Economics in Two Lessons

by John Quiggin on February 15, 2018

I’ve finally committed to delivering a manuscript of my long-overdue book Economics in Two Lessons. As part of the process, I’m going to post the chapters, one at a time, and ask for comments, criticism, encouragement and so on. To begin at the beginning, here’s the Introduction.



Rapier 02.15.18 at 11:31 pm

As long as it is understood that Economics has nothing to do with people, en mass, society it was once called, have at it.


Daniel 02.16.18 at 1:36 am

The introduction is clear and well presented. It, however does assume the term “opportunity cost” is clear to everyone. It’s not very clear to me and needs to be explained when it is introduced. Some examples of the problem would be helpful


afeman 02.16.18 at 3:05 am

I agree with Daniel.

When in the arguments that the introduction addresses “econ 101” is invoked, I think back to the introduction my own undergrad introductory physics 101, which worked off of F=ma and the concepts surrounding that relation. From that you can get an account of certain limited cases like those involving momentum transfer and pendulums, like that desk toy with the balls. The pendulum equation that you work with at that level uses the only first term, accurate enough for small swings. Go any farther and you quickly learn how simplified the introductory explanations are, how much they leave out, and the limitations of assuming a spherical cow.


Dave W. 02.16.18 at 3:08 am

This intro does seem to be misusing the term “opportunity cost” to refer to externalities. The Mirriam-Webster definition is “the added cost of using resources (as for production or speculative investment) that is the difference between the actual value resulting from such use and that of an alternative (such as another use of the same resources or an investment of equal risk but greater return)”, which is roughly the definition I remember. So, for example, if you are a store owner who owns the building the store is in, one doesn’t properly consider the store rent to be zero cost, just because you own the building. Instead, you need to consider whether you would have made more or less money if you sold the building and paid rent to the new owner, but then used the money you got from the sale of the building to do something else that made money. (Or alternately, what if you closed the store and rented the space to someone else?). The revenue you are forgoing by maintaining your current arrangement is an opportunity cost that must be considered in analyzing the true profitability of the business.


Saryan Sha 02.16.18 at 7:46 am

It would be good to have a top-list of things to learn about, in economics. That way, people understand the subject easily.

Economics: the environment around trade and commerce.


Another Daniel 02.16.18 at 7:58 am

I agree with the first Daniel that it would be really good to have your definition of opportunity cost. I’m pretty sure you will provide definitions later in the book; maybe a footnote pointing the way.


RichieRich 02.16.18 at 9:59 am

On p1 you write

As the name implies, this book is, or at least began as, a response to Henry Hazlitt’s Economics in One Lesson, a defense of free-market economics first published in 1946. But why respond to a 70-year old book when new books on economics are published every day? Why two lessons instead of one? And where does opportunity cost fit into all this?

Is this the manuscript’s first mention of “opportunity cost” (OC)? If so, then the way it’s mentioned strikes me as rather odd. The previous two questions obviously relate to Hazlitt. But this third question on OC doesn’t. And so the concept of OC seems to have landed out of nowhere. And is, thus – to me, at least – rather bizarre.

Further, though you mention OC twenty times in this section, it doesn’t appear to be defined/explained. And without a definition/explanation, you go on to introduce the concept of “social opportunity cost” (SOC). If I’m unclear about what OC is, how am I meant to grapple with SOC?!


John Quiggin 02.16.18 at 11:13 am

Thanks for these useful comments. Opportunity cost will be discussed in detail in the opening chapter. I obviously need to flag this more clearly.


Tim Worstall 02.16.18 at 12:34 pm

The two things about economics are:

1) Incentives matter.

2) Opportunity costs.

It’s the second most have problems with so, yes, as above, a definition at first meeting it perhaps.

“What you give up by doing what you’re doing” is the rough gist of it too. Or, “What you can’t do because you’re doing this other thing.”


Mike Huben 02.16.18 at 12:52 pm

This introduction is extremely clear: a delight to read. My only complaint:

“The market outcome depends on the system of property rights from which it is derived. In fact (as we will see later) when markets work in the way Hazlitt assumes, any distribution of goods and resources where prices equal opportunity costs can be derived from some system of property rights. So Hazlitt’s Lesson tells us nothing useful about the distribution of income or about government policies that may change that distribution.”

Compared to your other paragraphs, this one is not very clear. For a start, you should say that the implication in the preceding paragraph would be incorrect. Don’t force the reader to figure that out. Nor will most readers be familiar with the idea of different choices for property rights.

“The choices that determine property rights are subject to the logic of opportunity costs just as much as the choices made within a market setting by firms and households.”

That paragraph needs to point out that these are choices made politically, not by markets, for market failure reasons. Indeed, you may want to identify government creation of the system of property rights as a response to market failure.


DCA 02.16.18 at 2:28 pm

Not your writing, but the opening quote: what on Earth does “Darwin is in the nuances” mean? I have a suspicion, but only that. I assume that there is prior discussion that this lapidary phrase refers to.

A revision to “summed up in the concept of ‘opportunity costs’ (see Chapter X).” would address the issue raised above. I don’t see a need to define it here: after all, the purpose of the Introduction is not to be a summary, but to tell me why I should read the book.


steven t johnson 02.16.18 at 2:29 pm

It seemed to me that the intro gave us Hazlitt’s definition of opportunity cost rather quickly. It was the “the consequences of…policy not merely for one group, but all groups.” This isn’t very helpful, which I think is because in the final analysis Hazlitt wasn’t about being helpful, but all about the apologetic. Clear definitions don’t obfuscate.

At any rate, in context, opportunity costs of goods and services are quickly and explicitly said to be the summing up of “all the costs involved for a society providing those goods and services…” My reading of Hazlitt is forty years old, and what I remember is Time Will Run Back. But my very vague impressions suggest that the restatement of Hazlitt’s one lesson as “Once all the consequences of any act or policy are taken into account, the opportunity costs of government actions to change economic outcome always exceed the benefits” is accurate.

So, personally I can’t see that there is any problem about introducing opportunity cost per se, nor any great need to flag the concept.

Where I see the trouble emerging is the proposition that in market failure, “prices don’t equal social opportunity costs.” It is entirely unclear to me how microeconomics can price social opportunity costs, even if they were definables. What is the supply curve for climate? Even worse, it is not clear how prices can reveal preferences in the only meaningful way in economics, which is an individual making a purchase, when costs are distorted by government action. When the consumer buys, they put their money where their mouth is.

The genius of markets is to make satisfaction of revealed preference more profitable. Interference in markets causes the deviation of prices from opportunity costs, at least in so-called free market or libertarian or neoclassical or Austrian economics, because the only measurable opportunity cost is monetary. And if one assumes, under rubric of “social” opportunity costs, some privileged actor, such as government (pretending to be “society,”) one is only being inconsistent, or maybe the term is incoherent. Absent a market exchange measure of “social” opportunity costs, a living Hazlitt might simply accuse the writer of just not getting it.

The rebuttal to this I think lies in the claiming that market prices equal opportunity costs only when there is no recession/depression, or to phrase it more accurately, when there is full employment. The thing is, taking into account all the alternative opportunities for profit is very likely precisely why the economy slows or contracts. Full employment is not even definable if you accept opportunity costs, as far as I can see. I say that a twenty hour work week would mark a full employment economy. This is manifest nonsense by any economics.

The introduction also explicitly sees income distribution as something somehow separate from markets. But there is no historical reason I know of to believe that increasing inequality of income and distribution aren’t the expected outcomes of normal market operations. An increase in the number of middling size firms and middling strata of, well not workers as such necessarily but managers, foremen, small entrepreneurs meeting demand not quite large enough for the big boys, etc., is quite compatible with increasingly vast wealth of the greatest bankers, financiers, landlords and stock owners of the largest industrial and commercial firms. Similarly, the poverty of the least profitable parts of the population is the market correctly pricing in the high social opportunity cost of useless people. The intro claims outright that opportunity costs tell us nothing about income distribution, but at this point, again, a living Hazlit would only sniff that thinking so means you just don’t get it.

It is true that I think it’s Hazlitt who doesn’t get it, because getting it would lead to undesirable conclusions. But that’s just me.

The intro says “While markets are exceptionally powerful social institutions, they cannot work unless governments establish the necessary framework within which they can operate. The core of the economic framework in a market economy, and a central role of government, is the allocation and legal enforcement of property rights.”

As I recall Hazlitt tends to operate either at the highest possible level of abstraction (less encumbered by evidence,) or at the most quotidian (assuming a host of convenient issues as givens.) At the highest level of abstraction, markets have existed without governments at all, or the weakest kind of government any modern citizen would scorn as banditry. At this level Hazlitt would laugh at the idea that governments allocate property rights. At the most mundane, Hazlitt would see property owners (aka humanity, if I remember his usage rightly) as prior to government, who are interfering.

But perhaps looking at Hazlitt is merely a rhetorical device, useful for the confronting the continued baneful influence of this propagandist. What matters is in fact reality. Historically, to the best of my knowledge, governments have fostered modern market economies first of all by establishing the boundaries of national markets and a national currency. Insofar as they allocate property rights, it is almost always by redistributing somebody else’s property to its citizens, usually unequally, which is no accident. Historically, when the government has intervened to re-allocate property rights is in times of civil strife, to avert outright civil war. Sometimes it was Solon revising the laws or the plebs seceding til they had their voice in the tribunes. Only occasionally was it a revolutionary government seizing property and allocating it.

But the notion that governments allocate property rights as a function, rather than presuming them, strikes me as untenable. Therefore, when the intro observes that “the choices that determine property rights are subject to the logic of opportunity costs just as much as the choices made within a market setting by firms and households,” it comes across as something awfully close to assuming away Hazlitt’s (and others’) objections.

Perhaps this seems excessively long, but it seems to me that often a lot of the heavy lifting in an extended argument is done very early on.


Schofield 02.16.18 at 3:35 pm

Since the central point of having markets is to allow “choosing” to take place then it’s important that in regard to all aspects of markets operating the “choosing” for these operations should be fair. This is clearly not so and accordingly simply saying markets should be left alone is blinkered and shallow thinking.


fgw 02.16.18 at 3:36 pm

I’ve never heard of Hazlitt before, so as a casual reader I’m not sure why I might be interested in a response to him. But I have certainly been exposed to free market absolutism (if that is a fair generalization of his views based on what you wrote) every time I turn on the radio, TV or read a newspaper. A cogent rebuttal would be welcome. I get that Hazlitt is your hook, still it might be advisable from the beginning to put what’s at stake and why it’s relevant in a more general context.
Looking forward to the installments!


Economist (Regulator) 02.16.18 at 8:36 pm

Haven’t read the chapter yet (blocked at work), but I wanted to throw this question out there. Still grappling with the definition of money. Went back and read the 2012 double coincidence post and in light of the whole distributed ledger/smart contract developments in the last few years, started to rethink some of the comments. I thought I knew the difference between currency and money, and now I am confused again with coins and tokens and such. Sometimes I think it’s easier to start with concepts: store of value, unit of account, medium of exchange, measure of indebtedness, claim on asset, etc. and then try to label and name things. Any thoughts to lend some clarity?


Thomas Beale 02.17.18 at 2:46 pm

One thought: many economic books don’t talk much about the categories of the economic actors whose interests are supposedly maximised by laissez faire, and there is usually the unwritten assumption that financial ‘health’ is what needs to be maximised. But natural persons are real world actors whose interest in maximising financial success is only instrumental, i.e. as a means to the end of achieving life goals (and only justifiable if one really believes the personal wealth indeed leads to true fulfillment), whereas firms are abstract actors whose health is generally defined in terms of profit maximisation (leaving out public bodies, non-profits etc). Laissez-faire markets tend to aid the health of abstract economic actors such as firms, but not generally speaking natural persons, except insofar as the latter are truly like competent instances of the former (more or less, the 0.1%). So there is the underlying question of who the economy is for, also often glossed over.

There are potentially useful comparisons to be drawn between economics and eudaimonia that might be interesting to pull out.


LAL 02.17.18 at 3:45 pm

What is the audience for this book? If it is for a wider audience than political philosophers the extensive focus on Hazlitt in the introduction is at best a distraction and at worst a
disincentive to continue. Mention Hazlitt by all means but get to the two principles more clearly and directly.


Howard 02.18.18 at 8:22 pm

Yes, your use of the term “opportunity cost” is problematic, and yes, it does appear that you mean “social cost.”

Possibly this is because you are used to thinking of those terms in a macroeconomic context– that the social cost of government spending is the opportunity cost of the resources, which in a recession is close to zero. But I don’t see the two terms as in general synonymous. You could have a private opportunity cost as well as a social one.

Here’s a suggestion that may be too radical for you: do a global delete of the word “opportunity” and see how it reads. I found its constant occurrence a distraction. Maybe also try a global replacement of “opportunity” with “social.”

When I once taught a course in microeconomics, I defined a cost as a foregone benefit. All costs are opportunity costs. (OK, a few exceptions: pain, risk of death. But basically true.) So why clutter up the prose?


Dirk 02.18.18 at 10:00 pm


it is a nice project. Just three comments.

You describe the General Theory as “the study of disturbances affecting aggregate levels of employment, interest rates and prices”. This is misleading. Keynes examines what determines the level of output and hence employment and what causes disturbances in these. His answer: changes in the level of investment. This is the ‘disturbance’ that affects employment via output, of which investment is a part. Interest and prices are set by institutional arrangements, but the book does not so much explain how disturbances affect interest rates and prices as employment/output.

Then, “Keynes was the first economist to present a convincing account of how a market economy could operate for long periods at high levels of unemployment”. That is a misstatement. Keynes attacks “the classics”, who believe that “long periods at high levels of unemployment” are caused by real wages that are too high. Of course, you might find that not convincing, but the revolutionary aspect of the General Theory is that demand is determining output and employment, not supply, as the Classics thought. Therefore, the solution to depression lies not on the labour market (falling real wages), but on the goods market (more money spent on goods).

“While markets are exceptionally powerful social institutions, they cannot work unless governments establish the necessary framework in which they can operate. The core of the economic framework in a market economy, and a central role of government, is the allocation and legal enforcement of property rights.”

There is another fundamental role for government: providing the money that we use. I deem it to be at least as important as enforcing property rights.



Dirk 02.18.18 at 11:43 pm


I just noticed that your description of the General Theory as „the study of disturbances affecting aggregate levels of employment, interest rates and prices“ has „prices“ in it instead of „money“. I work on Wicksell a lot („Interest and prices“) so I did notice this only now.



RichieRich 02.19.18 at 8:41 am


Opportunity cost will be discussed in detail in the opening chapter. I obviously need to flag this more clearly.

If the book is being written for folk who won’t have come across the notion of OC, then simply flagging in the Intro that you’ll define/explain/discuss OC in Chap 1 isn’t, in my view, a satisfactory solution.

Without an explanation in the Introduction, you’re expecting the reader to plough through several pages that mention OC again and again without the slightest possibility of them really understanding what you’re on about. You’re essentially saying to the reader

Even though this is an introductory text, you won’t understand the first chapter (Introduction). Hey, but don’t worry, it’ll become clear by the second chapter (Chapter 1).

This strikes me as a proposition that may (well) hack (a lot of) readers off. If I pick up an introductory text, I want stuff explained to me clearly as I go along. If you keep me in the dark for an entire chapter when it’s not absolutely necessary, I’m probably not going to be a happy bunny and I may start deducting Amazon stars!


G. B. Robinson 02.19.18 at 6:06 pm

Hi Professor Quiggin,

[I am not a frequent commenter at CT. I am a lay person with no credentials in any field of interest. I read your _Zombie Economics_ with great enjoyment and have recommended it to friends.]

My thoughts:

1. Paragraph one: strike “And where does opportunity cost fit into all this?”. There’s plenty of time to deal with that jargon later. IMO your mission in the Preface is outline why you wrote the book and why the reader should read it, which means establishing that Hazlitt is important–that his incorrect assumptions are widely shared “conventional wisdom”–and explaining in the broadest, most graspable terms possible, why he is wrong about important things.

2. “Readers have embraced the message that all economic problems have a simple answer, and one that matches their own preconceptions.” #notallreaders; you might prepend this sentence with “Fiscally conservative” or simply “Conservative” or even just “some”.

3. “…_Economics in One Lesson_ has been in print continuously since its first publication and has now sold more than a million copies.” Ground this number. Not all of your readers will be academics or professional writers who have a rough idea of the quantities that make a nonfiction book a runaway hit, let alone one on economic theory as opposed to self-help, dieting, or personal finance. Again, this establishes Hazlitt’s importance to those who have not heard of him.

4. “…Hazlitt extends Bastiat by including a critique of the Keynesian economic model developed in response to the Great Depression of the 1930s.” If you can come up with a brief and defensible way to claim that Keynes’s model is what drove, or at least greatly influenced actual economic policy in countries that recovered from the Great Depression, you will help your readers understand why Hazlitt’s extension was important–and suggest, to those who know only that FDR was a big-government liberal–why Hazlitt undertook it.

5. “…Hazlitt gave a simpler and sharper presentation of the case than many of his successors. [paragraph] Hazlitt presented One-Lesson Economics in simple terms that have not been improved upon by any subsequent writer.” There is too much redundancy in these two sentences. I would recast and possibly fuse the paragraphs.

6. ” The central question, which will be the main focus of this book, is whether the prices of goods and services reflect all the costs involved for a society in providing those goods and services, summed up in the concept of ‘opportunity costs’.” Again, and in concurrence with others in this thread, I think you can lose the reference to “opportunity costs” here.

Aside: The confusability of externalities with opportunity costs in Hazlitt is what enabled me to read Hazlitt without strong objection over 20 years ago while I was falling out of the anarcho-capitalist orbit. He did not bring me back into the fold but rather reinforced my departure through agreement with him! It was easy to see that cherry-picking and selective blindness was essential to the ancap project, and the rule was as simple as it could be in application: if an externality, or opportunity cost, inconveniences you, ignore it. As with Potter Stewart’s approach to pornography, personal expediency is always available when theory fails.

7. “the opportunity costs of government action to change economic outcomes always exceed the benefits” This pseudoquote needs a period/full stop at the end.

8. “So, we need Economics in Two Lessons.” Why not three? Why not more? These are obvious questions your readers will ask themselves.

9. “nor the reflexive assumption that any economic problem can be solved by government action.” This statement is insufficiently motivated. I think it comes from simply inverting Hazlitt’s One Lesson (as restated). This is easily fixed. You can cite to common experience: everybody heard on the Internet or Fox News, the ancap/U.S.-libertarian assertion that Government Intervention Is Always Wrong. But we know (or believe we know) that command-style economies don’t scale to the economies of nation-states, either. This is useful to establish that your project is not pro-government statism, though you will be accused with absolute certainty of this crime anyway. Il sont les wingnuts.

10. “AC Pigou”–shouldn’t that be A. C. Pigou? A minor point of typography.

11. The remainder of the Pigou paragraph is nice and clear. Perhaps, if you want to start the demystification of “opportunity cost” in the introduction, this material relating it to externalities (with the classic pollution example) should be moved earlier.

12. However, you say “_social_ opportunity costs” (emphasis mine). In my opinion it is a bit early to be breaking the brand new concept of opportunity costs into subcategories. When I was first taught economics in high school, “opportunity cost” was simply defined as all the stuff I couldn’t do/buy because I was doing or buying something else. I found that explanation difficult because except in the simplest models, the configuration of other ways I could spend my time or money is not enumerable. That high-school econ definition of opportunity cost did not easily extend to “social” costs that I, in the absence of morality or empathy, would not regard as costs at all. (I might even derive a positive externality from seeing a rise in the birth defect rate in an enclave of liberals living downstream of my factory’s PCB-belching waste pipes.) At any rate, if you are going to speak of “social opportunity costs” in the introduction, it will leave a reader like me wondering what other classes of opportunity cost exist. This could bloat the introduction, which is another argument for keeping the opportunity cost term itself out of it.

13. “In all these cases, prices differ from social opportunity costs.” Aren’t prices in nearly all cases going to differ from social opportunity costs? In an ideal market, won’t a price will reflect all of the costs of production plus the minimum level of profit required to keep the good in production. (As I understand it, the quest to achieve a price level above this minimum is termed “rent-seeking”, and those who succeed in doing so are “rentiers”.) Can this sentence be recast with a bit more precision? I suggest something along the lines of the price failing to reflect all of the costs. (This amounts to a hidden subsidy and/or hidden taxation, which in my view is the fatal vulnerability of ancap reasoning, and why Hazlitt failed to keep me in its orbit–but driving your sword into this soft underbelly can likely wait for later chapters.) Edit: In fact this is your lesson #2, as you establish at the end of the introduction!

14. “at a time of chronic economic recession or depression in much of the developed world” As far as I know, this is not presently the case. The IMF identifies only 2 nation-states, Venezuela and South Sudan, as being in recession as of October 2017: In any case, income and wealth inequality is sufficient to motivate reader interest. Few of your readers will be plutocrats.

15. “an attack on the work of John Maynard Keynes the great English economist,” needs a comma between “Keynes” and “the”; typography again.

16. This material about Hazlitt contra Keynes could be profitably moved much earlier, corresponding to my point 4 above. Perhaps some consolidation is possible.

17. In fact the next several paragraphs seem somewhat grafted on from another essay, perhaps written at another time. But that’s not a criticism; these next few paragraphs are good stuff! They seem tighter, more coherent than the earlier material. Perhaps you could relocate most of it to the very beginning, interleaving in selected facts? Furthermore, while most of the world appears not to presently be in recession, everyone who must work for a living fears unemployment. And they know that when overall unemployment is high, their chances of finding work again soon are worse. Thus, even without a current global recession you can motivate reader interest on three grounds, all of which they can connect to their personal welfare or intellectual curiosity: (A) What are the forces that make firms like the one I work for lay people off? (B) Why is it sometimes hard to find another place of employment? (C) Why does increasing income and wealth inequality seem to be a runaway process?

18. I think the structure of the preface from “When I began writing this book” to the end is excellent. I would fit the entire preface into this infrastructure. Deeper historical references to Bastiat, Marshall, and Pigou might not be necessary here. You obviously can’t ignore Hazlitt, nor Keynes against whom Hazlitt reacted. But as your book is about economic principle rather than a history of economic thinkers (cf. Heilbroner), I think keeping the focus on the handful of concepts you need is the way to go.

Thank you for reading all of this! I look forward to chapter 1.


Howard 02.19.18 at 11:49 pm

Just went back and looked at the chapter again. I was struck by how much simpler and more forceful your restatement of Hazlitt’s One Lesson is with the word “opportunity” removed. And similarly for your discussion of Pigou on the next page. Maybe you’re going to pull a rabbit out of your hat in the next chapter, but…


J-D 02.20.18 at 1:57 am

“AC Pigou”–shouldn’t that be A. C. Pigou?

It depends on which style guide you’re trying to conform to. Different guides take different positions on this point.

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