Economics in Two Lessons: Chapter 5

by John Quiggin on March 17, 2018

Thanks to everyone who the first four chapters of my book, Economics in Two Lessons. I’m continuing with policy applications of Lesson 1: Market prices reflect and determine opportunity costs faced by consumers and producers.
That will be followed by Lesson 2: Market prices don’t reflect all the opportunity costs we face as a society.

Now here’s the draft of Chapter 5. Again, I welcome comments, criticism and encouragement.

The book so far is available
Table of Contents
Introduction.
Chapter 1: What is opportunity cost?
Chapter 2: Markets, opportunity cost and equilibrium
Chapter 3:Time, information and uncertainty
draft of Chapter 4:Lesson 1: Applications.

Feel free to make further comments on these chapters if you wish.

{ 17 comments }

1

nastywoman 03.17.18 at 10:04 am

we very much would encourage countries -(like my homeland the US) to give poor people – instead of the degrading food stamps money -(just like many European countries do)
but the remark:
‘If poor families were given money, they could choose to pay the rent bill even if it meant living on rice and beans. That’s a hard choice, but it might be the best one available.’ -points to the fact that economics in this century won’t work anymore without well working ”price control” -(especially for the rent and health care)
In Health Care European Countries have shown US how well ”price control” -(by government) can work and as in this century rents in the US in most cases have grown to much more than 30 or 40 percent of the peoples yearly income – the US HAS to come up with some measures to control such economical insanity.

And Manhattan is an excellent example – as we are also sometimes toying with the idea to live ”on and off” in Manhattan – but as the difference between a comparable two bedroom in the most expensive cities in Italy/Germany and NYC is about 4500$ concerning ”opportunity cost” it makes more sense for me as an American to reside in Europe and then spend the money I have saved from the much lower rent in visits to Manhattan in order to – NOT eating rice and beans but at Nobu next to our favorite Hotel in Manhattan.

Which always reminds US – that there is actually not only one economy in NYC -(or the whole wide United States?)
There is the ”Rich Mans Economy” – with completely different opportunity costs than the poor mans economy. And I just don’t know if it is still possible to write for both economies the same… lesson?

2

nastywoman 03.17.18 at 10:41 am

– and let us do some exciting math -(or comparison of opportunity costs) – as we know – there are all these Americans out there – who have come to the conclusion that they actually can’t afford anymore to ”reside” in their own ”homeland” anymore.

1. The Rich Mans Economy
A single (and ”free”) American who makes above 150 000$ and who loves to support the economy by happily consuming – but doesn’t live (permanently) in one of US desired places – like Laguna Beach NYC or SF – and so is able to save about 45 ooo$ a year – she is able to spend – by spending more than three month every year in the most desired places of her homeland and consume the most awesome food.

2. the poor mans economy
The ”Free Singles” Cousin – who is married and makes -(with her husband) close to 200 ooo$ -and has 3 -(in words ”three”) – children – who soon will be all in school -(and hopefully later in University) – with some perspective ”costs” of between 90 and 150 thou per year – and after such costs for education might have to go a lot on rice and beans in order to afford the rent or mortgage of her shelter…

To make a long story short – their story could be a really great story about ”opportunity costs”?

3

Robert 03.17.18 at 11:05 am

Back in chapter 4, on the opportunity cost of college: If you want to complicate the story, you could talk about 2 year degrees at Community Colleges, people that decide to go back later, or take classes at night, and so on. Those who think they might go back later often never finish because they find the opportunity costs too great, given how little non-work time they have later.

4

bruce wilder 03.17.18 at 7:35 pm

Usury laws can be very effective in furthering the general welfare. I would love to see a shout out for that particular policy of price control.

5

Peter T 03.18.18 at 3:13 am

Price control might be an issue worth exploring in some detail, just to make the point that prices do not include all costs. The city that rations in times of war or poor harvest survives, the one that lets prices reign succumbs to the enemy or to riot; the city that reserves some housing for the low paid and keeps price from over-running everything keeps its nurses and firemen and libraries and interesting shops and livability. The one that doesn’t becomes a desert after dark, poorly served. Or is forced to pay large wage premiums to the essential personnel (see London). And so on.

A quick skim of this:

https://www.southampton.ac.uk/~jps7/D8%20website/future%20trends%20in%20aircraft%20costs.pdf

suggests that deregulation did not lower costs – they were on a consistent path down due to technology – but redistributed the gains (although with increased passenger numbers, economies of scale likely also played a large part).

6

nastywoman 03.18.18 at 7:48 am

@4
”Usury laws can be very effective in furthering the general welfare.”

How true – as in the ”poor-mans-economy” not only ”pay-day-lenders” have really overdone it – as in the ”poor-mans-economy” – mysteriously – there is no easy money – there are no low interest rates – WE enjoy?
Or the pleasure of reading our wonderful credit reports?

And what is a woman or a man in America without a wonderful credit report???! –
Nada!
Nothing!
-(another reason why we – perhaps at least in the poor mans economy should shut of the Internet -(and start again from the beginning) – that those landlords – who somehow want to know EVERYTHING about ”the poor” – are protected from commiting usury so often?)

7

nastywoman 03.18.18 at 8:22 am

– and concerning ”usury” or my favorite usury sin – ”exploitation” – I have a suggestion for lesson Nr.2 and ”Market prices don’t reflect all the opportunity costs we face as a society.”

What’s about NOT eating at restaurants anymore where ”the Market prices don’t reflect all the opportunity costs we face as a society.”?

As WE since quite some time don’t eat anymore in restaurants where employers are exploited by NOT having them receive any livable wages. –
(which includes nearly every US Fast Food Restaurant) – that would teach the Rich Mans Economy a lesson?

8

Equalitus 03.18.18 at 11:42 am

A majority utility government program for housing would be that the state, or municipality owned a large amount of housing and rented out at a fixed rate of 1% profit margin. That would make much less opportunity costs for the great majority.

9

Equalitus 03.18.18 at 11:56 am

On the paragraphs of fisheries, if the government owned all the fisheries and decided to have a long term strategy for maximum ocean harvesting through decades, then the opportunity costs would be reduced and fishing increased.

If private firms do the fishing then this is my suggestion for solution and improvement:
Elementary arithmetic example; maximum 1 month fishing per year per 10k km2, or maximum 1 month fishing every second year, or third year, or fifth year per 10k km2 or even per 100k km2. No more over fishing would happen after a time of incremental dynamic stabilizing of harvested amount of fish per year and on average.

10

Equalitus 03.18.18 at 12:15 pm

Another takeaway from this chapter of yours, [which is hilariously funny btw] is that price control is almost always inefficient and unfair. I have that methodological opinion myself.
Instead of controlling prices for such different goods as housing, gas, food, medicine, etc. it is much better and efficient and rational as for majority-profitability to “control” aggregate financial inequality. By percent expressed in dollar or local currency. Unfortunately we haven’t culturally evolved that far as economic specie yet.
The second identitarian cultural war in America is but one of many factors of evidence for that.

11

nastywoman 03.18.18 at 2:17 pm

– and… perhaps as an excuse -(or not?) – I write all of this crazy chaotic and convoluted and idiotic stuff about economics – BE-cause contemporary (US) economics have gotten so far ”over the top” – but not as far as the Mexican Mountain-Climbers who soon – according to Von Clownstick will go ”over the top” of ”our” wall -(”their” government will pay) – but… anywhooo – waaay ”over the top” that the major lesson we learned (again) in two month crisscrossing America (again) that the only lesson ”the people” currently want to learn is:
How to survive economically in such a crazy, chaotic and convolutes system?

AND who the f… in America came up with this (economical?) idea – in ”the richest country on earth” to pay people NO LIVING WAGES?
-(and here I’m only writing about ”the poor mans economy” – as the Rich Mans Economy is… ”fine”)

And so perhaps a lesson about Economics (in these times) should be firstly some kind of a guide how this Cousin of mine – with her three children – can make it OUT of an economy which doesn’t offer here any ”opportunity” at all anymore?

12

Scott P. 03.19.18 at 2:13 am

Let’s analyze your example of wartime rationing. Let’s say that you have a number of commodities that your nation doesn’t produce, or is heavily reliant on imports.

One option is to issue ration cards that must be handed in in order to buy the commodity. The goal here is to limit demand and thus control prices. This has several advantages:

1) You can print and distribute ration cards pretty cheaply.
2) Consumers get a sense of what is the ‘correct’ amount to consume, and thus will be inclined to restrain their consumption for patriotic reasons.

It’s true that some people might attempt to circumvent the rationing system and purchase on the black market. But there are brakes on this. A black market won’t spring up overnight. By labeling purchases on the black market as criminal, you inhibit many people from attempting to acquire the commodity beyond the rationed amount. Any increase in prices will be relatively contained. If you expect the war to be over relatively quickly (and who doesn’t?), then the downside may be avoided in part or entirely. And although there is an opportunity cost (waiting in lines), it is primarily borne by women, i.e. not soldiers or munitions workers. There is a sense in which ‘everyone is in it together,’ building national solidarity.

Your suggestion would seem to be not attempt to hold down demand and let the price float, but respond by giving money to every citizen. There appear to be several severe drawbacks to this strategy. First, you don’t disinhibit consumption, so the commodity may be used up more quickly than under the rationing strategy. Second, determining how much to subsidize each person does not seem a trivial task. Whereas changing the ration is quite simple (e.g., you simply decree that you need two ration coupons to purchase a pound of butter rather than just one), whereas under the alternate system you have to physically print and ship more money. Third, injecting money into the system like that will spark instant inflation that won’t confine itself to the commodity(ies) in question, but will appear everywhere. If you are looking for military contracts based on stable prices, this is a problem. Moreover, since the price is floating, you incentivize suppliers to sit on the commodity in the hopes the war continues and prices increase.

Obviously, in a situation like late-WWI Germany, things have broken down and the rationing system doesn’t work. You end up driving many commodities out of the regular market and forcing people to cheat in order to survive, which eliminates the disinhibition of using the black market. But even there, it’s not clear how much elimination the ration system would have helped.

13

Tabasco 03.19.18 at 2:59 am

On rent controls, here is the abstract of a paper published in the Journal of Economic Perspectives in 1995 by Richard Arnott. Make of it what you will.

“Economists’ traditional hostility to rent controls is based on models that treat the housing market as perfectly competitive and on the experience with ‘hard’ controls in New York City and many European countries following World War II. The current ‘soft’ rent control systems in North America are varied and qualitatively different from earlier hard controls. The theoretical case against them is weak, particularly when the housing market is viewed as imperfectly competitive. The empirical case against them is weak, too. Economists should reconsider their blanket opposition to current rent control systems and evaluate them on a case-by-case basis.”

14

Peter T 03.19.18 at 6:21 am

If the state intervenes to ensure greater equality (higher minimum wages, steeply progressive taxes and so on) then it is controlling prices. Most obviously the price of labour, but also the floor and ceiling prices of anything bought with wages (pretty much everything). There is a good case for doing this – avoidance of social unrest being one. There is equally a good case for at least having the power to control the price of necessities (a varying category), to avoid inflation, social unrest or the deterioration of social life. Once again, prices are functions of markets, and what’s in the market or out is a political and social choice, not a law of the universe.

15

John Quiggin 03.19.18 at 6:45 am

@10 “hilariously funny” I’ll take that as a compliment – hopefully it’s intended as such

@12 I agree that wartime rationing can work for a while. I’ll try to be clearer about this

@13 I looked pretty hard at the more recent evidence, and couldn’t see much of a case for soft rent controls either. As with price control in genera, there are short term crises when control may be justified,

@14 Agreed in general terms, but pushing wages up is generally better than trying to hold prices down.

16

nastywoman 03.19.18 at 10:22 am

@
”Obviously, in a situation like late-WWI Germany, things have broken down and the rationing system doesn’t work.”

That might be a good reason to use contemporary examples and parables in lessons about economics – as obviously, in a situation like early 21th century Germany when ”things” are breaking down -(like the faucet in our bathroom) the repair system really doesn’t work anymore with the rationing of plumbers.

And with the waiting time for ”Handwerker” in Germany approaching 6 -(in words ”six”) month – why can’t we have all these unhappy American workers become plumbers in Germany? –
They would earn more than a livable wage – could afford their rent and health care – send their kids for free to University – drive a Mercedes -(like our plumber) and could even enjoy a surfing vacation in Australia (like our plumber)

17

Peter T 03.20.18 at 10:57 pm

JQ @ 15

Pushing wages up is good. But observe that this also pushes prices up.

More widely, to measure utility in money is to obscure the trade-offs between money and the many other factors that go into the general or personal welfare (time, company, convenience, certainty….), and treats price itself as unproblematic.

As a good many studies have shown, people often prefer to adjust these other factors rather than money price for anything other than small one-off transactions. They alter credit terms, add or subtract extras, extend delivery times, change the specifications. Regulations and laws affect all these much more than formal money price, but nevertheless constitute price controls in the utility terms economics tries to measure just as much as if they had imposed a fixed price. When you cannot offer a cardboard shack (or a Manchester back to back), the price of housing is altered.

I really think you need to point out that money is not a good measure of utility, and that therefore money price is not usually a good measure of opportunity costs.

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