Quiggin’s Economics in Two Lessons should be on ECON101 reading lists for decades to come

John Quiggin, the UQ Vice Chancellor’s Senior Fellow in Economics, has a new book out, Economics in Two Lessons: Why Markets Work so Well, and Why They Can Fail so Badly, which I can highly recommend. I’ve enjoyed dipping in and out of it over the last couple of weeks and discussing it with friends and colleagues. The consensus appears to be that, while the book isn’t as original and provocative as his previous books (e.g. Great Expectations, Zombie Economics), it is nonetheless a great introduction to economics for the general reader. Furthermore, it is a useful refresher of key concepts for experienced economists, and it does contain several stimulating insights.

My favourite section of the book is Quiggin’s discussion of the economics of Bitcoin, in which he notes (on p. 233) “The Bitcoin bubble rests on no plausible premise.” Quiggin rightly observes:

Whatever happens to Bitcoin, we must not lose sight of a more fundamental, and worrisome development. A financial product with a purely arbitrary value has been successfully introduced in the world’s most sophisticated financial markets.

If the 2008-09 financial crisis wasn’t enough to convince you that financial markets occasionally go haywire, and the efficient markets hypothesis is nonsense, the bubble in Bitcoin certainly should.

The blurb on the back cover nicely explains why Quiggin’s book is called Economics in Two Lessons:

Since 1946, Henry Hazlitt’s bestselling Economics in One Lesson has popularized the belief that economics can be boiled down to one simple lesson: market prices represent the true cost of everything. But one-lesson economics tells only half the story. It can explain why markets often work so well, but it can’t explain why they often fail so badly—or what we should do when they stumble. As Nobel Prize–winning economist Paul Samuelson quipped, “When someone preaches ‘Economics in one lesson,’ I advise: Go back for the second lesson.” In Economics in Two Lessons, John Quiggin teaches both lessons, offering a masterful introduction to the key ideas behind the successes—and failures—of free markets.

It certainly is “a masterful introduction”. I was impressed by Quiggin’s very clear explanation of the concept of opportunity cost, and his presentation of a brain teaser on opportunity cost involving Eric Clapton and Bob Dylan concerts on the same night. You have a free ticket to see Clapton. Dylan costs $40 to see, but you’d be willing to pay $50 to see him, so what is the opportunity cost of going to the Clapton concert instead of the Dylan concert? Embarrassingly, a very high proportion of economists at an American Economic Association conference answered incorrectly when this question was posed to them. You can read the full story and find out the correct answer in Quiggin’s book on pp. 69-70.

Notwithstanding Quiggin’s extraordinary contributions to economic theory and the policy debate on a huge range of issues – including climate change, the Murray Darling Basin, privatisation, and toll roads among others – this book may well end up being his most enduring contribution to economics. I expect it will be enthusiastically recommended to students by first-year economics lecturers for decades to come.

Despite the fact I disagree with a number of Quiggin’s policy suggestions, particularly the vague and Utopian “Job Guarantee” (p. 300), I have no hesitation in recommending this book to readers. You can pick up a copy at Dymocks on Albert St, Brisbane CBD, which had dozens of copies last time I checked.

Quiggin_cover

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2 Responses to Quiggin’s Economics in Two Lessons should be on ECON101 reading lists for decades to come

  1. Graham Young says:

    Interesting Gene, but I’d have to disagree about Bitcoin. While it is difficult to ascribe a fundamental value to Bitcoin, that is true of many things that can be bought and sold. There are often multiple points of equilibria for prices, depending on a whole range of factors. Ultimately value is what people are prepared to pay, which is evident from your Clapton and Dylan example. Most successful businesses and speculators arbitrage between the cost of producing something and what it will sell for. Which you can apply to Bitcoin. It actually has a cost of production – the electricity and hardware that goes into its production – and bitcoin miners move to where power is cheap so they can make a better margin. People are then anchored in what they think it is worth, which is then modulated by how much others might pay for it. I don’t own any bitcoin, which is a measure of the fact I think it’s value is a bit flaky, but I wouldn’t say it was irrational to own it.

    • Gene Tunny says:

      Thanks for the comment Graham. That’s an interesting perspective. Crypto-currencies could be a good topic for your next AiP event, especially if you could get John along to present his views.

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