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John Quiggin

Economics in Two Lessons: Draft Outline

by John Quiggin on February 20, 2018

At the suggestion of a reader , I’m posting a draft Table of Contents for Economics in Two Lessonshere
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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.

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.

I have a piece in the New York Times looking at the implications for the bitcoin bubble for economic theory and, in particular, for the (Strong) Efficient (Financial) Markets Hypothesis (EMH) which states that prices determined in financial markets reflect all the available information about the value of any asset. If that’s true then governments can’t improve on a policy of allocating investment to those assets with the highest market return, which can be achieved by letting private capital markets determine all investment decisions.

Bitcoins have no inherent usefulness, being a record of pointless calculations. They are useless as a currency (their putative purpose) and are now being promoted as a store of value on the basis of scarcity alone. This leaves supporters of the EMH with a dilemma.

If Bitcoins are indeed worthless, then financial markets should price them at zero. But the introduction of futures trading actually boosted the price in the short run. Even after recent declines, there’s no sign that prices will reach zero any time soon.

On the other hand, if Bitcoins are valuable simply because people value them, then asset prices are entirely arbitrary. The same argument can be applied to any financial asset.

Dean Baker at CEPR has a nice followup, making the obvious but crucial point that, since financial services are an intermediate input to production, we want the financial sector to be as small as possible, consistent with doing its essential tasks. As the experience of the mid-20th century shows, a market economy can function perfectly well with a financial sector much smaller than the one we have today. As Bitcoin shows, the massive expansion since then is nothing but wasteful speculation. The financial sector should be cut down to (a small fraction of its present) size.
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The gig economy and the future of work

by John Quiggin on February 3, 2018

One of the things I do from time to time is write submissions to public inquiries, mostly those of our Senate, which has a committee system loosely modelled on that in the US. I’ve had a run of them lately, appearing (by teleconference) before two of them this week and making a submission to a third. The first two, on the Northern Australia Infrastructure Facility (a slush fund that may be used to finance coal projects) and one on the problems of vocational education

In addition, i completed a submission to the inquiry into the Future of Work and Workers, which is now available on the inquiry website. The submission is about the way in which technology and labor market institutions have interacted to generate the “gig” economy of insecure employment, continuously threatened by technological disruption. The key point is that decades of anti-union and anti-worker legislation and state action have created a situation where technological change is likely to harm rather than help workers. A summary is over the fold
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Renationalisation: How to get there from here

by John Quiggin on January 29, 2018

My latest Guardian article is headlined The core of the argument is that, to make a success of renationalisation, we need to do more than buy back privatised enterprises, and run them as publicly owned corporations. We need a different model. A starting point would be the statutory authority model used in Australia with great success, before the Hawke-Keating government adopted the corporatised model as a step towards privatisation.

Bitcoin’s zero-sum game

by John Quiggin on January 23, 2018

That’s the title of my latest piece in Inside Story. Nothing that will surprise anyone who’s been paying attention to what I’ve written on this, so I’ll just cite the conclusion

Since bitcoins are not useful as a medium of exchange, or desirable in themselves, their true value is zero. The highest price at which bitcoins have traded is around $20,000. At the time of writing, the market price is halfway between that level and zero. Pay your money (or not) and take your chances.

A taxonomy of never-Trumpers

by John Quiggin on January 21, 2018

I’m a sucker for taxonomies, and Ross Douthat has quite a good one in the New York Times

Like any strange and quarrelsome sect, the church of anti-Trump conservatism has divided and subdivided since Donald Trump’s election. Some members have apostatized and joined the ranks of Trumpists; others have marched leftward, with anti-Trumpism as a gateway drug to wokeness. There is a faction that is notionally skeptical of Trump but functionally anti-anti-Trump, a faction that insists it’s just calling “balls and strikes” and a faction screaming that the president rigged the game and needs to be thrown out.

What’s interesting is that, from my observation, he has the factions about right in order of size. The group who have gone left is probably smaller than its ranking suggests, but contains most of what was left of serious thought on the conservative/libertarian side of politics. The smallest group, and the one treated most dismissively, consists of those who have remained politicaly conservative while being unremittingly hostile to Trump. Its members are either out of active politics already (like the Bushes) or are kicking Trump on the way out (like Corker and Flake). By 2020, it will probably be an empty set. That obviously raises the question of what will remain of the conservative movement when and if Trump is defeated.

A point of purely sporting interest is to classify Douthat himself. I’d say, some mixture of “anti-anti-Trump” and “balls and strikes”. The main part of his column, arguing that Trump is more of a joke than a menace, is consistent with this, I think.

A while ago I had one of those “Someone on the Internet is Wrong” arguments with the authors of an article arguing that we would need massively more evidence before we could conclude that autonomous cars are safer than those driven by humans. Rather than dig back to find those arguments again, I thought I’d link to this Bloomberg piece and, in particular the following passage

GM’s autonomous test cars were in 22 accidents in California last year, according to data from the state’s Department of Motor Vehicles … In a November interview, GM President Dan Ammann attributed the accidents to testing in a dense urban environment and noted the company’s cars weren’t at fault in any of the incidents.

Suppose that in any crash between autonomous cars and humans, each is equally likely to be at fault. What is the probability of seeing 22 crashes caused by humans and none by autonomous cars. Obviously, it’s the same as that of a fair coin showing 22 heads in a row, which is 2^-22 or about 1 in 10 million.

Of course, the drivers involved in the crashes aren’t likely to be a random sample of the population. As is standard in such things, the 80/20 rule applies: 20 per cent of drivers are responsible for 80 per cent of crashes and traffic infringements. The 80/20 rule is derived from a Pareto distribution, and we can apply it a second time to say that 20 per cent of the remaining 80 per cent of drivers are responsible for 80 per cent of the remaining 20 per cent of crashes. That is, 36 per cent of drivers are responsible for 96 per cent of crashes. On that basis, it’s perfectly possible that the remaining 64 per cent of good drivers are as good as autonomous cars or even better.

It might also be argued that autonomous vehicles may fail in defensive driving, that is, in reducing harm in a crash caused by the failure of another driver.

Still, it seems pretty clear that autonomous cars are a lot better than the drivers responsible for most crashes and infringements. It isn’t that hard to identify a lot of these drivers before they kill themselves someone else, since prior driving record variables, particularly a driver’s prior traffic citation history, are the most consistent and powerful predictors of subsequent accident risk. Now that cars don’t need steering wheels or pedals any more, there’s no obvious reason to put people with bad driving records back in charge of them. Bad drivers should have their cars driven by robots.

The Rise and Fall of Keynesianism after the GFC

by John Quiggin on January 8, 2018

International Studies Quarterly has just published a symposium responding to a paper by Henry and me, which has been released from behind the paywall for the occasion. Our paper has the fairly self-explanatory title “Consensus, Dissensus, and Economic Ideas: Economic Crisis and the Rise and Fall of Keynesianism ” In our paper we looked at the resurgence of fiscal Keynesianism in the immediate aftermath of the Global Financial Crisis and of the successful counterthrust leading to the adoption of austerity policies in the US and Europe.

The symposium has comments from a multidisciplinary group of political scientists, sociologists and economists: Abraham Newman, Andrew Baker, Elizabeth Popp Berman, Paul Krugman, Stephen K. Nelson along with a response from us. It’s great to get these different disciplinary perspectives all in one place, since they all have key pieces of the puzzle, and we are very happy they have chosen to engage with us.


Why “extremely unlikely” climate events matter

by John Quiggin on January 5, 2018

I’ve just been advised that my latest article “The importance of ‘extremely unlikely’ events: Tail risk and the costs of climate change” has come out online in The Australian Journal of Agricultural and Resource Economics. For those who can use it, the DOI is 10.1111/1467-8489.12238. For everyone else, here’s a link to a pre-publication version. The main points are

  • The IPCC convention is to use the phrase “extremely unlikely” to refer to outcomes (in particular, values of climate sensitivity) in the range of 0–5 per cent.
  • Most of the risks against which we act to protect and insure ourselves (for example, car crashes, premature death in any given year) are “extremely unlikely” by this definition
  • Around half, or even more, of the expected welfare loss from climate change arises from the worst-case 5 per cent of high values for climate sensitivity.

Nothing really startling here, but it’s the other side of the coin to the contrarian suggestion that since there’s a 5 per cent probability that global warming will turn out not to be a problem, we should do nothing.

UBI, work and unions

by John Quiggin on January 2, 2018

I’m working with Troy Henderson from the University of Sydney on a book chapter looking at union responses to the idea of a universal basic income (UBI),which have covered a range from supportive to strongly hostile, with the latter view predominant in Australia. Here’s a draft of my section of the chapter. Comments much appreciated.

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by John Quiggin on December 17, 2017

With the huge upsurge in the price of Bitcoin recently, I’ve been getting a lot of demand for articles putting forward my point of view: Shorter JQ: It’s an environmentally destructive Ponzi scheme that isn’t usable as a currency even for believers.

My observations on the electricity demand associated with Bitcoin made it into the ABC (Australian equivalent of BBC) News Quiz last week, which is a kind of fame, I guess.

Meanwhile, I had another piece in the Guardian, this time looking at the fact that, despite being called a “cryptocurrency”, Bitcoin is used even less as a currency now than it was several years ago. The core problem is that the system is so overloaded by miners creating new coins that processing transactions is slow, costly or both I mentioned the fact that game company Steam had stopped accepting coins and that the list of merchants accepting Bitcoin is small enough to fit on one page. Checking further I concluded that this list is out of date, but not in a good way. Lots of those included, such as Expedia, no longer accept Bitcoin, if indeed they ever did. Here’s one person’s experience. Bitcoin is now a “crypto asset” which is even more obviously a Ponzi fantasy than the original currency story.

One response I got was that transaction speed would soon be greatly improved by something called Lightning. Checking on this it appears that this is software in an alpha (very early) stage of development, which would allow any two parties to set up a transactions account separate from the main Bitcoin blockchain, and only occasionally update the main account. An analogy, for readers of a certain age, is the era before Bankcard, when, if you wanted to do something other than paying cash, you maintained a separate credit and debit account with every store you dealt with. This does not seem like the dawn of a new era to me.

Good news from Oz

by John Quiggin on December 7, 2017

The Australian Parliament has just passed legislation establishing equal marriage. This was the outcome of a Byzantine process in which the bigots tried every possible trick to delay the inevitable, culminating in a non-binding postal ballot, which produced a 60 per cent majority for equality, following a nasty and bitter campaign. Having rolled the dice and lost, the religious right tried to negate the result with special protections for bigotry, but got nowhere. As a result, they have suddenly discovered a previously unobserved love for UN conventions on human rights.

At the same time, an election in my home state of Queensland has produced a win for the Labor party, which campaigned in support of public investment in renewable energy and belatedly announced its opposition to funding for a massive coal mine-rail-port project, proposed by the Indian Adani group. The opposition consisted of an alliance between the main conservative party, the LNP ,and the racist/Trumpist One Nation party. The LNP not only supported the Adani proposal but wanted to put public money into a new coal-fired power station. One Nation is hostile to greenies but also opposed Adani on xenophobic grounds. THe outcome supports my view that the right will face bigger problems than the left from the emerging three party system.

Bitcoin an even bigger waste of energy

by John Quiggin on December 4, 2017

I gave a talk yesterday at a Colloquium organized by a group called Sort, on The Wasteful Economics in Resource Recovery, and I was asked to talk a bit about blockchain technology. That reminded me that I needed to take another look at the issue, and what has changed since 2015 when I wrote that

at most of the market value of a Bitcoin reflects the electricity wasted in the calculations needed to “mine” it, with the obvious disastrous implications for the global climate.
and concluded that the sooner this collective delusion comes to an end, the better.

As far as I can determine, the only thing that has changed is that the Bitcoin bubble has got massively bigger and that the associated waste of energy is now much more widely recognised than when I first wrote about it.

Despite the huge increase in the market value of bitcoins, they seem further than ever from becoming an actual currency. Unsurprisingly, there’s no sign that governments are willing to accept bitcoins as legal tender. Nor is there any sign that they are displacing standard forms of money. On the contrary, bitcoins now seem to be seen as a financial asset, with no real suggestion that they will ever be a general medium of exchange.

As a check on this, here’s a list of firms that accept bitcoin as payment, which fits easily on to a single page. Sydney readers who would like to buy a beer with bitcoin are in luck, or were back in 2014 when the Old Fitzroy got a bit of coverage for saying it would accept bitcoins. There’s another pub listed in London, and that’s about it as far as drinks are concerned. After nearly a decade, Bitcoin acceptance remains the stuff of publicity stunts, not a serious commercial option.

At least by repute, bitcoins are used more extensively in covert transactions such as those involving drug trading, tax evasion and money laundering. But that’s scarcely a good reason to bet on them being around for a long while. If the scale of the problem gets large enough to cause real problems, governments will act to shut the whole system down or regulate it to the point where the compliance costs make the whole idea unattractive.

At any rate, the durability and magnitude of the Bitcoin phenomenon, running for nearly 10 years and with a putative value of nearly $US 100 billion, provides us with a very sharp test of the Efficient (financial) Markets Hypothesis. If Bitcoin eventually becomes a currency, the EMH and its supporters will be vindicated, and I (along with quite a few other economists) will have a lot of egg on my face. If the bubble bursts, the roles will be reversed.

Finally, I should give a plug to Gridcoin. This is a project that aims to avoid the massive waste involved in Bitcoin by making calculations that are actually useful to science. This is a worthwhile idea. But with a current market capitalization of $21 million, it’s obviously got a long way to go.

There are also alternatives to the “proof of work” method of validating changes to the blockchain, such as “proof of importance”, which is analogous to Google’s page ranking systems. I’m still trying to find out more about these.