Economics in Two Lessons: Why Markets Work So Well, and Why They Can Fail So Badly

Economics in Two Lessons: Why Markets Work So Well, and Why They Can Fail So Badly

by John Quiggin

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A masterful introduction to the key ideas behind the successes—and failures—of free-market economics

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.

Economics in Two Lessons explains why market prices often fail to reflect the full cost of our choices to society as a whole. For example, every time we drive a car, fly in a plane, or flick a light switch, we contribute to global warming. But, in the absence of a price on carbon emissions, the costs of our actions are borne by everyone else. In such cases, government action is needed to achieve better outcomes.

Two-lesson economics means giving up the dogmatism of laissez-faire as well as the reflexive assumption that any economic problem can be solved by government action, since the right answer often involves a mixture of market forces and government policy. But the payoff is huge: understanding how markets actually work—and what to do when they don’t.

Brilliantly accessible, Economics in Two Lessons unlocks the essential issues at the heart of any economic question.

Product Details

ISBN-13: 9780691186108
Publisher: Princeton University Press
Publication date: 04/23/2019
Sold by: Barnes & Noble
Format: NOOK Book
Pages: 408
Sales rank: 983,053
File size: 2 MB

About the Author

John Quiggin is the President’s Senior Fellow in Economics at the University of Queensland in Brisbane, Australia. His previous book, Zombie Economics: How Dead Ideas Still Walk among Us (Princeton), has been translated into eight languages. He has written for the New York Times and the Economist, among other publications, and is a frequent blogger for Crooked Timber and on his own website: Twitter @JohnQuiggin

Table of Contents

Acknowledgments xi

Introduction 1

Outline of the Book 8

Further Reading 9

Lesson One, Part I: The Lesson 11

Chapter 1 Market Prices and Opportunity Costs 13

1.1 What Is Opportunity Cost? 14

1.2 Production Cost and Opportunity Cost 17

1.3 Households, Prices, and Opportunity Costs 22

1.4 Lesson One 24

1.5 The Intellectual History of Opportunity Cost 25

Further Reading 27

Chapter 2 Markets, Opportunity Cost, and Equilibrium 30

2.1 TISATAAFL (There Is Such A Thing As A Free Lunch) 32

2.2 Gains from Exchange 35

2.3 Trade and Comparative Advantage 37

2.4 Competitive Equilibrium 40

2.5 Free Lunches and Rents 44

2.6 Adam Smith and the Division of Labor 45

Further Reading 48

Chapter 3 Time, Information, and Uncertainty 50

3.1 Interest and the Opportunity Cost of (Not) Waiting 51

3.2 Information 59

3.3 Uncertainty 62

Further Reading 64

Lesson One, Part II: Applications 67

Chapter 4 Lesson One: How Opportunity Cost Works in Markets 69

4.1 Tricks and Trap? 69

4.2 Airfares 71

4.3 The Cost of (Not) Going to College 75

4.4 An Exception That Proves the Rule: The Boom and Bust in Law Schools 77

4.5 TANSTAAFL: What about "Free" TV, Radio, and Internet Content? 79

Further Reading 83

Chapter 5 Lesson One and Economic Policy 85

5.1 Why Price Control Doesn't (Usually) Work 85

5.2 To Help Poor People, Give Them Money 89

5.3 Road Pricing 96

5.4 Fish and Tradable Quota 100

5.5 A License to Print Money: Property Rights and Telecommunications Spectrum 108

5.6 Concluding Comments 111

Further Reading 111

Chapter 6 The Opportunity Cost of Destruction 114

6.1 The Glazier's Fallacy 115

6.2 The Economics of Natural Disasters 118

6.3 The Opportunity Cost of War 119

6.4 Technological Benefits of War? 125

Further Reading 128

Lesson Two, Part I: Social Opportunity Costs 131

Chapter 7 Property Rights and Income Distribution 134

7.1 What Lesson Two Tells Us about Property Rights and Income Distribution 135

7.2 Property Rights and Market Equilibrium 136

7.3 The Starting Point 138

7.4 Property Rights and Natural Law 142

7.5 Pareto and Inequality 145

7.6 Conclusion 148

Further Reading 149

Chapter 8 Unemployment 150

8.1 Macroeconomics and Microeconomics 151

8.2 The Business Cycle 153

8.3 The Experience of the Great and Lesser Depressions 155

8.4 Are Recessions Abnormal? 159

8.5 Unemployment and Opportunity Cost 162

8.6 The Macro Foundations of Micro 165

8.7 Hazlitt and the Glazier's Fallacy 167

Further Reading 169

Chapter 9 Monopoly and Market Failure 171

9.1 The Idea of Market Failure 171

9.2 Economies of Size 173

9.3 Monopoly 177

9.4 Oligopoly 184

9.5 Monopsony and Labor Markets 185

9.6 Bargaining 187

9.7 Monopoly and Inequality 191

Further Reading 193

Chapter 10 Market Failure: Externalities and Pollution 196

10.1 Externalities 197

10.2 Pollution 200

10.3 Climate Change 203

10.4 Public Goods 208

10.5 The Origins of Externality 210

Further Reading 212

Chapter 11 Market Failure: Information, Uncertainty, and Financial Markets 214

11.1 Market Prices, Information, and Public Goods 215

11.2 The Efficient Markets Hypothesis 218

11.3 Financial Markets, Bubbles, and Busts 221

11.4 Financial Markets and Speculation 223

11.5 Risk and Insurance 226

11.6 Bounded Rationality 228

11.7 What Bitcoin Reveals about Financial Markets 232

Further Reading 235

Lesson Two, Part II: Public Policy 237

Chapter 12 Income Distribution: Predistribution 239

12.1 Income Distribution and Opportunity Cost 240

12.2 Predistribution: Unions 242

12.3 Predistribution: Minimum Wages 249

12.4 Predistribution: Intellectual Property 254

12.5 Predistribution: Bankruptcy, Limited Liability, and Business Risk 262

Further Reading 267

Chapter 13 Income Distribution: Redistribution 270

13.1 The Effective Marginal Tax Rate 272

13.2 Opportunity Cost of Redistribution: Example 275

13.3 Weighing Opportunity Costs and Benefits 278

13.4 How Much Should the Top 1 Percent Be Taxed? 282

13.5 Policies for the Present and the Future 285

13.6 Geometric Mean 286

Further Reading 286

Chapter 14 Policy for Full Employment 288

14.1 What Can Governments Do about Recessions? 289

14.2 Fiscal Policy 290

14.3 Monetary Policy 297

14.4 Labor Market Programs and the Job Guarantee 299

14.5 One Lesson Economics and Unemployment 301

14.6 Summary 306

Further Reading 306

Chapter 15 Monopoly and the Mixed Economy 308

15.1 Monopoly and Monopsony 309

15.2 Antitrust 311

15.3 Regulation and Its Limits 314

15.4 Public Enterprise 315

15.5 The Mixed Economy 319

15.6 I, Pencil 322

Further Reading 326

Chapter 16 Environmental Policy 328

16.1 Regulation 330

16.2 Environmental Taxes 332

16.3 Tradeable Emissions Permits 334

16.4 Global Pollution Problems 335

16.5 Climate Change 336

16.6 Summary 342

Further Reading 342

Conclusion 343

Bibliography 345

Index 371

What People are Saying About This

From the Publisher

"With apologies to Isaiah Berlin, Quiggin is a foxy hedgehog: He knows two big things, and these twin lessons—about the virtues and limits of markets—sustain a pioneering, persuasive, and even passionate case for democracy and the mixed economy. Make room for two lessons in your mind, and on your bookshelf.”—Jacob S. Hacker, coauthor of American Amnesia: How the War on Government Led Us to Forget What Made America Prosper

“This popular, accessible introduction to economics is organized around an idea that is brilliantly simple yet encompassing.”—Suresh Naidu, Columbia University

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