I don't know if Hazlitt ever would 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 overlooked, 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.
One Lesson thinking / Throughout the book, Quiggin talks about "One Lesson thinking" and "One Lesson economists." Although he mentions Hazlitt numerous times, Quiggin rarely names other economists to whom he attributes what he says are mistakes in One Lesson thinking. For instance, he writes:
GDP was not intended as a measure of society's total productive activity or of economic well-being. Unfortunately, it is often (mis)used in this way, particularly by One Lesson economists.
He also writes that One Lesson economics "produced the Great Depression." Is Quiggin unfamiliar with the pathbreaking work by Milton Friedman and Anna Schwartz on how the Federal Reserve's monetary policy helped cause the Great Depression?
By not naming the people he criticizes, Quiggin makes it impossible to know whether he has characterized their views accurately. It's true that, at the end of each chapter, he gives a list of references for statements made in the chapter, but it is far too brief and often fails to list sources of some of the ideas he criticizes. When he does cite sources, some of his citations are misleading or incorrect. That makes me, as a reader, wonder what else he gets wrong.
Indeed, I can pick out a number of important facts and ideas that he gets wrong. Consider, for example, his claim, referencing anthropologist David Graeber, that money arose from debt, contra the standard economist's claim that money arose because barter was inconvenient. He credits Alison Hingston Quiggin for making the same point about money and debt. I consulted monetary economist Jeffrey Hummel of San Jose State University for his take. Hummel, who has read both the Graeber book and the book by Alison Quiggin, answered that the view of many anthropologists, archaeologists, and historians—particularly those who specialize in money—is that the standard economist's account of money's origin is correct. Moreover, he said, John Quiggin "most definitely misrepresents" Alison Quiggin's book.
Property and income inequality / Everyone is allowed a few mistakes, but John Quiggin makes many. In his introduction, for example, he writes, "The other crucial issue of the day is the distribution of income and wealth, which is becoming steadily more unequal." If he is referring to only the United States, his point would be correct (though, as economic historian Phil Magness has pointed out in various technical articles, some of the most prominent economists who have worked on the issue lately have overstated the increase in U.S. wealth inequality). But if Quiggin is referring to income inequality worldwide, he's wrong. As India and China, which together have 36% of the world's population, have become wealthier, wealth worldwide has become more equal. In a 2015 study, Tomas Hellebrandt and Paolo Mauro found that the Gini coefficient of global income inequality fell from 69 in 2003 to 63 in 2013. (The lower the coefficient, the more equal are incomes.)
Related to Quiggin's discussion of income inequality is his discussion of what determines income. He writes, "Incomes in turn are determined by the allocation of property rights, including financial wealth, access to education, obligations to pay debts including taxation, and rights to receive income from others, or from government programs like Social Security and Medicare." Those are all relevant factors. But where in his system is the role of effort or smarts or inspiration? Such a narrow view has to be wrong.
An important part of Quiggin's case is that governments are needed to enforce property rights. There's a reasonable chance that he's right, but he might be wrong. Consider economist Edward Stringham's 2016 book Private Governance. Stringham shows how contracts were enforced by arbitration on the Amsterdam Bourse in the early 17th century—a private arrangement. To that, defenders of the view that government is necessary for property rights often respond that government is the ultimate backstop behind private arbitration. But Stringham points to contracts that obligate the contractees to engage in transactions that the government has made illegal and notes that arbitration works even then. In those cases, the government cannot be a backstop.
Even if Quiggin is right about the necessity of government, his illustration of the point gets some important history wrong. For instance, he notes that when radio first began in the United States, there was a lot of interference between stations' signals. So far, so good. But, he writes, that led the U.S. government to establish, in 1927, the Federal Radio Commission, which later became the Federal Communications Commission. Wrong. As telecom economist Thomas Hazlett explained in his 2017 book The Political Spectrum, in the early 1920s the U.S. Department of Commerce had figured out how to minimize interference: by granting rights to those stations that had been there the longest. But in 1926, Commerce Secretary Herbert Hoover abandoned this arrangement and that caused chaos. Hoover then championed the creation of the Federal Radio Commission, thereby creating "a problem in order to solve it," in Hazlett's words. So, Quiggin is right about the role of government but badly wrong that chaos made the FCC necessary.
Broken window redux / In Economics in One Lesson, Hazlitt retells the story, first told by 19th century economist Frederic Bastiat, of the broken window fallacy. A boy breaks a window and many people think that's bad. But one of the observers says it's good because it makes work for the glazier. The problem, notes Bastiat and echoes Quiggin, is that, whereas the glazier has a new demand for his services, there is also the opportunity cost of what the shopkeeper would have done with the money that he now must pay the glazier. Quiggin claims that one of Hazlitt's implicit assumptions is that there is full employment, but if there is high unemployment, the loss is less clear. The shopkeeper is worse off, but the opportunity cost is not quite as clear-cut as Hazlitt and Bastiat had thought.
That's a good point, although it can be overstated. What if, for example, there is no unemployment among glaziers? Quiggin overstates it even more. He writes:
The critical assumption in Hazlitt's version is … "Everyone faces the same market-determined prices for all goods and services, including labor of any given quality, and everyone can buy or sell as much as they want to at the prevailing prices."
But that's not critical for the argument at all. For the broken window lesson to be correct, not everyone has to face the same prices for all goods and services. Quiggin's passage is reminiscent of modern critics of Adam Smith who claim that Smith assumed perfect competition, a situation in which no buyer or seller is important enough to affect the price. Smith assumed no such thing.
Fortunately, Quiggin grants that Bastiat's broken window point—destruction does not increase wealth—is apropos even if he thinks the conditions under which it applies are narrow. It was especially heartening to see him recognize, in that context, the huge costs of the Afghan and Iraq wars, which total trillions of dollars. Never forgetting opportunity cost, Quiggin has a great anecdote about the cost of World War I: He tells of the 1915 death at Gallipoli of Harry Moseley, "widely regarded as the greatest experimental physicist of the twentieth century." Fellow physicist Niels Bohr is supposed to have said that Moseley's death alone made the war an unbearable tragedy. (According to Wikipedia, Isaac Asimov said something similar.)
Gains through trade? / 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, charging him $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.
Quiggin argues that labor unions, by bargaining for higher wages, increase income equality. I was initially skeptical of this claim because one of the subtle effects of successful unions' increases in wages is to cause employers to reduce the number of union workers hired, which causes many of those workers to shift to non-union jobs, thus driving down non-union wages. But with a quick check of recent studies, including one co-authored by Princeton University's Henry Farber, I learned that Quiggin is right. (I assume they accounted for the effects on non-union workers, although it's hard to tell from a quick reading.)
Unfortunately, in describing how the Wagner Act of 1935 guaranteed the right to join unions and go on strike, Quiggin leaves out a crucial fact: the legislation made unions the sole bargaining agent for workers when the workers voted, by a simple majority, to form a union. Dissenting employees who want those jobs have to be represented by the union. Even pro-union economists Richard Freeman and James Medoff have admitted that unions are a government-enforced monopoly. In many parts of the book, Quiggin criticizes monopoly, but he somehow didn't mention unions as an important source of monopoly.
On the monopoly issue, he gives a distorted treatment of the effects of trusts that became prominent in late 19th century America. Because he advocates strong antitrust action against what he regards as current monopolists, this history matters a lot. Quiggin claims that the trusts used monopoly power to raise prices for consumers but he gives no evidence for this claim, which is unfortunate because the evidence goes the other way. In a 1985 article in the International Journal of Law and Economics, Loyola University Maryland economist Thomas DiLorenzo found that between 1880 and 1890, when real GDP rose by 24%, real output in the seven trusts for which data were available rose on average by 175%. In six of the seven trusts for which he had data, inflation-adjusted prices fell dramatically. Because monopolists tend to restrict output and charge high prices, both the output and the price data are strong evidence against the idea that the trusts were monopolistic. Quiggin reports none of these data.
He criticizes high executive pay, asserting there "is ample evidence that the increased pay of senior executives over recent decades has not produced a commensurate increase in their economic contribution." In his recent book Big Business, George Mason University economist Tyler Cowen gives strong evidence that the pay of senior executives is in fact commensurate with, but somewhat lower than, their economic contribution to their firms' bottom lines. (See "A Love Letter to Tyler Cowen," Summer 2019.)
To his credit, Quiggin points out that increasing the already high marginal tax rates of high-income earners will cause them to engage in more tax avoidance. He can't resist, though, casting aspersions on the ethics of someone who would avoid taxes. Such people, he says, are "not concerned with the ethics of tax avoidance." Possible Quiggin has in mind tax evasion, which is illegal and is a subset of tax avoidance, which also includes legal ways to lower own's taxes. But if he's saying all ways to avoid taxes are bad, does he really think that it's ethically suspect to buy tax-free municipal bonds, claim the mortgage interest deduction, or write off charitable donations? All of these are tried and true methods of tax avoidance.
Labor / One of the big controversies in labor economics in the last 25 years has been about the extent to which increases in the minimum wage puts low-skilled workers out of work. The big challenge to the traditional economist's view that minimum wage laws hurt employment came from economists David Card and Alan Krueger, who found that after the minimum wage rose in New Jersey but not in Pennsylvania, employment in the fast-food industry in New Jersey did not fall relative to employment in the same industry in Pennsylvania. In discussing their findings, Quiggin writes, "These estimates were subject to lots of reanalysis, the majority of which tended to confirm the original Card and Krueger analysis." I asked Jonathan Meer, an economist at Texas A&M University who studies the employment effects of minimum wages, if he thought that statement was accurate. He emailed in reply:
The only actual attempt at replication that I know of is by [David] Neumark and [William] Wascher, and it (famously) did not replicate Card & Krueger. To the best of my knowledge, no one has "reanalyzed" Card & Krueger's data. The most charitable interpretation of that statement is "Lots of other people have done minimum wage studies and the majority of them tend to confirm Card & Krueger," but that is also wrong.
Quiggin is a strong believer in Keynesian economic policy. For that reason, he thinks unemployment insurance (UI) is a good automatic stabilizer: UI payments rise when the economy goes into recession and fall when the economy recovers. He notes that during the last decade's financial crisis, Congress extended eligibility for UI benefits from the typical length of 26 weeks to 99 weeks. He writes, "However, the extension was wound back well before the labor market recovered from the crisis." His unstated implication seems to be that the labor market would have recovered more quickly had the extension remained in place longer. In fact, ending the extension of UI brought the unemployment rate down substantially. A 2015 study published by the National Bureau of Economic Research found that "1.8 million jobs were created in 2014 due to the benefit cut." This should not be surprising: pay people to stay out of work while seeking a better job, and some people will stay out of work longer, not because they're lazy but because they're rational.
Conclusion / One of the weakest parts of the book is Quiggin's treatment of macroeconomic policy. As noted above, he completely misses Federal Reserve monetary policy as a cause of the Great Depression. Related to that, he claims that expansionary monetary policy at the start of last decade's financial crisis "proved unable to stimulate a return to normal economic conditions." But he completely misses the fact that the Fed sterilized, by selling assets, much of its monetary injection and, in October 2008, chose to pay interest on bank reserves, thus giving banks an incentive not to lend to the public. In short, monetary policy was not expansionary.
I noted earlier that Quiggin has a beautiful analysis of rent control and price controls in general. He writes:
The problem with price controls is simple when we think in terms of opportunity cost. If prices are fixed by law, they cannot tell us anything about the true opportunity cost of goods and services. Nevertheless, the logic of opportunity costs still applies to producers, including landlords, and consumers, including tenants.
He then goes on to show that price controls, by reducing the amount supplied, often raise the implicit price consumers pay to a level above the price they would pay in a market without price controls.
Also to his credit, Quiggin critiques the extreme form that patent and copyright laws have taken and argues that the costs of the extreme forms outweigh the benefits. I'm inclined to agree but he doesn't make enough of a case.
One of the areas in which he sees a big market failure and, thus, the need for "Two Lesson" thinking, is pollution. I agree. It's difficult to conceive of a plausible free-market solution for air pollution or pollution of the oceans.
While Quiggin is quick to notice the imperfections of free markets, he says very little about the imperfections of government. He relegates the discussion of government failure to one page, on which he does admit that government fails. He says that the central lesson of Two Lesson economics is to examine both sides—market failures and government failures. But he doesn't follow through on this. He claims that markets have not done well in providing education or health care but he doesn't discuss the various government interventions that have hobbled those two sectors. He refers, for example, to the "near-total failure of for-profit school companies," but doesn't point out that because they are embedded in a system where the competition—the government sector—charges a zero price, they start at a huge disadvantage. If, for example, a for-profit school or a nonprofit school wishes to charge a modest tuition of $8,000, it must provide a service not worth $8,000 but worth $8,000 more than the zero-price government option.
Perhaps Quiggin needs to write another book, called The Missing Third Lesson in Economics.
