Economics in two lessons
Fancy learning the essentials of economics in just two lessons? School of Economics Professor John Quiggin has you covered with his new book.
Economics in Two Lessons is, or at least began as, a response to Henry Hazlitt’s Economics in One Lesson, a defense of free-market economics first published in 1946. But why respond to a 70-year old book when new books on economics are published every day? Why two lessons instead of one? And where does opportunity cost fit into all this?
The first question was one that naturally occurred to me when Seth Ditchik, Princeton University Press, suggested this project. Seth had already encouraged me to write Zombie Economics: How Dead Ideas Still Walk Among Us. Zombie Economics turned out to be the most successful book I’ve ever written by far, selling thousands of copies and translated into eight languages, so I take his suggestions seriously.
As Seth explained, Economics in One Lesson has been in print continuously since its first publication and has now sold more than a million copies. Hazlitt’s admirers have embraced the message that all economic problems have a simple answer, ‘leave markets alone, and all will be well’. Adapting Hazlitt’s title, this simple answer may be described as One-Lesson Economics.
Hazlitt worked in the tradition of ‘microeconomics’, that is, the study of the way prices work in particular markets. The central question, which will be the main focus of this book, is whether the prices of goods and services reflect, and determine, all the costs involved for a society in providing those goods and services, summed up in the concept of ‘opportunity cost’. The opportunity cost of anything of value is what you must give up so that you can have it.
When I began writing this book, I envisaged it as a non-technical guide to microeconomic policy, based on the concepts of opportunity costs and market failure.
As I worked on the book, though, I felt dissatisfied.
I started to think more about the problem of unemployment and how it is treated in Hazlitt’s work. Much of Economics in One Lesson can be read as an attack on the work of John Maynard Keynes the great English economist, whose General Theory of Employment, Interest and Money was published in 1936 and gave rise to the entire field of macro-economics, the study of unemployment, inflation and monetary policy.
As I worked on the problem, I reached the conclusion that the central issue in macro-economics could be stated in terms of opportunity cost. In a recession or depression, markets, and particularly labor markets, don’t properly match supply and demand. This means that prices, and particularly wages, do not, in general, reflect or determine opportunity costs.
The other crucial issue of the day is the distribution of income and wealth, which is becoming steadily more unequal.
While markets are exceptionally powerful social institutions, they cannot work unless governments establish the necessary framework in which they can operate. The core of the economic framework in a market economy, and a central role of government, is the allocation and legal enforcement of property rights. The market outcome depends on the system of property rights from which it is derived. The choices that determine property rights are subject to the logic of opportunity costs just as much as the choices made within a market setting by firms and households.
Between them, micro-economics, macro-economics and income distribution cover all the critical issues in economic policy. To master any one of these fields requires years of study. In micro-economics, for example, it is necessary to deal with the theory of supply and demand, first by manipulating the graphical representations given in a typical Economics 101 course, and then with more complex algebraic and numerical techniques.
But this level of analysis is required only for specialist economists.
Most of the questions of principle involved in public policy can be illuminated by a careful application of the idea of opportunity cost, and its relationship to market prices.
Anyone can understand these issues, by learning just two lessons, and thinking hard about them. The first lesson is:
Lesson One: market prices reflect and determine opportunity costs faced by consumers and producers.
Lesson One describes the way markets work, and explains why, under certain ideal circumstances, Hazlitt’s One Lesson economics gives the right answer.
Lesson Two is the product of more than two centuries of study of the way markets work under circumstances that are less than ideal, and why they may not deliver the results that are hoped for.
Lesson Two: market prices don’t reflect all the opportunity costs we face as a society.
The problem of how markets work and why they fail is at the core of most of the economic policy issues that drive political and social debate.
My aim in writing this book was to show how anyone can understand these questions without learning the technical tools needed to become an economist.
I hope the book, and the two lessons it contains will help to achieve this goal.
Economics in Two Lessons is available here.