Quiggin Needs a Third Lesson
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.