I’m now coming up to (what I hope will be) the most challenging part of my book-in-progress, Economics in Two Lessons. The core theoretical point the first part of the book (Lesson 1) is that, under a set of ideal assumptions, competitive equilibrium prices both reflect and determine the opportunity costs faced by consumers and produces. This means that there is no way to rearrange consumption to make someone better off unless someone else is made worse off. (I’ve already mentioned my reasons for avoiding the term “Pareto-optimal” in this context.
What I’m trying to do here is to spell out the logic underlying these results in a way that foreshadows the discussion of market failure and income distribution, in Lesson 2, but still shows the power of market mechanisms. I’ll probably need a few goes at this, and this is my first try. Critical comments on everything from the underlying theory to editorial nitpicks are welcome. Sincere praise is also welcome of course, but constructive criticism is best of all.
Competitive equilibrium
Let’s restate Lesson 1:
Market prices reflect and determine the opportunity costs faced by consumers and producers.Â
We’ve seen how market prices determine the opportunity costs we face in making economic decisions as consumers, workers and producers of goods and services. We can’t as individuals, change the market prices we face for goods and services in general, so we must take them as given in looking at the opportunity cost of different choices.
But Lesson 1 says something more, namely that market prices also reflect opportunity costs. That is, just as the opportunity costs of our choices are determined by market prices, those market prices are determined by our choices. Under ideal conditions, those choices, aggregated over all the members of a society, will reflect the opportunity costs for that society as a whole.
There is a large branch of economic theory devoted to proving results of this kind using formal mathematics. But the core of the idea may be approached using the idea of ‘no free lunches’ or, more precisely, ‘no benefits without equal opportunity costs’, discussed in the previous section.
As we saw then, this condition requires that all production be technologically efficient. If not, there is always a free lunch to be had by making production more efficient, producing more with the same inputs.
The second requirement ‘no free lunch’ requirement is that there should be no gains from mutually beneficial exchange remaining to be realised. It’s easy to see that this requirement is closely related to market prices.Â
Example 2:Â lets suppose that you own a new jacket that you would be willing to trade for tickets to tonight’s baseball game, while I have tickets and would be willing to trade them for your jacket.Â
Now lets look at market prices. If the market price of the jacket is greater than the price of the tickets, there is no need for you to trade with me. You can (assumption A) sell the jacket at the market price (which is unaffected by assumption C), use the proceeds to buy the tickets and have money left over. Since you make the best possible choices (assumption D) that’s what you will do. If I want to complete the trade, by selling my tickets and buying the jacket, I will have to make up the price difference. By assumption (E), no one else is affected.Â
On the other hand, if the market price of the jacket is less than that of the tickets, the fact that this price prevails indicates that there must be someone else willing to sell jackets, and buy tickets at those prices. So, I can sell my tickets and use the proceeds to buy a jacket, making an exchange that benefits both me and the other parties involved. You, on the other hand, am out of luck. At the prevailing prices, no one is willing to trade tickets for a jacket, and there are no remaining exchanges to be made.
This simple examples give a flavor of the argument that leads to Lesson 1. Intuitively, it suggests the conclusion that trade at market prices will capture all the potential gains from mutually beneficial exchanges, so that no free lunches will be left on the table. In other words, in market equilibrium, TANSTAAFL holds.
This is where casual presentations of Lesson 1 commonly stop. But the simple story above embodies a lot of assumptions about the way markets work:
The most important are:
(A) Everyone faces the same market-determined prices herefor all goods and services, including  labor of any given quality, and everyone can buy or sell as much as they want to at the prevailing prices
(B) Everyone is fully aware of the prices they face for all goods and services, including how relevant uncertain events might affect those prices
(C) No one can influence the prices they faceÂ
(D) Everyone makes the best possible choices given their preferences and the technology available to them
(E) Sellers bear the full opportunity cost of producing the good, and buyers receive the full benefit of consuming it, no more and no less. That is, no one can shift costs associated with production or consumption to anyone else without compensation (for example, by dumping waste products into the environment) and no one else receives benefits for which they do not pay.Â
We can go back to the example to see where each of these conditions fits in
If the market price of the jacket is greater than the price of the tickets, there is no need for you to trade with me. You can (assumption A) sell the jacket at the market price (which is unaffected by assumption C), use the proceeds to buy the tickets and have money left over. Since you make the best possible choices (assumption D) that’s what you will do. If I want to complete the trade, by selling my tickets and buying the jacket, I will have to make up the price difference. By assumption (E), no one else is affected.Â
This more complicated version of the story can be formulated in mathematical terms to show that, under the stated conditions (and some additional technical requirements), a competitive equilibrium will arise in which there are no free lunches; that is, any potential benefit entails an opportunity cost that is at least as great.
In this ‘perfectly competitive equilibrium, the price of any particular good good is equal, for everyone who consumes that good, to the opportunity cost of a change in consumption, expressed in terms of the alternative possible expenditures. Similarly, firms can maximise profits only if the prices of the goods they produce are equal to the opportunity cost of the resources that could be saved by producing less of those goods.Â
This point is the core of Lesson 1. In a perfect competitive equilibrium prices exactly match opportunity cost. So, there are no ‘free lunches’ left. More precisely, any additional benefit that can be generated for anyone in the economy must be matched by an equal or greater opportunity cost, where opportunity cost is measured by the goods and services foregone, valued at the equilibrium prices. This opportunity cost may be borne by those who benefit from the change or by others.
Hazlitt, and many subsequent writers, implicitly assume something much stronger: that if prices reflect opportunity costs, there is no room for improvement in public policy. In particular, he assumes that any policy that benefits one group at the expense of others is undesirable. To put it more strongly, the distribution of income associated with competitive market equilibrium, based on existing private property rights, is assumed to be optimal.[^1]
This idea is false: as we will see there are a vast number (in the usual mathematical formulation, infinitely many) possible outcomes in which there are no free lunches, each corresponding to a different allocation of rights and a different market equilibrium.
We will discuss the issue of income distribution when we come to Lesson 2. Before doing this, we will consider a variety of examples to illustrate Lesson 1.
[^1]: Hazlitt’s reasoning is reinforced, in many economics texts, by the description of the competitive market equilibrium as “Pareto-optimal” or “efficient”. These misleading terms are discussed here.
fn1: Hazlitt’s reasoning is reinforced, in many economics texts, by the description of the competitive market equilibrium as “Pareto-optimal” or “efficient”. These misleading terms are discussed here.
{ 33 comments }
Chris Warren 07.18.15 at 7:58 am
So what happens if there is an equilibrium, but I increase my demand by issueing IOU’s. Am I better-off in the short run without making anyone else worse off?
John Legge 07.18.15 at 8:34 am
But the competitive equilibrium is unstable; the only stable equilibrium is the monopoly price (Keen 2010, Legge 2015[in press])
Peter Dorman 07.18.15 at 9:38 am
Each competitive equilibrium has its own associated set of prices and opportunity costs. What can be said about the significance for well-being and economic performance of the differences between these equilibria? Does it matter whether we are at equilibrium A or B or whatever? And how would we know?
Or is there an implicit assumption that there can be only one equilibrium? And if so, on what basis?
John Quiggin 07.18.15 at 9:51 am
@3 I’ve tried to foreshadow the point of the Second Welfare Theorem, that there’s a different competitive equilibrium for every initial allocation of endowments.
I think, though, that you are talking about the possibility of multiple perfectly competitive equilibria for the same endowments. As you suggest, I’ve implicitly assumed that there can only be one.
My basis for this is that I’ve never seen any interesting examples of multiple perfectly competitive equilibria, let alone useful analysis of empirically relevant cases. If you have, please point me to them.
Peter Dorman 07.18.15 at 10:45 am
As you know, there’s a large literature now on multiple expectation equilibria. That’s not my particular thing, but it’s hard to avoid. Also economic geography is rife with such models. My recent paper on the theory of the firm (SSRN abstract 2615165) implicitly entails multiple competitive equilibria, although the emphasis is on the significance for firms of different local optimum selection strategies. (According to the theory I put forward, the firm exists in the first place to implement such strategies, which cannot be implemented through markets alone.) The paper has a few references to the multiple-equilibria-due-to-interaction-effects literature.
Bruce Wilder 07.18.15 at 2:57 pm
Diminishing returns?
James Ward 07.18.15 at 4:56 pm
“Under ideal conditions, those choices, aggregated over all the members of a society, will reflect the opportunity costs for that society as a whole.”
Maybe you’re going to get to this, but I would say this statement is false. Based on marginal utility and the law of diminishing returns, society as a whole can be far better off if some people profit at the expense of others.
geo 07.18.15 at 4:57 pm
OP: no way to rearrange consumption to make someone better off unless someone else is made worse off
JQ, you’ve probably answered this, perhaps several times, in previous threads, in which case you may just want to refer me to them. But except as an theoretical exercise and/or a concession to political reality (ie, the degraded moral sensibility of the very rich and the lack of mobilization among the non-rich), is it important not to make anyone else worse off? Shouldn’t we, after all, want to make the .1 percent significantly worse off, and the 1 percent moderately worse off, both to prevent anti-democratic distortions of the political system and to transfer resources to universal social welfare programs?
dsquared 07.18.15 at 6:10 pm
I think you meant to not have the assumptions in brackets first time round? Also, I’d put “assumptions A and B” in the first bracket – it’s just as true and stops the reader stumbling over “what happened to assumption B?”
MikeM 07.18.15 at 10:08 pm
IANAE, but aren’t you assuming that there is one market price, and that transactions occur instantaneously? I can trade my car in for a credit of $3000, or sell it on CraigsList for $5000; it may take two weeks and lots of my time to show and finally sell the car, and it’s not a priori guaranteed that I can sell it. How do you factor the different opportunity costs it generates?
dsquared 07.18.15 at 10:37 pm
MikeM: the totally mathematically rigorous version of competitive equilibrium has to have every good specified including a time and place of delivery, and you are right that the transition from the very odd world of the rigorous proofs to reality is usually made by ignoring it. John’s assumptions A to E, while IMO definitely close enough for rock and roll, could be supplemented with half a dozen more.
UserGoogol 07.18.15 at 10:42 pm
It’s implicit in the existing assumptions, I believe. If everyone always makes the best possible options then there has to be one price, since a rational buyer would always pick the lower price and a rational seller would always pick the higher price. And transactions happen instantaneously since if everyone has all the information, then there’s no point wasting time showing off the car, and so rational buyers would buy it instantaneously.
The fact that car dealerships are able to buy cars at a premium is more or less directly the result of the assumptions failing. Car dealerships (and really, retail in general) makes their business from the fact that people aren’t perfect traders, so they can charge a premium for dealing with that for people.
MikeM 07.18.15 at 11:00 pm
In other words, DD & UG (& even JQ), you’re still dealing with modeling a perfect vacuum in which the feather and the bowling ball fall equally fast. While I have to figure out the opportunity cost of waiting x weeks for a higher sale price — which depends on my financial situation and various other opportunity costs associated with waiting, anxiety, inflation, and my current financial condition.
MikeM 07.18.15 at 11:01 pm
Oops — a little redundancy in that last sentence.
Bruce Wilder 07.19.15 at 12:01 am
It seems odd to me to discuss a competitive equilibrium without using the term, marginal. ‘no benefits without equal opportunity costs’ is not the claim — the claim is there can be no additional benefits without equal or greater additional costs, from the point of equilibrium.
An economy in a general, competitive equilibrium has reached a knife’s edge, where everyone says in unison, no más.
That implies nothing at all about about inframarginal satisfactions. I think your readers will need to be cautioned about that. People may have realized a great surplus of satisfactions from inframarginal trades before exhausting the possibilities.
Bruce Wilder 07.19.15 at 12:03 am
I think I would revise your list of assumptions. People really don’t need to know every assumption made for reasons of mathematical tractability. They need to understand how the imagined world of theory contrasts with the world of their experience and intuitions.
I would not write, “No one can influence the prices they face ” as a description of the assumption of price-taking. “No one does try to influence the prices they face,” would be a little better. “No one behaves strategically” would be even better, because it emphasizes how weird the imagined world is. “No one behaves strategically” encompasses things like no one tries to influence prices, and no one tries to gain a strategic edge by getting a special supply or a special price; no one tries to defraud anyone; no one tries to get something for nothing; no one tries to externalize costs by dumping effluent in a river, say. If you are very clear about “no one behaves strategically” then you will also be much clearer about what you mean when you say, “Everyone makes the best possible choices given their preferences and the technology available to them”. Many sane people are going to think intuitively that the “best possible choice” is a strategic one; before you make an ambiguous claim that everyone in the imagined world makes the “best choice” you need to be very clear that no one in the imagined world is making strategic choices or behaving strategically.
It is kind of a mental trap, I think, to try to find some feature of the imagined world that prevents strategic behavior. Perfect information arguably prevents some kinds of strategic behavior, so there’s some overlap in assumptions there. But, in general, this is just a simplifying assumption to aid elementary reasoning, not an idealizing assumption that identifies a moral advantage. Strategic behavior is an inevitable feature of a realistically complex world, just not one that is easy to think thru to crisp conclusions.
c 07.19.15 at 11:02 am
I have had some critical comments and will give one more below here but let me first say: I praise the general project of the book!
Quiggin: “Hazlitt, and many subsequent writers, implicitly assume something much stronger: that if prices reflect opportunity costs, there is no room for improvement in public policy. In particular, he assumes that any policy that benefits one group at the expense of others is undesirable. To put it more strongly, the distribution of income associated with competitive market equilibrium, based on existing private property rights, is assumed to be optimal.[^1]
This idea is false: as we will see there are a vast number (in the usual mathematical formulation, infinitely many) possible outcomes in which there are no free lunches, each corresponding to a different allocation of rights and a different market equilibrium.”
This objection, even though it is only meant to foreshadow things to come, is too weakly put. Why not add some examples with more moral punch where one particular economic structure give a “market optimal” distribution that is clearly morally repugnant? E.g. providing tax funded medical support to congenitally severly disabled persons always involve benefitting someone at the expense of others but it would be morally repugnant to simpy leave the congenitally severely disabled person to die.
RJB 07.19.15 at 1:41 pm
This sentence seems too strong to me: [Under the assumptions you state] “a competitive equilibrium will arise in which there are no free lunches”. I would be comfortable with the weaker claim “at least one competitive equilibrium exists in which there are no free lunches.” The weaker claim allows for multiple equilibria, and also for the possibility that an equilibrium exists but is not attained.
The stronger claim is probably justifiable in a pure exchange economy with only one period, where the utility or cash flowing an asset are not affected by what happens in the market. I expect you would see this assumption being captured by the lack of externalities, but I doubt many readers would infer that.
here is a paper in the typical rational expectations pure-exchange setting with perfectly competitive markets that shows how there are many equilibria that differ according to how the market prices stocks based on earnings. The only difference from your assumptions that I can see is that the model uses overlapping generations with an infinite horizon, so I guess you could look at each investors’ action as having externalities based on how they affect other investors expectations. But this is a far cry from the pollution-style externalities that most readers will think of. When you add real investment and multiple periods, the multiplicities become even more important.
Then there is the difference between equilibria existing and actually being attained–one of my favorite axes to grind. Economists always seem to identify a fixed point and say “see, this is what MUST happen”, but that is often wrong. Most of my experiments on this topic have been more in the realm of game theory, but here is a paper that looks at a setting in which, depending on the parameters, players empirically never converge to any of the equilibria because they are always unstable.
My experience is that if you can’t find a reasonable class of adaptive processes that will lead to an equilibrium, the equilibrium won’t actually be attained, even if there is no other equilibrium. Most equilibria that are unstable under any definition fail this criterion, and they have little predictive power in the lab.
Richard Harmer 07.19.15 at 3:29 pm
Competitive equilibrium is a core, essential construct at the _household_ level of analysis. But it’s a misleading distraction at the product~service category, single-market level of analysis.
Individual households (when spending prudently) do tend towards a kind of general equilibrium where the return on the final dollars spent in each budget category tend to deliver roughly the same benefit per dollar spent. It’s from this margin between how far they go and don’t go in their spending in each category that households get their since of the _value_ or opportunity cost of the funds at their disposal. Lower-income households generally have higher opportunity costs; higher-income households, lower. The idea of a kind of general-equilibrium-establishing process is, indeed, critical at the household level of analysis.
http://customervaluecenter.org/deck/26.html
But that’s not the case at the single-market-category level of analysis. At that level, the idea of a single equilibrium acts as a huge, misleading distraction. That’s because product`service market is not an aggregation of similar households. It’s a different kind of animal, one made up of a heterogeneous mix of different product~service versions targeted at different households with different tastes and different abilities to spend – i.e. with different opportunity costs for their money.
Product~service markets that move towards a single overall equilibrium, as depicted in Marshall’s 2 coupling curves, are a rarity. More productive images for anchoring one’s thinking about the structure and core processes of individual product~service markets (in doing, that is, market-level analyses) are:
1. For basic structure, a _competitive landscape_ with multiple peaks and valleys that host different segments and niches, each with its own semi-quasi-oh-so-temporary competitive equilibrium.
http://customervaluecenter.org/deck/41.html
http://customervaluecenter.org/deck/43.html
2. For processes, not shock and equilibration, but the 4 core processes (comprising the Schumpeter Cycle) of _Value Innovation_ (new quasi-monopoly features), _Imitation_ (the commoditization of those features), _Cost Innovation_ (finding more productive ways to deliver the goods), and light and heavy Price Competition. These four core processes keep most products~service markets in a quasi-continual (and ever-more productive) state of disequilibrium.
http://customervaluecenter.org/deck/14.html
To sum up …
Forget Marshall’s coupling curves (for single market level analyses), think competitive landscape.
Forget single product~service equilibrium, think multiple quasi-constant disequilibria.
Then you’ll be in a position to do serious analysis at the single product~service market level.
Sebastian H 07.19.15 at 3:59 pm
I’ve recently become interested (well annoyed by but still interested) in the fact that the equilibrium is almost always out of whack because people avoid telling you their best off or what they would really accept. So habits of negotiation almost always throw off the equilibrium (or is that a discovery question that gets dealt with elsewhere)?
Swami 07.19.15 at 7:56 pm
You are asking for feedback, so here goes…
First, I am confused with your entire approach. You start by quickly rephrasing Hazlitt’s one lesson to another lesson which you assure us is what he really means. Then you add that this one lesson of your creation is incomplete and needs to be expanded to two lessons. Maybe what you want to say is that Hazlitt tried to do it in one, but that it is best done by you in two. OK, take your shot.
Second, I am confused by the whole free lunch diversion. I am sure Hazlitt and others were or are well aware that production and exchange are endeavors seeking value creation. To state that there are opportunities to improve value or utility is not the same thing as a free lunch. There are costs, or opportunity costs and that is not “free” so why introduce that there is such a thing as a free lunch, and that the “core concern of economics” is all about explaining where these come from? I am afraid you are just muddling the entire issue.
The point is that markets, when properly functioning, appear to seek an attractor which captures all potential value enhancements in production and exchange. At no point is any move free, but in general each is expected or hoped to be utility or value enhancing. The process of course never ends as any change anywhere affects everything else in the system. It self amplifies.
When I pass by a penny or nickel, I don’t bother to pick them up. Not worth my time. But a quarter maybe. A twenty for sure. And the whole point of the economists passing a twenty joke is to laugh at the silliness of a model at fixed equilibrium and at the folly of the economists not seeing themselves as part of the system they are modeling. No?
“(A) Everyone faces the same market-determined prices herefor all goods and services, including labor of any given quality, and everyone can buy or sell as much as they want to at the prevailing prices.”
No. I think the proper way to characterize it is that the attractor point is for prices to converge for obvious reasons. I doubt Hazlitt or his readers would assume this or that everyone can buy or sell as much as they want at prevailing prices, indeed, the prevailing price is actually the point at which the what the parties wants converges in a complex mutually reinforcing way.
“(B) Everyone is fully aware of the prices they face for all goods and services, including how relevant uncertain events might affect those prices.”
No. Knowledge is never certain, and there is a cost or opportunity cost for knowledge too. However, the attractor is toward better awareness again for obvious reasons. Are you suggesting Hazlitt or his readers are unaware of this?
“(D) Everyone makes the best possible choices given their preferences and the technology available to them.”
No, everyone is incentivized to make optimal choices considering opportunity costs of the best vs the optimal. Again, it is hard to believe Hazlitt wouldn’t know this.
“(E) Sellers bear the full opportunity cost of producing the good, and buyers receive the full benefit of consuming it, no more and no less.”
Again, are you assuming Hazlitt is unaware of externalities and the need to control for these? I find this hard to believe especially considering his actual stated one lesson is:
“…the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. 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.”
To be more general, it seems you are jumping back and forth between simply laying out your two rules or lessons, attacking Hazlitt’s lesson, attacking naive interpretations of Hazlitt, and even attacking naive versions of classical economics (which was also the target of Hazlitt if memory serves).
The general approach is confusing to me.
Perhaps these comments are addressed in your next post, in which case I am just playing the straight man.
John Quiggin 07.19.15 at 9:45 pm
@Swami Hazlitt doesn’t mention externalities, by that name or any other, even though Pigou had addressed the issue long before he wrote. The only time he mentions uncertainty is as a justification for profit, as in Knight and the only source of uncertainty he mentions is “capricious” government policy.
david 07.20.15 at 6:24 am
I don’t think it’s fair to present (A)-(E) in the strong language above, at least in the context of Hazlitt. In 1946 there was no First Fundamental Welfare Theorem, and the intuitive notion of optimality was generally described graphically (if at all), with generalization to multidimensional cases left to, um, intuition.
If you want to attack the choice of axioms used, your target should be Paul Samuelson’s 1947 Foundations of Economic Analysis and its shift of emphasis towards powerful generality and conceptual symmetry between production, cost, and choice (and therefore highly demanding assumptions).
In contrast, Hazlitt’s arguments revolve around a Suppose There Are Two Kinds Of Goods/Consumers/Households/Taxpayers sleight-of-hand that doesn’t require strong assumptions to rule out the income effect interactions that can occur in general equilibrium. The rhetorical stars align in his favour: partial equilibrium reasoning is easy and intuitive, Hazlitt just needs to suggest a plausible mechanism rather than demonstrate its prevalence or that implied elasticities line up with actual data, and suggesting plausible mechanisms sits well with dark allusions to malevolent unions/politicians/etc. He never needs to introduce improbably strong assumptions because he doesn’t need to rule out, e.g., income effect interactions. Subsidies and taxes are described in a kind of proto-representative-agent confusion that elides distributive impacts (in the chapter on price fixing). These are logical weaknesses, but they’re not the weaknesses you’re ascribing to him. If anything his assumptions are too weak and cannot reach the conclusions he intends for them, not too strong.
John M 07.20.15 at 1:34 pm
I have a logical question on the jacket-tickets example, from the paragraph beginning “On the other hand…” In this example, we have 2 players “I” and “you.” “I” possesses tickets and “you” owns a jacket. Each party wants what the other has. The paragraph in question begins with the assertion that the market price of the jacket is less than that of the tickets. Later in the paragraph it claims, “I, on the other hand, am out of luck. At prevailing prices, no one is willing to trade tickets for a jacket…” But everyone is willing to trade a jacket for tickets, and that’s what “I” want my counterparty to do. I make a “losing” trade evaluated by market prices, but a winning trade based on my preferences. Have you possibly reversed “I” and “you” in this paragraph?
Rick R 07.20.15 at 2:13 pm
Here’s some meta-constructive-criticism: It seems fair to say that your first lesson teaches readers about the private-resource economy and that the second lesson–the lesson on income distribution–will unavoidably focus on what we might call the public-resource economy–the prioritizing of limited public resources.
Ok… but why stop there? Are there not other types of resources a society should economize? Political resources, for example–positions of power within the government–are clearly resources and a wise society maximizes the utility of those resources through elections and free speech. Likewise, a wise society will economize its foreign resources,/i> through national defense and diplomacy–encouraging foreign entities to use their resources in ways that benefit that wise society. Finally, I believe the concept of future resources also makes sense… meaning that a wise society will set some limits on the present-day use of certain resources and/or the destruction of resources (e.g. pollution) in order to maximize sustainability over the long term.
Perhaps your book should be called economics in five lessons.
Michael Sullivan 07.20.15 at 4:40 pm
John, in the second and third paragraphs of your “Example 2” you contrast different situations based on prevailing prices. In situation one (jacket price lower than ticket price) both parties are satisfied with the equilibrium market, with one simply having to come up with some extra money to complete the deal. In the second, you say that the ticket holder is out of luck. I don’t get what’s different there. Why can’t the ticket holder do the same thing the jacket holder did in the first scenario — sell the ticket for the prevailing price, and then pony up the difference to buy the jacket at it’s prevailing price? How is s/he any more “out of luck” than the holder of a jacket worth less than the ticket was in the first scenario?
I feel like maybe I’m missing an assumption about how things get traded in the real world that makes this true (I know that tickets in general are subject to weird regulation) — but of course in the real world there are so many ways in which the basic assumptions you’ve stated aren’t true which make transactions like these often fail. Given your assumptions though — (open competitive clearing markets with no trade costs that both parties are aware of), I can’t see how the situation is different from one paragraph to the next, except for who has to come up with some extra money to make the deal they want.
What am I missing? and is there a way to make it clearer? I may be wrong, but I’d expect to be right in your primary target audience for this book — someone with a lot of interest and who fondly follows many econ bloggers, but has no formal education or experience beyond a few introductory courses in undergrad.
Michael Sullivan 07.20.15 at 4:42 pm
Woops, looks like John M got to the same issue I had while i was writing. Sorry to double up.
steve kyle 07.20.15 at 5:35 pm
” Under ideal conditions, those choices, aggregated over all the members of a society, will reflect the opportunity costs for that society as a whole.”
Maybe you will get to it or maybe you consider it to be included under the above definition but I was left wondering where you talk about fallacies of composition. Individual choices are one thing when only one person chooses. When everyone does they can be quite another thing.
John Quiggin 07.20.15 at 11:33 pm
@John M and Michael S
.
I did indeed get this the wrong way around, which is unfortunately characteristic of me. Thanks for picking this up. If you could re-read and see if the revised version makes more sense, I’d be very grateful
david 07.21.15 at 3:13 am
lets –> let’s
but perhaps a diagram would be more appropriate than a paragraph of text for the jacket-swap.
“mathematical terms” is a little shifty, it suggests you have something to hide. Hazlitt never says “well I can’t prove it here, but I have a truly marvelous proof of it that too complicated for this margin to contain”. Perhaps footnote and then insert the standard exegesis in an appendix? Readers interested in economics tend not to ever even see the general equilibrium sketch, much less get to the point where graduate micro justifies the use of composite goods or local equilibrium (which swing the intuition in favour of A-E) or the introduction of even more troubling assumptions like contingent goods (which make A-B-C suddenly much more ‘expensive’ as assumptions; “I can buy anything on the market” is not the same as “I can buy an option on anything that anyone could believe could possibly happen”).
Swami 07.21.15 at 7:21 pm
John at 22
Thanks for the reply, but you repeated the confusion which my comment was mainly aimed at. If you want to critique a journalist’s take on economics, fine. If you want to critique conventional economics, again feel free to do so. If you want to present two rules which establish a breakthrough in understanding and clarity as a foundation, then again, have at it.
But I caution the confusion you are generating by doing them all at once. Much of my criticism was on your confusing approach and your response was to point out one missing element from Hazlitt’s booklet. Case in point.
John Quiggin 07.22.15 at 9:36 am
@Swami, Thanks for following up. I’ll offer a more substantive response.
1. Hazlitt is just a convenient starting point, and I will rewrite the preface to make this clear.
2. I’m not critiquing conventional economics in the sense of advancing a heterodox position; it’s an argument within mainstream economics, broadly defined
3. This is the main aim, and I will try to clarify this as I write
Billikin 07.22.15 at 8:42 pm
Bruce Wilder: “It seems odd to me to discuss a competitive equilibrium without using the term, marginal. ‘no benefits without equal opportunity costs’ is not the claim — the claim is there can be no additional benefits without equal or greater additional costs, from the point of equilibrium. ”
Can we say that we are not talking about “no free lunches”, but about “no free deserts”?
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