Economics in Two Lessons: Chapter 1

by John Quiggin on February 19, 2018

Thanks to everyone who commented on the draft introduction to my book, Economics in Two Lessons. The revised introduction is here. Feel free to make further comments on it if you wish.

Moving along, here’s the draft of Chapter 1. Again, I welcome comments, criticism and encouragement.

{ 18 comments }

1

Mark nelson 02.19.18 at 9:42 am

“Absence of a specific government policy…”
It is too simplistic to put all regulation in one “bad/evil” category, as absence of regulation can just as effectively have a negative impact on the overall “fairness” of an economic system. We can easily see how control of the ability to regulate can result in huge economic advantages for those in control, and huge disadvantages for everyone else.
Well written. Looking forward to the second lesson.

2

nastywoman 02.19.18 at 12:41 pm

Getting caught the third time in three days in the horrendous Southern Californian Traffic which even on sunday’s – ON SUNDAY’S!!! reminds everybody that Time is Money” – or as an unfamous angry Italian said:
”This place needs a major recession in order NOT to suffocate –
(-on consumer wastes on unnecessary, guilty enjoyment that which could have served to heal the wounds of poverty)

And that might be the problem? – that Benjamin Franklin probably never could have ”thunked” that a Cousin of mine spends everyday about five hours of the day driving back and fourth – ”sitting idle one half of that Day” and makes Benjamin Franklins quote sone very dated – or can ”the idling” nowadays actually be considered a major part of the ”opportunity cost”?

And does Wieser have to correct his observation?

3

steven t johnson 02.19.18 at 2:26 pm

It seems bizarre to me that labor and wages is conceived as a matter of opportunity costs for producers. “The workers who produce a given good or service could have spent their time on another job (assuming other jobs are available), or at home, working around the house or enjoying leisure.” Why do we assume there is a home? Or that leisure automatically includes eating?

The notion that a genuine “producer” (which here actually means capitalist I think,) has the option of closing down production is correctly cited as one of the choices in judging opportunity costs. It is true that occasionally workers will immediately shut down production, so to speak, (commit suicide, to speak otherwise,) and forego all sunk costs of their previous “production,” (life.)

Opportunity costs that can be measured will guide economic life in a way that inconsistent, transitory and personal non-monetary evaluations will not. The Ben Franklin anecdote does highlight that in modern economy, it is all money, even if the text immediately walks it back. In particular, though this may be anticipating, when the opportunity costs to be measured are foregone profits, these have a significance to social life of a magnitude and nature vastly different from those opportunity costs to workers. The text says producer/capitalist=producer/workers, so far as I can tell.

4

DCA 02.19.18 at 2:36 pm

You are certainly correct that o.c. is an underused concept, and this chapter shows why: it is foreign and difficult to think about: in Kahneman terms, a “slow” activity. I had to struggle a bit with this chapter (I know the concept, but am not a professional). Given what you are trying to do, you want to be brief, but a longer discussion (or at least some additional examples) would be helpful. Maybe make them a bit more colorful, a la Bastiat?

I’d also suggest that a more forthright: “I’m going to start with costs not prices, and these are not the same thing” would help the reader get started.

5

Mike Huben 02.19.18 at 4:06 pm

Almost everything here is clear and beautifully written. But I have a problem with the organization. Allow me to make a few recommendations.

You should start the chapter and each of its subheadings with a clear statement of intent. This chapter could start with:

“In this chapter, we will begin with a careful exposition of the core idea. Next we will consider the relationship between opportunity cost and more familiar measures of the cost of production. Finally, we will examine opportunity cost in relation to the choices we face, as consumers, workers and households”

Instead, you charmingly talk about why opportunity costs are important and underappreciated for two paragraphs, when that would actually make another very good subheading.

Starting with good topic paragraphs may not feel as gracious, but it helps the impatient. THEN give them the choice bits of interesting stuff, such as how economists disagree.

“Time at home can be allocated to household work, childcare or leisure. The wage that could otherwise be earned in the market is the opportunity cost of this time.”

I think you have omitted an important part of the lesson about opportunity cost here. If work is chosen, then the opportunity cost is the subjective (and sometimes monetary) value of the household work, childcare or leisure.

But even more basic to this argument is the opportunity costs to the other VALUES of real people. As Isaiah Berlin said, “Liberty and equality, spontaneity and security, happiness and knowledge, mercy and justice – all these are ultimate human values” Unless you recognize these as possible costs, you are giving away much of the game.

“Market prices (including wages) tell us about the opportunity costs we face as consumers and workers”

This needs to be denounced much more firmly and clearly, not the passive “But market prices are only one side”. It would also be good to declare its source: are you saying it, or is it something you oppose?

“Hazlitt, like other advocates of the free market, assumes the allocation of private property rights to be preordained and natural, while treating government programs as an arbitrary intervention. In fact, all property rights are constructions of government and law. “

This is a thing of beauty, and one of the greatest criticisms of Economics 101 arguments. But it really needs its own subsection (or chapter) and it needs to be explained at greater length in terms of opportunity costs. For example, should we rely on individual efforts of billionaires to reshape society, or by redistributing part of their wealth enable the people as a whole to choose their own destiny? Examples good and bad could include the Carnegie libraries vs. modern education deform through charter schools and vouchers, pushed by the DeVoses.

“1.4 The intellectual history of opportunity cost “

This is terrific, but it may be boring to non-enthusiasts. I recommend that you identify side excursions such as this as unnecessary to the major theme of the book, encouraging the impatient to skip on ahead to the next chapter. Something like a TLDR unless you are interested marker. The same for the further reading. Maybe some icon meaning optional reading would help.

“The idea of opportunity cost is a natural consequence of modernity”

More explicitly: The idea of opportunity cost is a natural consequence of the increase in choices in modern society.

But is that really true? People have always had to make enormous numbers of economic choices. While they may plant the wheat at traditional times, they may have to choose which crops to plant where and how much.

I also beg you to reconsider (or explain) the use of the term “Free market”: it gives away too much to Economics 101 thinking. Forgive me if I am wrong, but there are ideal “free market” economics models, but there can be no such thing as a real free market: only markets unregulated to some degree. Free market is a political propaganda term outside of its use in economics theory.

“Mainstream economists largely accepted Robbins’ dictum that interpersonal comparisons of wellbeing should be rejected as ‘unscientific’, and sought to rebuild welfare economics without reference to such concepts as marginal utility (another term coined by Wieser). By the time theorists such as Peter Diamond and James Mirrlees returned to the problem of optimal tax in the 1970s, the link to Wieser’s work and to the concept of opportunity cost was lost.”

This is a very important subject, but this paragraph is not very clear without a great deal of background. Can you relate it to opportunity cost?

“Wieser’s students Hayek and Mises pursued a far less fruitful aspect of his work: the sterile 19th century controversy over the “theory of value”. By subordinating economic analysis to dogmatic ‘market fundamentalism’, Hayek and Mises drove the Austrian school of economics into a blind alley from which it has never escaped.”

Once again: need clarification on “theory of value” for this to make sense.

6

Robert 02.19.18 at 6:49 pm

I think posing a choice between government intervention or non-intervention in markets is nonsensical. Might you say so, if you agree and reference, say, Robert Reich or Dean Baker (see the link with my name)?

7

Know Teeth 02.19.18 at 10:30 pm

Mike Huben @ 5…
+ 100
One of the best comments I’ve ever read.
I hope you agree JQ.

8

Peter T 02.19.18 at 10:49 pm

I think if you are going to make opportunity cost central, then you need to unpack the term. What is a “cost” here? Almost all your examples are monetary, as is Ben Franklin’s example. But costs come in many forms (the costs to an employer of paying adults rather than children or installing safety equipment are easily and quickly measurable; the “opportunity costs” to the children in terms of health or education are not nearly so measurable, as are the “costs” of industrial injury) and many are not attributable to any particular person, but distributed as chances over a whole class. As another commenter noted, security, leisure, socialising, family, enjoyment are all essential human pursuits too, even if they cannot be “costed”.

I’m using quotes because the term cost carries its own baggage – one that skews towards money, the measurable, market relations (as does the casting of externalities as “market failures”, as if we could have a market in the survival of the planet). I really think you need to lay this out and then perhaps use another term, for it’s that baggage and its implicit claims that Hazlitt relies on.

9

Tom 02.19.18 at 10:53 pm

John, which is the audience of this book?
a) an undergraduate student?
b) somebody already versed in some economics?
c) a layman (educated or not)?

In ch. 1 the first page is about comparing your approach to what other books do. If the audience is b), then this makes sense. If a), not so much. If c), maybe, maybe not.

Likewise, at the end of ch.1 you talk about the history of the concept of opp.ty cost. Again, this is interesting for b), but not sure how much for the other audiences who may feel a bit lost there.

10

Tabasco 02.20.18 at 12:52 am

In section 1.4, you say Wieser coined the term marginal utility, and you say it again on the next page.

11

John Quiggin 02.20.18 at 2:58 am

Thanks to everyone who has commented, especially Mike Huber @5.

To Mike and also Tom @9, the intellectual history section was meant to be marked as optional (I plan a few sections like this).

I’ll fix that, as well as looking carefully at all the points raised in the thread.

12

Alan White 02.20.18 at 4:09 am

I just attended an ethics of education conference where one very good paper discussed the costs of upwardly mobile first-generation higher ed students (I was one). One central question was about whether “cost” was a proper term in this context. I argued there from first-hand experience that it is proper only if those who incur such costs regard them so as having “paid” for them–in terms of a stable sense of self and impostor sentiments, alienation from family, discomfort with one’s new peer groups, etc.–and the sense of what price is paid and whether one has paid too much is constantly subject to revision. I think many such costs don’t have anything like subjective criteria that settle what such costs are for all time–just diachronic ones that vary, and can vary wildly over time. I’m an idiot about econ BTW so please just factor this in FWIW.

13

RC AKA Darryl 02.20.18 at 11:32 am

Time is not money. A nation can print more money. One with good credit can borrow someone else’s money. One can steal more money. One can make too much money, more than they can spend.

Time can neither be printed nor manufactured. One can pay for someone else’s time to do some chore, but our own time is all and only our own even if we give others the use of much of it. One cannot really steal time despite our freedom to choose how we spend it. There is never too much time for any of us and we will always spend all of it.

14

RC AKA Darryl 02.20.18 at 11:46 am

I have no fear that I will ever run out of money, but I am absolutely certain that I will run out of time before very long.

15

RC AKA Darryl 02.20.18 at 12:19 pm

Of course my point should not be taken to undermine the importance of opportunity costs in making economic decisions, but rather to underline the importance of using realistic and non-contradictory semantics in expressing economic ideas. Economics is a methodology of understanding the operations of commerce and not an alibi of meritocracy for the pleasure of privilege.

16

Kiwanda 02.20.18 at 5:33 pm

Some tiresome person will eventually point out the ironic interpretation of the Frost poem.

17

John Quiggin 02.25.18 at 9:29 pm

@16 This point was made in the thread on the outline also. I don’t think the ironic/dark interpretation is a problem for the way I want to use the quote. I’m not saying that “the path less travelled” is a better choice, just that it *is* a choice and forecloses the opportunities that might have been found on the other path.

18

Equalitus 03.10.18 at 9:22 am

There is always never free markets, or “the free market” there is almost always asymmetry and power inequality in markets. And almost all industrialized markets are conditionally regulated, legislated by political assembly and bureaucrats.

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