Book review: Economics in Two Lessons

Yesterday I reviewed Henry Hazlitt's Economics in One Lesson. The takeaway from that review should be that something pretty important was missing: a recognition of market failure. And that is essentially the second lesson that John Quiggin's Economics in Two Lessons provides. Quiggin wrote the book as a (somewhat belated, but still important) response to Hazlitt's book. Quiggin's two lessons are:

Lesson One: Market prices reflect and determine opportunity costs faced by consumers and producers...

Lesson Two: Market prices don't reflect all the opportunity costs we face as a society.

In essence, Quiggin's book takes Hazlitt's first lesson, and adds in a second (and probably more important) lesson about market failure. This echoes something that Paul Samuelson wrote in this 2009 article:

When someone preaches "Economics in One Lesson," I advise: Go back for the second lesson.

Quiggin provides that second lesson, along with an extensive critique of Hazlitt's book. I really enjoyed the framing of things in terms of opportunity cost, which is something that is often not made explicit beyond the first week or two of introductory economics. For example:

Mass unemployment is an example, and arguably the most important example, of Lesson Two. The prevailing wage does not reflect the opportunity cost faced by unemployed workers, who would willingly work at this wage and could, under full employment conditions, produce enough to justify their employment.

I also liked Quiggin's focus on the importance of property rights, and like my review yesterday, the recognition that government sets the property rights and legal regime, but that doesn't mean that it cannot be changed. The chapter on redistribution (and predistribution) was also very interesting, and many bit of it will make an appearance in my ECONS102 class in future.

The book is very readable, and like Hazlitt's book, it has its share of humour:

Expecting economic benefits from a natural disaster is like hoping that a car crash will fix your wheel alignment.

The book is not all perfect though. Quiggin goes though in excruciating detail Hazlitt's description of the 'parable of the broken window', which was introduced to economics by Frederic Bastiat. However, I don't think Quiggin is correct in his critique, and neither is Hazlitt correct in his interpretation. Bastiat's point was about the stock of wealth in society, and not about employment or production, which both Hazlitt and Quiggin get hung up on. Breaking windows doesn't make us better off (Quiggin's argument in the case of a recession) or no worse off (Hazlitt's argument), because if the window hadn't been broken at all, society would have the window plus more. Or maybe I have misunderstood both of them - this was the most unclear section of an otherwise very readable book.

Market fundamentalists won't enjoy this book. But for the rest of us, it provides some useful reminders of things that we should keep front of mind.