Economics in Two Lessons, Chapter 7

by John Quiggin on March 27, 2018

Thanks to everyone who the first six chapters of my book, Economics in Two Lessons. That brings us to the end of Lesson 1: Market prices reflect and determine opportunity costs faced by consumers and producers.

Now its time for Lesson Two: Market prices don’t reflect all the opportunity costs we face as a society.

I’ll start with a brief intro and then the draft of Chapter 7: Property rights, and income distribution

As usual, 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
Chapter 4:Lesson 1: Applications.
Chapter 5: Lesson 1 and economic policy.
Chapter 6: The opportunity cost of destruction

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

{ 14 comments }

1

philip 03.27.18 at 10:13 am

I like the chapter, it nicely shows the blind spots around property rights of lots economistic thinking. I think you could mention in the bit about historic property rights about (married) women’s right to own property and slavery. You could also mention other types of discrimination and inequality today to further show how outcomes are constructed and not natural, seems more relevant to me than the physical strength example.

I also think you could make the implications of the chapter more explicit i.e. that if Pareto optimality is met it does not have to be accepted as a natural outcome of economic processes so does not exclude the possibility of changes that don’t meet the conditions for a Pareto improvement, i.e. make decisions that make some worse off. I vaguely remember this stuff from my economics degree and it was shown that different starting points would end up with different Pareto optimal outcomes but then there was a bit of hand waving that to decide that would require utilitarianism or another normative theory, implying it was unscientific and outside of economics. But just because economics finds it difficult to go beyond Pareto optimality doesn’t mean we should just accept any form of Pareto optimality.

For the bit about UK property there are still some estates today that were in Domesday. Lots of land is still owned by the aristocracy e.g. Duke of Northumberland and Duke of Westminster but I don’t know if any go back to the Domesday book. Some interesting articles here.

http://www.countrylife.co.uk/articles/who-really-owns-britain-20219
https://www.newstatesman.com/life-and-society/2011/03/million-acres-land-ownership

Should this sentence read ‘… by it …’? One problem with this argument is that the conditions required by are never satisfied in practice.

Here ‘out’ should be ‘our’. If we are going to consider changes in the distribution of income and wealth, what should we take as out starting point?

This should say chapter 15. As we will see in Chapter 1unity5 the creation of property rights in ideas has opportunity costs that often outweigh the benefits.

2

Robert 03.27.18 at 8:44 pm

I was stopped on the first page:

“To begin with, there is nothing special about the particular market equilibrium we observe at any given time. There is an infinite range of possible allocations of property rights, each corresponding to different social choices, and each associated with a different competitive equilibrium.”

In context, this is supposed to have something to do with markets not reflecting opportunity costs. Or maybe it is supposed to have something about markets not working in an idealized way. Either way, I don’t see that.

Maybe the point is that even if markets worked in an idealized way and did fully reflect opportunity costs, one could still object to the allocation of property rights. (By the way, when was the initial allocation supposed to have been made?)

3

John Quiggin 03.27.18 at 10:31 pm

@1 Thanks. Very useful and I will try to work some of this material in

@2 Chapter 7 addresses precisely this point. Try reading on, and seeing if it resolves your problems. You might also want to go back and read the Introduction, where the issues are flagged.

4

Raja Junankar 03.28.18 at 12:27 am

John, Although I have only read your chapter one, it is an important enterprise. Good luck!
However, just reading your Introduction you mention that prices may not reflect opportunity costs if there is some externality, I think you should mention an important theorem proposed by Lipsey and Lancaster: The General Theory of the Second Best, RE Studs 1956-57.
Raja

5

nastywoman 03.28.18 at 3:13 am

I very much like the chapter.

6

Robert 03.28.18 at 8:14 am

Yes, the chapter addresses my point.

If you are going to use the laws of thermodynamics as an example, you might use the word “entropy” to make your point.

I think of the three laws as: You can’t win, you can’t break even, you can’t get out of the game. That might be in Halliday and Resnick’s physics text.

7

Robert 03.28.18 at 8:17 am

A reference I like:

Robert Lee Hale (1923). Coercion and distribution in a supposedly non-coercive state.

The chapter is about efficiency. Some fall back on defending nonsense about free markets by arguing a non-aggression principle. This reference refutes such a move.

8

Robert 03.28.18 at 10:17 am

My name links to some notes I made on Locke’s justification for private property when I read him three years ago. I do not that the chapter needs more about Locke, but perhaps our host would find my notes helpful.

9

Peter T 03.29.18 at 10:16 pm

Minor point. The eastern woodland Amerindians were, IIRC, mostly agriculturists (all that corn, those pumpkins). Locke could not even get that right. And aside from his investments in the Americas, he was very active in taking up confiscated Irish land. As someone remarked, the English never did anything horrible to their imperial subjects without first doing it to the Irish.

10

Mike Huben 03.30.18 at 4:10 pm

I’m back in the saddle again. :-)

“simple tracts”: why not say what you actually mean? Something along the lines of “politically motivated, blinkering propaganda”?

You start with a summary of the opposing point. That may be “fair”, but it plays right into the hands of the propagandist by scoring him yet another repetition of his propaganda, and by the opponent! Later on, the reader may notice that you disagree, but you start out without objecting. This is a framing problem: you might want to re-read Lakoff’s “Don’t think of an elephant!” Then you might want to review the previous chapters, because I think this is a persistent problem throughout your chapters. Your goal should be to present the correct view, and then use it to show how Hazlitt is not just wrong, but also manipulative.

Start out with: “markets don’t work in the idealized fashion assumed in simple tracts like Economics in One Lesson.” Then something to the effect of “the economist’s term for this is ‘market failure’.”

“there is nothing special about the particular market equilibrium we observe at any given time. “ This shifts gears: there is nothing in the preceding 2 paragraphs that relates directly to this. And then you don’t refer to it again: it is hanging, useless.

“Rather, there are long periods of recession and depression where productive resources sit idle, so that their opportunity cost, in effect, is zero.” Huh? Isn’t their opportunity cost high, because they could be used? Please explain this.

“The inability of markets to resolve questions of distribution, and the various forms of market failure form the basis of Lesson Two” Another point appearing out of nowhere: distribution. Market failure gets a page of introduction and distribution gets no introduction.

Intro to Chapter 7
The first paragraph is excellent. But then I think you blunder. There never has and never has been a “initial allocation”. That is an economics 101 fantasy. There is always CONTINUAL REALLOCATION. Through markets, birth, death, taxes, law, crime, invention, production, conquest, etc. Social decisions affect these reallocations, as you note below. But this is the framing you need: there is no initial “fair” allocation: there is only reallocation, and we need to make it fair. And you can’t buy fairness in a market.

Perhaps you do not want to add fairness as an objective. The problem is the market 101 people claim fairness. You may want to point that out as a value-laden dispute that is irrelevant to the idea of opportunity cost. Different reallocations provide different opportunity costs in the real world. Reallocation to public schooling, for example, is immensely productive.

7.1
This section needs to be more concrete, and start with some clear statements about the nature of property rights. Otherwise you give away the game to the assumptions that the propagandists have instilled for generations. 101ers start with the ASSUMPTION of absolute property. Real property (as opposed to holding) is a creation of government law and is never absolute for the simple reason that enforcement costs would be too high. It is the reason markets can be so hypertrophied. Markets do not create property: its creation is a social process where opportunity costs need to be considered to decide what sorts of property to create. Property is not free: there are enforcement costs as well. Property is complex and there are many different kinds with different opportunity costs (see Ostrom and Honore.) I have a few pages at my site about these subjects:

What Are Rights

What Is Property?

Only when you have established what property really is can you refute the hidden assumptions of the 101ers.

Then you need to provide a few examples of alternative types of property and how ownership is never absolute (liens, for example.)

7.2
Your presentation of the 2nd welfare theorem should be clearer and more direct. Much of this chapter seems to assume substantial knowledge of economics.

7.3
Ah! Here is where you discuss property rights. This needs to be moved to the beginning of chapter 7. But you still need to give up the idea of initial allocation.

“Since market outcomes are determined by property rights, One-Lesson economics is of no use here.” That seems like a non sequitur because property rights are not determined by markets.

I like this chapter a lot.

7.4
How can you discuss natural law without starting with “nonsense on stilts”? And point out that rights of kings were natural law until other politicians realized that claims of invisible rights were available for anyone to make?

I love your point that Locke was self-serving. I’d also add that his “enough and as good” proviso fails as soon as a price for land arises, making all current property unjust by his standards.

“More fundamentally still, a natural rights theory of property only makes sense if we believe that individual effort can generate wealth.” This doesn’t seem to follow, since you were treating an initial allocation theory.

I have a page on this as well: The worthless Lockean Fable of Initial Acquisition Feel free to use any of those ideas.

7.6
This is very interesting!

You may want to suggest “Pareto local maximum” instead of optimum or efficient.

You may also want to point out the crucial idea that a small change in the Pareto landscape will always have negative effects, but a large change might move you to a much higher peak. By analogy, to get from one mountaintop to another, higher one, you have to go downhill first.

This is another “big lie” by omission by the 101ers.

SUGGESTIONS

I’ve noticed that you don’t seem to provide a positive alternative to Hazlitt that is simple like Hazlitt’s laissez faire. That is a missing overall objective of your book so far.

Allow me to propose that the alternative is democratic governance of the market and the economy precisely because markets are not sensitive to all the opportunity costs, but the populace can note many that the market doesn’t, this improving economic efficiency. Pollution, for example.

This should be an overriding theme throughout the book, not something left to the reader to infer. Otherwise you leave readers who reject Hazlitt rudderless. You can point out the endless examples of democratic issues about regulation and how they reveal opportunity costs that the market ignores.

Hazlitt also makes no bones about saying who is the enemy. You shouldn’t either. That’s the nature of this form of rhetoric.

11

Equalitus 03.31.18 at 4:33 am

If a municipality has less than 10k citizens it might be labeled as “partial equilibrium” or “semi-equilibrium”, but quantitatively there is no equilibrium on a “macro” level or scaled economy level of above 500-1000 economic agents or human beings/people as we usually call it.
Again, the only country which has something close to “partial equilibrium” or “semi-equilibrium” meaning less competition and struggle about “finance capital” [concept includes any accounting identity combination of stock, flow, gross and net money prices in any economy, “money-ness” or even “aggregate money-ness” is a parallel accounting identity or equivalence accounting identity of the concept “finance capital”. It really means all the money prices].
Please use the term “market clearing” if that is what you mean by “market equilibrium”.

I agree to the critical parts of Vilfred Pareto, even though his infamous 80%-20% rule can be “modified” or interpreted as accepting a rigid or dynamic distribution profile of 80%-20% by that on aggregate in an economy the richest shall have exactly or approximately 4 times the income or wealth that the lowest 80% of the population has.

You are too forgiving to the moral hazard and aggregate opportunity costs for the majority by not being more critical against IP, including all medical patents and cultural products like movies and music.
The only thing that it is rational to have judicial limitations on by the IP framework is trademark on products like cars and clothes and computers and stuff, etc. We should be allowed to make a copy of a Ferrari, but the horse symbol and the name “Ferrari” we should not be allowed to put on a car not produced by the owners of the Ferrari corporation.

12

Equalitus 03.31.18 at 4:42 am

Re. Mike Huben at 10, entirely empirically correct about “initial allocation of property”. There is also *exponentially* increasing economic growth and financial inequalities from the start of the industrial revolution, somewhat more than 200 years ago. Property is not coupled to productivity it is law and institutions, and politicians and voters and ballot induced. Always.

13

Equalitus 03.31.18 at 4:47 am

@11 can’t edit so must add Liechtenstein for country that is closest to semi equilibrium currently.
“Again on “economic equilibrium”, the only country which has something close to “partial equilibrium” or “semi-equilibrium” meaning less economic competition and financial struggle is Liechtenstein. Or a Scandinavian municipality with less than 10k citizens.

14

czrpb 03.31.18 at 10:45 pm

OT (sorta): what is the equivalent book to _The New Spirit of Capitalism_ (Boltanski) for the US?

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