Is the UK benefits system a CDO?

by Daniel on May 16, 2015

Almost as an illustration of the sort of thing John’s looking at in terms of misplaced opportunity costs, I have a piece up at medium.com on forthcoming changes to the UK benefit cap system, and how they could have fairly serious consequences for housing benefit tenants. I probably don’t emphasise it enough in the piece, but these knock on effects destroy the cost economics of the policy – once tenants are evicted because they can’t pay the rent, they become emergency cases and have to be accomodated by the council in short-term accomodation, which is one of the most wasteful and expensive things you can do in housing policy. As I said in discussion of the piece, if you don’t like subsidising these guys as buy-to-let landlords, you’re unlikely to love them when they come back as bed-and-breakfast proprietors, at twice the price.

Economics in Two Lessons

by John Quiggin on May 16, 2015

I’ve been promising for a long time to write a new book, framed as a reply to a free-market tract Economics in One Lesson by Henry Hazlitt, published in 1946, but still in print and popular among free market advocates. Its popularity reflects the fact that it’s a reworking of Bastiat’s “What is Seen and What is Not Seen”, still one of the best statements of the case for free markets.

Bastiat’s argument is implicitly based on the concept of opportunity cost but, since the term wasn’t coined until 1914, he doesn’t use it. Neither, more surprisingly, does Hazlitt. Once this is made explicit, Hazlitt’s rather ponderous, and misleading statement of his “One Lesson”

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.

can be boiled down to the much simpler statement “Market prices reflect opportunity cost”. In important respects, this is true, particularly when we consider the problem from the perspective of choices about how to allocate an individual, family or government budget. With fixed aggregate levels of public expenditure, for example, more money for the military means less for schools, and vice versa.

There are plenty of other questions about private and public decisions for which Hazlitt’s One Lesson is useful. Another example is the well-supported finding that the best way to fight poverty is to give money to poor people. This is unsurprising given that poor people themselves will usually have a much better idea of the opportunity costs they face than will those seeking to help them.

But as a general statement, Hazlitt’s One Lesson is false, which is why my working title is Economics in Two Lessons”. Lesson Two is “Market prices do not reflect all the opportunity costs we face as a society”
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