Economics in Two Lessons, Chapter 12

by John Quiggin on June 16, 2018

Thanks to everyone who commented on the first eleven chapters of my book-in-progress, Economics in Two Lessons.

Here’s a draft of Chapter 12 on Predistribution

Comments, criticism and praise are welcome.

Earlier draft chapters are available. These aren’t final versions, as I am now editing the entire manuscript, but you can read them to see where the book is coming from.

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
Chapter 7: Property rights, and income distribution
Chapter 8:Unemployment
Chapter 9: Market Failure
Chapter 10: Market failure -Externalities and pollution.
Chapter 11: Market failure: Information, uncertainty and financial markets

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

{ 11 comments }

1

nastywoman 06.16.18 at 3:46 pm

– each time I read such ”well-balanced ecolingo” I wonder if it’s mainly from the perspective of the inhabitant of a Consumer Country? – as I currently reside in a ”Producing Country where – for example – a union like the IG-Metall ”rules supreme”.

And the union rule ”supreme” because the whole country mainly lives from the products of the members of the union – and so in the future ”redistribution” will for sure go even more to these unions members – as they will have to produce higher and higher quality machinery products – which will be in higher and higher demand – and Yes – our -(the US) production of money will be in higher and higher demand too – but sadly not as well redistributed as ”the bankers” – ”speculators” and ”investors” -(Me?) like to keep it all for themselves in order to afford the more and more expensive high-quality products the most sophisticated Producing Countries are producing.
-(like – I really would like that one Swiss watch – even a very successful US investment banker hast to work a full monthBanker has to work a full month for)

In other words: It seems to be ”what an economy” is really living from – and if an economy is living from – just some ”natural resources” which flush out of some desert ground – there is no ”redistribution” problem – as everybody who owns that piece of dirt – get’s a cut…

2

Mr Art 06.16.18 at 4:48 pm

You write:

“With the allocation of property rights to employers that normally prevails in the US, referred to as ‘employment at will’, the job is the property of the employer who can withdraw it at any time, for any reason, or none”

Obviously an employee can withdraw their labour at any time, for any reason, or none. If the employee has savings (an old fashioned idea) they are free to do this and find another job, just as the employer can replace them.

I don’t necessarily see this as an imbalance.

3

Mark Brady 06.17.18 at 1:26 am

You provide an insightful discussion of IP, one that somewhat reflects my own thinking and teaching on this topic, and which I enjoyed reading especially for some ideas that were new to me. That said, I suggest that you cite the seminal work of Sir Arnold Plant, most notably his two papers on patents and copyright (1934) that have stood the test of time. For the record, it’s worth noting how present-day Austrian school economists, among whom I count myself, are pretty skeptical about, if not downright opposed to, IP.

4

eg 06.17.18 at 3:12 am

@Mr Art

All well and good in theory — less so in reality where the majority of households are $400 from insolvency …

https://www.cnbc.com/2018/05/22/fed-survey-40-percent-of-adults-cant-cover-400-emergency-expense.html

5

Tabasco 06.17.18 at 6:44 am

The copy-paste of the OECD’s figure on union density might be a breach of the OECD’s copyright, which is either ironic or apposite, depending on how you view the discussion of IP.

6

Peter T 06.17.18 at 1:00 pm

Further to 2 and 4 above, fifty per cent of US households have zero or less than zero net wealth (ie their debts equal or more than equal their assets). These people are, of course, the people upon whom much of the actual productive work of the economy devolves (the nurses, garbage-collectors, welders, brick-layers, truck-drivers, warehouse clerks and so on.

7

RichieRich 06.18.18 at 6:18 am

​​​I wanted to add a few comments on the ​I​ntroduction to my previous ​comments ​here​​.

Hazlitt’s lesson ​(HL) ​reads

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.

You restate the lesson (QH​L​) thus​.​

Once all the consequences of any act or policy are taken into​ ​account, the​ opportunity costs​ of government action to change​ economic outcomes always exceed the benefits

​Your first lesson (QL1)​,​ which you say is implicit in QHL (and/or HL?)​,​ reads

Market prices reflect and determine opportunity costs faced by consumers and producers.

Your second lesson (QL2) reads

Market prices don’t reflect all the opportunity costs we face as a society​.​

​COMMENTS

​1. ​It’s not clear to me that the target reader will grasp that QL1 is implicit in QHL1. After all, QL1 is about price and QHL is about the (dis)benefits of government intervention. If it’s not obvious but will be explained later in the book, perhaps you should make this clear.

​2. ​Q​L​1 strikes me as underspecified. Do market prices reflect some or all of the opportunity costs faced by consumers and producers​?​ Given that Q​L​2 says that prices don’t reflect all opportunity costs, then I’m guessing QL1 means that prices only reflect some opportunity costs. If so, then it strikes me that QL2 is merely a restatement of QL1.

​3. ​I’m unclear where the disagreement is between you and Hazlitt. Are you suggesting that Hazlitt thinks that market prices reflect and determine all opportunity costs? I’m guessing not​ as s​urely Hazlitt would accept the notion of externalities​ (which you discuss on p4)​? If so, it seems that you and Hazlitt agree that market prices don’t reflect all opportunity costs​​. And if this is the case, ​then ​I can only guess that you and Hazlitt disagree on the benefit of government action in response to this fact. Hazlitt says it’s never beneficial. You say it’s sometimes (but not always) beneficial.

If I’m right on where you and Hazlitt disagree, then IMHO it’s not clear (enough) in the text. It was a significant effort on my part to work this out. And if I’m wrong, then IMHO the text isn’t clear enough to allow me to understand correctly.

8

Kenny Easwaran 06.18.18 at 3:53 pm

The OECD chart seemed a little odd when I looked at it – it might be helpful to include a footnote saying something about why the “Ghent system” means that it’s natural to group Belgium with the Nordic countries, rather than treating it as an anomalous northern European country in the Netherlands/Luxembourg/Germany chart.

I was intrigued by the brief mention of occupational licensing and the ways that it is and isn’t like unionization, and would have appreciated a little bit more discussion of this point (or an apology for mentioning an interesting topic only to drop it).

The names of the Sonny Bono and Mickey Mouse act seem to have strange italicization/boldface going on.

9

John Quiggin 06.18.18 at 9:01 pm

Thanks for all these comments. They are very helpful.

10

Robert 06.19.18 at 10:37 am

I wish the chapter references for this chapter included Dean Baker’s Rigged. Or Maybe a book by Robert Reich.

I may be misremembering, but maybe you want to say, for younger readers, that Sonny Bono was a member of Sonny and Cher – a popular group with a lot of songs still in copyright – before he became a congressman with his district including Disneyland (if I got that right).

11

Mike Huben 06.20.18 at 5:26 pm

12:

“One way to think about the way society determines the allocation of income and consumption is based on a distinction between ‘predistribution’ and ‘redistribution’.”
A little more hifalutin’ and difficult than it needs to be. How about a more direct: “Any social choice for allocation of property rights has two parts: ‘predistribution’ and ‘redistribution’.” 14 versus 24 words.

You may want to point out here that while some might have preferences for only predistribution and not redistribution, they can have them only at the expense of social opportunity costs. That is WHY you are explaining with the second lesson. (You may want to make such comments on moral positions of capitalists as footnotes, if you think they detract from the explanation of the economics.)

12.1:

You do not really explain the opportunity cost of policy B. As a matter of fact, you focus on the government related costs, and ignore the business/private costs of these policies except to focus on taxes. That falls right into the propaganda framing of the right wing. You might be better served with a table of opportunity costs on each side of the policy decisions, to keep it clear and parallel. The table could also list whether they are predistribution or redistribution or arguable.

12.2:

“This division is often treated as”: Why not come right out and use the word “model”? Then you would also say “This division is often modeled as…This model is however, a drastic oversimplification.” Vague terms such as “treated” give away much too much.

At no point do you really describe “the inequality of bargaining power between workers and employers”. This is a HUGE omission. You cannot simply assume it. Without it, you cannot justify unions.

I really like the history of the “servant problem”. I’d always wondered about it.

The union history is very important, but how are you tying it in to the second lesson?

“the resurgence of One Lesson economics.”: not a mere happening: part of a well-orchestrated program by the Kochs and the Mont Pellier Society, as well documented in recent books.

Much of this fascinating union history should perhaps go into an appendix (for the TLDR crowd), as the second lesson application to unions is actually not very long.

12.3:

“Because of this imbalance of power,” What? You have explained no such thing. Employment at will works both ways, you’re fired or I quit. You need to explain that labor is a commodity as far as the employer is concerned, and thus the price will be driven very low by competition.

You need to properly relate the ideas of monopsony and bargaining power. Maybe you need a bargaining power section to explain bargaining power and how it affects opportunity costs. For example, why are employers less a commodity than workers?
12.4:

“commercial in confidence” is a new term to me: perhaps it should be explained at greater length in a footnote or elsewhere. I’d like to know how it is “a convenient cloak for misrepresentation and corruption.”

“the premium paid by US consumers for patented pharmaceuticals,” is also an opportunity cost that far exceeds the costs of government research, which could also be applied to much more important drugs.

12.4.1:

“Unlike other governments, the US government does not bargain with pharmaceutical companies over the price of medications (Medicare is explicitly banned from doing so).” Could you ask for a better example of explicit, direct bargaining power?

“ relatively modest financial support could yield substantial social benefits.” at a much lower opportunity cost than the current IP system. Good to be explict, an not require the reader to make these conclusions themselves.

“the drafters of the US Constitution9understood the Two Lessons better than their successors two hundred years later.” but you provide no support for this claim. Perhaps Federalist 43: “The copyright of authors has been solemnly adjudged, in Great Britain, to be a right of common law. The right to useful inventions seems with equal reason to belong to the inventors. The public good fully coincides in both cases with the claims of individuals.”

“By contrast, in Economics in One Lesson, Hazlitt doesn’t mention limited liability or personal bankruptcy and seems to assume (like most propertarians) that these are a natural feature of market societies.” Ooooo, I like this! Often the lies by omission are the most important ones in propaganda. But on the other hand, it is quite possible that Hazlitt 9and other propertarians) don’t want those features, because they make it riskier for new competitors to challenge existing monopolistic business.

“In particular, the massive accumulations of personal wealth made possible by capital gains from share ownership would simply not exist. Perhaps there would be comparable accumulations of wealth derived in some other way, but the owners of that wealth would be different people.” This is basic to an even broader point that government protection of unlimited accumulations through property law creates opportunity for inequality. Other examples include primageniture as opposed to division of estates, limits on insured bank deposits, the protections of corporate assets from employee/partner embezzlement, etc.

“Limited liability corporations are creations of public policy, useful to the extent that they promote the efficient use of capital but dangerous to the extent that they facilitate gross inequalities of income and opportunity. “
Amen to that! But you left out the other large problems of corruption of the political system and criminality due to effective immunity of office holders and shareholders from the justice system. (Penalties for individuals convicted for crimes are vastly harsher than when corporations are convicted of the same crimes. What is the corporate equivalent of a jail term?)

Further Reading:
More on corporations!
Corporation Nation: How Corporations are Taking Over Our Lives — and What We Can Do About It
Corporations Are Not People: Why They Have More Rights Than You Do and What You Can Do About It
Life Inc.: How the World Became a Corporation and How to Take It Back
The Corporation: The Pathological Pursuit of Profit and Power
The Divine Right of Capital: Dethroning the Corporate Aristocracy
Unequal Protection: The Rise of Corporate Dominance and the Theft of Human Rights
We the Corporations: How American Businesses Won Their Civil Rights
When Corporations Rule the World
Thrown Out of Court: How corporations became people you can’t sue.
https://washingtonmonthly.com/magazine/junejulyaug-2014/thrown-out-of-court/

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