By David Henderson
One of my former students, a student who performed very well in my class and has kept in touch on economic issues, sent me a link to John Cassidy, “A New Way to Learn Economics,” New Yorker, September 11, 2017.
In the piece, Cassidy is very gung-ho on a lengthy e-book called The Economy. It is published by the Core team and is being used in some economics courses. Its main virtue–and here I agree with Cassidy–is its price: zero. The book has lecture outlines, graphs, interviews, and questions for the reader to test his or her understanding.
I don’t have time to review it in full but I did check a few things. Do not regard this as a complete review. These are quick impressions.
The Big Positive
The biggest virtue I’ve seen so far is the hockey stick. It shows just how dramatically standards of living have improved since 1800. The graph, if you don’t read it carefully, understates the growth of living standards because, as the authors point out, it’s a ratio scale. That is, going from a per capita income of, say, $250 to $500 gets the same vertical increase as going from $500 to $1,000 even though the latter increase is twice the former.
Oddly, though, even on this big positive there’s a negative. The authors take only two of the three important things from the graph. They write:
. For a very long time, living standards did not grow in any sustained way.
. When sustained growth occurred, it began at different times in different countries, leading to vast differences in living standards around the world.
What’s the unmentioned conclusion and, in my view, by far the most important? Not that for a long time living standards didn’t grow but that, almost everywhere living standards have exploded.
1. In discussing private property, the authors write:
This means that you can:
enjoy your possessions in a way that you choose
exclude others from their use if you wish
dispose of them by gift or sale to someone else …
… who becomes their owner
I didn’t notice anything wrong with that. But to test myself, I took the quiz. And guess what? This economist, with a Ph.D. from a top institution at the time (UCLA) and who has taught for almost 40 years, got the answer wrong.
Here was the question:
Which of the following are examples of private property?
computers belonging to your college
a farmer’s land in Soviet Russia
shares in a company
a worker’s skills
I suggest you figure out your own answer before reading what follows.
I answered that all but farmer’s land in Soviet Russia were private property. (I was assuming that “your college” means a private college, as, possibly, the authors assumed also. If it was a state university, it’s hard to say that the computer is private property.)
Wrong, according to the authors. A worker’s skills are not his property. Why? It goes back to the definition. He can’t sell his skills or give them away. But that makes me challenge their definition. I don’t think an essential part of private property is that one be able to sell it or give it away.
2. The inflation section is horrible.
First, the really horrible one: it does not even mention the Friedman insight that “inflation is always and everywhere a monetary phenomenon.” That is, according to Friedman, there has never been a sustained inflation without a prior increase in the money supply. Even if the authors disagree with this, they should mention it. Maybe they can find counterexamples here and there, but they’re pretty rare.
What’s the authors’ explanation of inflation? Are you ready? Here it is:
Inflation arises from conflicts among economic actors, when they are powerful enough that their claims on goods and services are inconsistent.
Second, in analyzing the effects of inflation on debtors and creditors, fails to distinguish between anticipated and unanticipated inflation. The authors write:
More generally, using the same logic as we used when discussing the government’s debt in the previous unit, inflation means that:
Borrowers with nominal debt will benefit: Those with mortgages on fixed nominal interest ratenominal interest rate The interest rate uncorrected for inflation. It is the interest rate quoted by high-street banks. See also: real interest rate, interest rate.close loans, for example, will benefit from inflation, because the debt stays the same in nominal terms, and so becomes smaller in real terms.
Lenders with nominal assets will lose: Banks or others who have loaned money at fixed nominal interest rates will lose, because when the sum is repaid it will be worth less in terms of the goods or services it can buy. Very high inflation will wipe out the value of nominal assets, which happened in Zimbabwe in 2008-2009.
But if, say, a 4% inflation rate is anticipated when lenders and borrowers enter contractual agreements, and then the 4% inflation rate actually comes about, there is not a wealth transfer from lenders to borrowers.
Notice that they mention Zimbabwe. That should have keyed them to mentioning the monetary cause of Zimbabwe’s inflation, and then to looking at monetary policy more generally.
3. The section on the Great Depression was the worst part I looked at. It could have used some wisdom and data from Milton Friedman and Anna J. Schwartz’s classic book, A Monetary History of the United States, 1867-1960. They don’t even mention it and, not surprisingly, therefore, don’t mention the 30% drop in the money supply that Friedman and Schwartz documented. At least I couldn’t find it. The authors appear to judge monetary policy during the Depression solely by interest rates. This flushing of Friedman and Schwartz down the memory hole is, in my view, the biggest weakness of the book I’ve seen so far.
HT2 to Tom Pilkerton.