I don’t know if Hazlitt would ever have said that all the economics you need to know is in his book. But in Economics in Two Lessons, University of Queensland economist John Quiggin writes as if he thinks that was Hazlitt’s thinking. Because Quiggin sees it that way, he decides to give two lessons. The first, echoing Hazlitt, is that markets work well a lot of the time. The second, which Quiggin says Hazlitt left out, is that markets also work badly a lot of the time. The first 38% of the book is dedicated to the first lesson while the remaining 62% is dedicated to the second.
Quiggin is a good writer who lays out much of the economics well. His analysis of rent control and price controls in general is a thing of beauty. Along the way, though, he makes small and big mistakes. He also shows by omission that the book, to be complete, badly needs a third lesson, on why government works so badly even when it intervenes in cases where markets work badly.
This is from David R. Henderson, “Quiggin’s Missing Lesson,” Regulation, Fall 2019. [Scroll down about 2/3 of the way.]
Another excerpt from my review:
In explaining gains through trade, economists often use the fictional case of Robinson Crusoe bartering with Friday. Quiggin writes, “In the typical One Lesson textbook version of the story, Crusoe and Friday bargain on equal terms and share the gains from trade more or less equally.” I can’t speak for other economists or for textbook writers, but when I’ve taught similar stories, I’ve never made that assumption. Maybe I’m alone, but I doubt it.
My favorite story, which I made up, is of Rita’s Friendly Oasis offering two quarts of water to a dehydrating person, who has no other options, for $50,000. Both sides gain. The otherwise dehydrating person gains the value of his life minus $50,000 and Rita gains $50,000 minus the marginal cost of the water. But Quiggin, in discussing the outcome of a similar trade, laments that “the Nash bargaining solution gives Crusoe most of the additional goods and services generated by the bargain, while Friday [whose life, Quiggin admits, Crusoe has saved] gets his life and not much else.” His life and not much else? It seems as if Friday got a pretty big benefit from that particular trade.
Read the whole thing.
READER COMMENTS
robc
Sep 26 2019 at 3:24pm
At the very end, in the section on schools, He (and you) fail to account for non-profit private schools, which seem to be decently thriving.
The non-profit private schools are just as much a market solution as the for-profit private schools.
John Quiggin
Sep 27 2019 at 1:39am
@Rob C I do mention non-profit private schools and note their success
on p324 “Successful ‘private’ schools are almost invariably non-profit, and commonly benefit from direct or indirect public funding.”
Thaomas
Sep 26 2019 at 4:15pm
Chapter 3 would be the place for discussing which kind of imperfect intervention (tax and subsidy v quantitative controls) to use for which kind of market problem. And then maybe a chapter 4 on how to do the cost benefit analysis of when to use or not use imperfect government to improve imperfect markets, (or completely missing markets as with CO2 emissions) markets and imperfect market income distributions.
John Quiggin
Sep 27 2019 at 1:40am
I wanted to do more along these lines, but couldn’t work it in to the flow in a way I would like.
Daniel Klein
Sep 26 2019 at 7:19pm
If Quiggin has failed to assess the alternative represented by the governmentalization of social affairs, hasn’t he failed Hazlitt’s lesson, which is to look at all the consequences, or, as Coase put it, “the total effect”?
John Quiggin
Oct 8 2019 at 7:55pm
As David mentions, I do discuss price/rent control in these terms and also look at regulatory capture. But I reject the claim that the observation of regulatory capture can be extended into a general notion of ‘government failure’.
John Quiggin
Sep 27 2019 at 1:46am
Thanks for a generally thoughtful review. As a quick response, the excerpt quoted here isn’t likely to convince many people of the justice of market outcomes, other than those for whom it is axiomatic.
David Henderson
Sep 27 2019 at 9:59am
You’re welcome, John (if I may.)
I’ll look into your other comment on Alison Quiggin. I’m traveling soon and so it might take a while.
Mark Z
Sep 27 2019 at 11:29am
It seems to me though that acceptance or rejection of the justice of market outcomes almost inevitably hinges on one’s moral axioms. E.g., whether one assumes the allocation from a voluntary transaction is inherently just, or assumes people are entitled to equal consumption of some (or all) goods and serviced. I doubt the details of how a market allocates things could change many people’s minds one way or another about the justice of it (except maybe for full-fledged utilitarians, and even then I’m not sure).
Thaomas
Sep 28 2019 at 7:16am
Or maybe if not “entitled to (more) equal consumption,” that it is legitimate for people to want a “state” to transfer income in a way that reduces some consumption disparities. Maybe I want housing vouchers not because the beneficiarias deserve them (maybe they don’t), but because I don’t like to see homeless people on the street.
Mark Z
Sep 28 2019 at 11:14pm
Sure, I just think this is still an ‘axiomatic’ moral position rather than a judgment of an outcome. E.g., whether a homeless person is homeless because the market failed and undervalued his labor, or because the market accurately assessed the value of his labor at zero (or at less than the transaction cost of hiring him) won’t affect many people’s opinions on housing vouchers. The merit or lack of merit in the intervention seems to be independent of how well markets work.
John Quiggin
Sep 27 2019 at 2:17am
I stand by my characterization of Alison Hingston Quiggin. From her book “Writers on its origin and evolution have paid exaggerated attention to the influence of trade, which, though doubt-less the chief stimulus in its subsequent development, was absent , or at any rate negligible, at its birth. ”
She is talking about stateless “primitive” societies, so she doesn’t discuss debts to rulers, but she goes on to say “There are earlier human institutions than trading, and among the earliest are marriage and *blood-revenge. It would be extravagant to claim that bride-price and wergeld brought currency into existence, but they cer-tainly established standards of value and regularized certain media of exchange, which are two of the three main functions of money asdefined above”?
Jeff G.
Oct 3 2019 at 12:50pm
I don’t know if I agree with that interpretation of Alison Hingston Quiggin. It seems to me that she specifically does not claim that marriage or blood-revenge led to currency when she says “It would be extravagant to claim that bride-price and wergeld brought currency into existence.” It seem to me that she is just drawing a distinction between these two types of transactions and what we would think of a “normal” commercial trade between two voluntary parties. I don’t see how you can infer from this that money was developed for debt?
But even if that were the case, why would be important to know that money was developed for debt?
John Quiggin
Oct 8 2019 at 7:42pm
“But even if that were the case, why would be important to know that money was developed for debt?”
It’s not important to the argument of the book. I mentioned the point as an aside, and David challenged it in the review, so I responded. I find things like this interesting but YMMV.
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