployed are provided with the necessities and some luxuries of life (Orange Krush!), preferably at the extractive and confiscatory expense of those monsters who insist on wrecking civil society by working hard, producing stuff, and saving their money.

58

John Quiggin 05.17.15 at 10:43 pm

@56 You might be interested in this piece I wrote a few years back

http://aeon.co/magazine/society/john-quiggin-keynesian-utopiav1/

59

LFC 05.17.15 at 11:44 pm

I’ve skimmed through Halasz’s 43, most of which was roughly comprehensible to me. Then I got to the last sentence: Because neither “we”, nor the social and natural world in which we operate and dwell are solid and substantial entities.

I’m not exactly sure what this last sentence means (though I have a rough idea), and I’m even less sure what it’s doing at the end of the comment at 43, since I can’t figure out what its relation is to what has preceded it, e.g., human life can be mostly about ‘sunk costs’ whether one thinks humans are ‘entities’, ‘processes’, or whatever. However, since I’ve recently been accused on another thread (the “last gasp of US neoliberalism” one) of illiteracy/ignorance, I might as well go on a roll.

60

Bruce Wilder 05.18.15 at 12:17 am

Peter Dorman @ 16: I’m happy to hear that he will point out that the allocation of rights—property rights, social insurance rights, institutional rights (e.g. whether or not a society has employment at will)—are also prior to market outcomes. This is one reason, even before we get empirical, for rejecting the argument that equity and “efficiency” are always at loggerheads.

Why “prior”? (Well, also, why “market”? but I’ll let that go.)

But, really, isn’t “prior” both logically and sequentially wrong?

“property rights, social insurance rights, institutional rights” — in actual practice, we invoke all of these in an important, functional sense after market outcomes. The political and legal disputes and tussles form ex post governance. We decide after, whether the the bankster stole the money or earned it, whether the public school teachers get their pensions, whether Detroit’s bondholders or art museum get the paintings, who if anyone has to clean up the polluted river. That is the point of institutions like bankruptcy and litigation in contract disputes. After.

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john c. halasz 05.18.15 at 4:55 am

JQ @ 58:

You forgot the link. Fixed now, thanks

LFC @ 59:

Sorry for slipping between narrowly economic terms and more broadly philosophical versions. (In some quarters that would be called the “fallacy of equivocation”, but how exactly is that to be avoided?) In the narrowly economic sense, “sunk cost investment”, i.e. the underlying structure of (re-)production, profoundly conditions “opportunity costs” and the choices available to various agents and agencies. (It might be better to speak more sociologically of opportunity structures and the distribution of constraints, rather than focusing narrowly on costs and benefits). I think that was the point that BW @ 48 was re-enforcing. Such that it is fairly absurd to claim that “opportunity costs” based on individual preference functions drive and determine the entire system. That’s a cart-before-the-horse arrangement.

But more broadly, outside of the narrowly economic jargon, “sunk costs” and “opportunity costs” actually describe much of human life, as commitments (and their failures) lead to increasingly constrained choices and a gathering sense of loss. (I’ll leave it to Bob McManus to explain how it is loss that gives rise to desire and it vagaries). IOW are the narrowly economic constructions of human agents and agencies remotely plausible in anthropological terms?

But let’s shift back to the economic terms. One of the “logical” demands of such models is to avoid the “time inconsistency” of preferences. But doesn’t that depend on the depiction of the economy as an aggregation of instantaneous decisions points, without regard to consequences. And isn’t it the interacting consequences of decisions or choices that gives rise to any functional system that operates over the heads of individual agents and thus impart the the overall system a certain social objectivity? So just how would such “time consistency” be enforced, independent of, er, learning curves and, er, “exogenous shocks”?

And to return to the economic question of losses, as opposed to mere costs,- (whose costs?),- the basic function of any system of credit is to provide for the construction of improved or transformed productive capacity without deflating current production and consumption. But what happens when such “speculative” projects fail? And how are such means to be deployed both to revive and transform production and consumption? I’m surprised how advocates of “free markets” often don’t appreciate the function of bankruptcy, as epistemically a loss reducing mechanism, recycling and renewing the utilization of resources. It’s actually one of the prime functional benefits of “free markets”, which sustains the whole system. (Cf. B.W. @ 60). But then just who is in charge of such procedures and to what ends? Since “wealth” is just a set of claims on underlying sustainable production, and losses and their social costs must be somehow allocated.

So to get back to the phrase about “solid substantial entities” and the de-reifiying intention of that last sentence, I tend to hold to a quasi-Whiteheadian version of “nature” as emergent evolution, but even independent of that, modern technologies have so decisively extruded upon natural beings, such that the very survival of nature has become a collective human responsibility. But nonetheless neither human beings, nor social processes and structures can intelligibly be reduced to traditional ideas about “substance” and the pre-given teleological order entailed. And yet in standard economic depictions you have an alleged system of individual choices leading to a system of blind inertial determinism. A blatant contradiction-in-terms, which precludes questions of collective political “choice” and responsibility.

So I’ll just leave off with a couple of old tags:

“Let the dead bury their dead”

“‘Tis the time’s plague when madmen lead the blind”

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Peter T 05.18.15 at 8:09 am

“market prices reflect opportunity cost”. I have trouble understanding what this means. Has anyone empirically examined prices to see if they do “reflect opportunity costs”? For example, by looking at the prices of, say, cinema tickets in urban centres as opposed to country towns (where the alternative forms of entertainment are obviously much less)? Or is it a statement about some ideal type?

What’s a “price” here anyway? The price of the same jar of peanut butter will differ from one supermarket chain to another, even within the same shopping centre. Do the opportunity costs differ? Or, more plausibly, are the supermarkets pricing slightly differing baskets of goods (one groups the peanut butter with the spreads, the other with the crackers). In which case the “price” is of the basket, not the jar. What’s the unit here?

When I worked on illicit drug policy I looked at the prices of heroin and ecstasy, in what are often supposed to be markets untainted by regulation. I found that dealers and buyers strongly preferred to hold money prices steady (a deal of heroin in western Sydney was a constant $50, or $80 in the red light district, for years at a time). They varied access to credit, freebies, demand for cash rather than goods, or supply to fringe customers, not the cash price. All recognisable as ordinary actions of ordinary people in a social network. How many pure prices are there in the world? How important are they?

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Metatone 05.18.15 at 9:49 am

@62

I think you make key points.
Brings us back to to Stafford Beer – you need as many levers of control as there are variables. Out in the real world, price isn’t enough of a lever, so people work out others. At which point, the informational value of “price” no longer confirms to the Hayek-ian model. But economists prefer not to think about that (and indeed, don’t take enough classes in information and systems and modelling to even know they need to think about it…)

64

ZM 05.18.15 at 10:20 am

“IOW are the narrowly economic constructions of human agents and agencies remotely plausible in anthropological terms?”

I am just writing an assignment where this came up. I will just quote:

“In her ‘Epistemology for the next revolution’ (2011) Linda Martín Alcoff refers approvingly to Bruno Latour’s (2004) plea for a realism that does not demand of real things a spurious independence—the supposed independence of what he calls ‘matters of fact’ or ‘objects’. She shares his disavowal both of the positivism that would make such a demand and of postmodern stances that, finding it unmet, would reject the possibility of making and sustaining claims about a real world. As Latour laments: ‘no matter what we do, when we try to reconnect scientific objects with their aura, their crown, their web of associations, when we accompany them back to their gathering, we always appear to weaken them, not to strengthen their claim to reality . . . . Why can we never discover the same stubbornness, the same solid realism by bringing out the obviously webby, “thingy” qualities of matters of concern? Why can’t we ever counteract the claim of realists that only a fare of matters of fact can satisfy their appetite . . . ?’ (Latour 2004, p. 237, emphasis in the original)

….

One thing we (ought to) learn is that ontological independence is neither what makes the world real nor what makes it objectively knowable. This is something that Nancy Tuana has known and written about for a long time, but that was brought strikingly home to her as she reflected on Katrina and the city of New Orleans. After, as she says, two decades of advocating an ‘interactionist ontology’, she was struck by how ‘the events unfolding in the wake of Katrina provided a trenchant illustration of the importance of embracing such an ontology and its concomitant epistemology. For in witnessing Katrina, the urgency of embracing an ontology that rematerializes the social and takes seriously the agency of the natural is rendered apparent.’ (Tuana 2008, p. 188, emphasis in the original)

The interactionist ontology that Tuana articulates applies to all of us, to the entire human and other-than-human world: it is part of what is needed for a thorough-goingly realist account of the world; but it becomes evident from the perspectives of those whose entanglements expose distinctive vulnerabilities.”

From: Scheman, Naomi. “Toward a sustainable epistemology.” Social Epistemology 26.3-4 (2012): 471-489.

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Lee A. Arnold 05.18.15 at 11:01 am

I’ve always hated the concept of opportunity cost. It is appropriate to analyze the millennia of scarcity, but is quickly assuming the misdirection and uselessness of phlogiston theory.

1. In the future economics, there will be no scarcity of goods, services, energy, etc. We are already halfway there, now. The only really scarce things will be a) your personal time and b) things which are obviously limited, such as wildlife preserves and real estate at the beach. These scarcities do not necessitate a price system for everything else.

2. As soon as we start opportunity-costing environmental goods (yuck, what a phrase!), we are placing a value on natural ecosystems particularly wildlife a) which is really not computable due to complexity and b) which we have no right to confer except by some self-regarding philosophical bafflegab, whether religious or secular.

So I am against it. I think that enforcing the redeployment of the concept of opportunity cost confirms the present misunderstanding that money is hard and real; and that budgets, deficits, taxation are things we should always be worried about. It is the psychology of a very long-term disease. We will find that there has been an “opportunity cost” to inculcating a wrong view of ourselves.

66

reason 05.18.15 at 1:52 pm

Nobody (not even Sandwichman which surprises me) seems to have picked up the point about opportunity cost for WHOM. I wonder why not. It would seem to be a critical question, one man’s golf course, is another man’s wheat field, is potentially a future man’s desert. So any single evaluation of opportunity cost implies choosing a particular point of view that has not got any universal relevance. The problem here lies in the word COST. Not only in interpersonal comparison of utility impossible, interpersonal comparison of cost is also not possible. There is no universal unit of measurement to use.

67

mattski 05.18.15 at 2:13 pm

I’ve always hated the concept of opportunity cost.

Me too. It ascribes value to what is necessarily notional. And to be consistent about it, you would have to say its value is always infinite.

68

Bruce Wilder 05.18.15 at 5:59 pm

WT @ 54: we’ve badly misunderstood the political part of political economy, and that the defense of the status quo has become untenable. What we do instead is confusing a lot of people

I think it is actually the economics that we get wrong, and it sinks our politics.

Hazlitt begins his One Lesson with a plain acknowledgment of the political problem of economics in a democracy:

Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics, or medicine—the special pleading of selfish interests. While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.

Not so bad an account, I think, of the politics.

It’s Hazlitt’s economics — which appears to me to be Mises’ economics covered with Hazlitt’s rhetorical charm — that is so wrong. Hazlitt’s doctrine is the market economy:

. . . in an economy in equilibrium, a given industry can expand only at the expense of other industries. For at any moment the factors of production are limited. One industry can be expanded only by diverting to it labor, land, and capital that would otherwise be employed in other industries. . . .

Everything, in short, is produced at the expense of forgoing something else. Costs of production themselves, in fact, might be defined as the things that are given up (the leisure and pleasures, the raw materials with alternative potential uses) in order to create the thing that is made.

[Opportunity cost! – bw]

. . . . It is only the much vilified price system that solves the enormously complicated problem of deciding precisely how much of tens of thousands of different commodities and services should be produced in relation to each other. These otherwise bewildering equations are solved quasi-automatically by the system of prices, profits, and costs. They are solved by this system incomparably better than any group of bureaucrats could solve them. For they are solved by a system under which each consumer makes his own demand and casts a fresh vote, or a dozen fresh votes, every day; whereas bureaucrats would try to solve it by having made for the consumers, not what the consumers themselves wanted, but what the bureaucrats decided was good for them.

So, there you have it: Hayek’s market prices beating calculating bureaucrats and Friedman’s consumer sovereignty. If you squint, you can see Brad DeLong’s neoliberalism: “. . . market mechanisms–properly-regulated market mechanisms–are more likely than not a better road to social democratic ends than command-and-control mechanisms.” (Typical of DeLong, weak tea with two lumps of sugar, but still recognizable, and it is that nodding agreement with the likes of Friedman that makes him a foolish aka left neoliberal. Back before neo, a liberal would have just called Friedman a liar or a charlatan and let it go at that.)

“in an economy in equilibrium” is the key phrase, the logical premise from which all else derives. It’s not a bad account of a market equilibrium, though it may seem tightly wound. An economy in equilibrium is on a knife’s edge, in a sense. No firm wants to produce even one more unit at current prices, and someone would have to yield something up to change that rigid stance one iota. It’s that knife’s edge that defines “opportunity cost” in a semi-sensible fashion.

Market equilibrium is just not something we’re familiar with, because it does not describe the economy we experience.

A competitive market equilibrium implies that firms offer product — produce and sell units right up to the point where marginal revenue equals marginal cost, and then want to stop. Marginal revenue is falling and marginal cost is rising, and they don’t want to sell another unit at any price the market will bear. That’s the knife’s edge. And: Marginal cost is rising. That’s a key condition for a market to clear. And, that is a very unusual cost structure in the real world.

In the real world, for most firms most of the time, marginal cost is considerably less than marginal revenue and for many firms, marginal cost is falling over the relevant range of output — at least long-run* marginal cost is falling. If marginal cost is falling, there’s no market equilibrium in price possible.

Falling marginal cost is typical of a cost structure of increasing returns, and that’s the world we live in. Although he didn’t recognize it, it is the world Adam Smith was describing when he told the tale of the pin factory, and explained that specialization reduced costs and was limited only by the extent of the market.

In the real world, firms specialize (for a lack of better term) and make dedicated, sunk-cost investments that increase their total factor productivity, lowering their cost. The baker can make his next loaf of bread more easily and cheaply than the last, and more cheaply by far than any non-baker, because he is in possession of the outcome of sunk-cost investments in skills, experience, reputation, specialized tools and equipment, a shop and location, and so on. If he could, he’d like a better oven, more skill as a baker, a bigger shop in a better location, more customers at the location he has. He’s not going to lower his price if he doesn’t have to, but if he could sell more at that price, he would do so, and if he had to, he’d sell more at a lower price, too. That describes a disequilibrium situation.

There’s a couple of things we should note about this economy in disequilibrium. One is that prices have to be administered. The price of iPhones. The price of McDonald’s hamburgers. The price of heroin, apparently. Prices are not the product of magical tatonnement by the market god operating “quasi-automatically” because in conditions of disequilibrium and non-clearing markets he could never arrive at a stable solution; the prices we observe are creatures of command-and-control. (Good thing Brad has tenure, because he’s an idiot.)

The other thing is: all business is risky business. As WT put it poetically, business must cast its bread upon the waters. The technologically efficient methods require prior sunk-cost, irrecoverable commitments. And, then management of sunk-cost investments has to try, against all reason, to recover a return on that investment. Those returns on sunk-costs are, for the wonks, some kind of economic rent. A quasi-rent in some cases — this is no place for typology. The point is that businesses need to secure a political power to earn an economic rent, to recover a return on a sunk-cost investment. That’s where the “allocation of property rights” comes in.

This economy in disequilibrium is not on a knife edge exactly — none of the lines are that sharply drawn. This is an economy with a lot of unknowns, that runs on fictions and could use, and misuse, a lot of insurance. This is an economy where “opportunity cost” is more than a bit fuzzy. If I am a newstand vendor, what’s the opportunity cost of a newspaper that goes unsold? I don’t want to miss a sale because I’ve run out, so practically everyday I throw away unsold, unread papers. Also, because property rights in economic rents are so critical to the ability to earn a return and finance an investment, as another comment pointed out, opportunities are likely to be the property of someone in particular.

Sorry for the economics lecture. I tried to keep it relatively short. It seemed to me that comments were getting mystical and could use some of this, for balance.

*I don’t want to get into the whole long-run, short-run distinction. In increasing returns situations, the long-run beckons like a siren, demanding new sunk-cost investment that will return the firm to disequilibrium, even if it manages to a place where a short-run equilibrium is possible. My favorite example is an airline: For any given passenger load, a bigger plane with some empty seats is always a cheaper way to move that given number of people than a smaller plane with just that number of seats. So, the airline is led to alternately try to fill the empty seats or to get a bigger plane, which will, again have empty seats.

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Seeds 05.19.15 at 12:56 am

A geologist friend explained to me that in terms of their atomic make up diamonds are actually unusual and thus precious because the atoms are fused together which is very uncommon.

That’s called a giant molecular structure.

On the one hand, if you wanted to make it sound cool, you could point out that each diamond crystal is one very large molecule.

On the other, you could point out that it isn’t very uncommon – another hard, crystalline, giant molecular structure with tetrahedrally-arranged covalent bonds is silicon dioxide (aka silica, aka quartz, aka the main ingredient in sand).

But maybe it’s the presence of carbon atoms that makes diamond so special? Well carbon actually has another giant molecular allotrope, called graphite, which can be found in pencils.

Anyway, that’s a long-winded way of saying that Bob is right and your geologist friend is wrong. The price of diamonds is high and there is no second-hand market thanks to De Beers. A quick google will help you out a lot, here.

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Bruce Wilder 05.19.15 at 1:17 am

DeBeers with a little monopolistic courtesy from General Electric.

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Matt 05.19.15 at 2:04 am

DeBeers with a little monopolistic courtesy from General Electric.

A few companies are making synthetic gem-grade diamonds for jewelry now. You can’t tell the difference between the natural and synthetic stones without instruments. Of course any jeweler carries the instruments so you don’t accidentally spend less money than you could.

I wonder if synthetic gold, manufactured from mercury-196 by neutron transmutation*, would inspire similar defensive bullshit from gold bugs or if they’d finally give up on the old “intrinsic value” nonsense.

*This works but is too expensive to threaten mined gold at present.

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BenK 05.20.15 at 11:06 am

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