Asymmetrical Information

Thomas Sowell also has two great books on Economics:

Basic Economics: A Citizens Guide to the Economy

and

Applied Economics: Thinking Beyond Stage One

The first is one of the best non-technical explanations of the role of prices in an economy that I've ever seen. It's extremely low-tech, and a great gift for non-economist friends.

The second is a pretty thorough explanation of the "Law Of Unintended Consequences". It shows how policies like rent control all too often result in predictable outcomes like real-estate shortages, discrimination, and so forth.

Sowell writes extremely well, and has pitched these for the non-academic. I don't think there's an equation in there - just lots of illustrations.

Thanks for the tip and the link !

There must be a better online format than the .pdf.

There is. It's called the papers.
Just print it.

But that book was published like a million years ago it is all different now. Theres like the internet and ebay and stuff now. You know?

Of course, the 50th anniversary edition is available in print from Laissez Faire Books, as are Thomas Sowell's books Basic Economics and Applied Economics.

Love your stuff! C /easy lesson/lesson/ ;-)

hmm,
so, we like classical models. ok. then again, adjustment takes time. and causes a lot of pain. but that is ok, i guess..."

as for the first example--it makes total sense, as long as we assume that the marginal propensity to consume out of income is the same for all folks across the economy. yes, i know its a glazier and a tailor. but it could easily be a wealthy dude and a poor dudette... oh well, its just assumptions--unstated or stated after all...

Economists always have much better explanations for why markets behave a certain way after the fact. Even though theres alot of high falutin' math involved, I dont really consider economics a science. It seems to me you can't come up with an equation to explain human behavior when it comes to spending money. The TV economists never agree on anything, or they agree on some points and still reach opposite conclusions. I just listened to two economists with completely opposite opinions on the housing market, reach near the same conclusion. Imo there are two types of economists, the academics and the sharks trying to get in my pocket. Not that theres much in my pocket. Now Im sure this might anger some here, but I'm not coming back to this thread, so keep that in mind before you get to angry and write a lengthy rebuttal.

The purpose of a lengthy rebuttal is not in the forlorn hope of getting thru to the likes of you, but out of concern for those innocents whom you might lead astray. So there, nyaah.

I never read this book but based on Prof DeLong's comments it seems to be one of those books that lead to the "a little knowledge can be a dangerous thing" situations.

http://delong.typepad.com/sdj/2005/04/economics_in_on.html

Suggest you read Professor Tabarrok's response to that:

http://www.marginalrevolution.com/marginalrevolution/2005/04/delong_on_hazli.html

Thanks. I had read that and will let Tabarrok and DeLong and others debate what Keynes really said.

But Tabarrok only focuses on part of what DeLong wrote and does not address what I consider DeLong's main criticism, that EiOEL is based on several assumptions that Hazlitt never explains or makes explicit. If this is true (and I repeat I haven't read the book) it's a pretty damning observation. As DeLong points out it would be a very dangerous book for anyone who did not realize that.

I've seen many examples of people very much in favor of free markets, who base their suppport on economic theory, yet when asked do not know how many assumptions such theory requires or how the model can break down if those assumptions are not met. To people like that a book that talks of the virtues of free markets but doesn't make explicit the conditions under which free markets work best can be counterproductive.

I am not an economist. I only know what I know, and some days that seems like quite a short list. I'm half way through EiOEL. DeLong's mistake is to make of it more than it is.

It's meant, I think, as an introduction to the topic of 'Economics' and the author's take on it and it does a good job of that. If you want to know more, then you'll have the curiosity to do so.

To delve into who Keynes was, and is, would make the thing a much longer volume and subvert the author's intent.

This isn't dishonest, it's consice. If I wrote a small volume for the laymen on the basics of IT that tells the reader how to launch notepad, and mentions there are other text editors called VI and EMACS but fail to go into eye-glazing detiail on their history and the warfare between the two classes of text editor user, you'd thank me, not revile me.

VI, EMACS, yes the debate is important in many ways, but no one outside the profession really gives a damn.

I just scrolled to the middle of the book where it discussed "spread the work" policies. He examines the effect of shorter workweeks and their overall negative consequences. Mr. Hazlitt wrote this in the early Forties. Sixty years later the French Assemblee Nationale is about to repeal the 35 hour workweek law, only after about 4 years since it was first enacted. No new jobs were produced, which ran counter the main reason for its legislation: boosting employment. This pocket book could have saved French lawmakers a lot of trouble, but I'm convinced that the elites in French government would have ignored it anyway even if forced to read it. I could not help but giggle while reading that section, wondering how something so obvious never came across France's finest minds!

Hazlitt wrote EIOL in 1946. We'd just weathered not only a war, but a decade long depression. Hazlitt knew how disastrous FDR had been for the economy, and had been saying so all during the New Deal. History shows he was right.

As for J. Bradford, he misstates Say's Law in order to refute Hazlitt. The correct version of it is: Supply is (implicit) demand. In order for it to hold, monetary policy has to be sound, and prices have to be free to adjust rapidly.

During the New Deal there were all kinds of crazy minimum pricing laws, labor and business cartels, and tax increases, that can be laid at the feet of FDR. All of which kept the U.S. mired in depression until WWII came along. Hazlitt was on the correct side of the debate all along.

hi all,
please, the point i raised earlier is important to note: this is a book that holds that the classical model really works. we can all agree that it does in the long run... but how long is that long run. given enough time, the us economy will come out of a depression like that in the 1930's. we can argue whether or not such policies are successful, but the question i ask is this: are you really prepared to sit back and watch the economy slowly adjust itself out of depression for 4 or 5 years with 20% u/e? if so, than i think the text makes total sense on its own merits.

as for keynesian policies, an examination of japan (and germany) in this time period shows that large influxes of government spending and private investment can help mitigate the effects of such an economic event.

Cas & GT,

First of all Hazlitt can only be called a classical economist if one calls everybody a classical economist. Hazlitt believes in the marginal theory of value and pricing for example. That is the hallmark of all non-classical economics whether it is Keynesian, various types of contemporary neo-classical economics (which encompasses most contemporary economists, including Keynes’ heirs Samuelson and, yes Brad Delong) or the Austrian school. Marxists still cling to the classical approaches to value, but few others.

Also, as to whether the classical model worked, of course not and Hazlitt would agree. At least if you mean classical economics if applied (the closest might be 19th century Britain, which in relative terms is a rather inspiring example) would eliminate poverty, recession or any other evil. Of course neither has any other form of economic policy. As an analytical tool it was pretty good, but the marginal revolution improved upon it dramatically.

As to Hazlitt’s beef with the Keynesian revolution, it seems to me his intellectual heirs (including Brad Delong) adopt more and more of Hazlitt’s philosophy as time rolls on.

If your issue is that Hazlitt's prescription for the great Depression or for managing contemporary economic fluctuations is inadequate, then he would agree, he would say though that Keynes has proven just as inadequate and has come at longer term costs. Disagree with it if you want, but Brad’s response that the book is inadequate at what it tries to accomplish is rather small of him.

It also should be pointed out since the commenters at Brad's site are so keen on pointing it out as well as you, that Hazlitt, as well as Keynes friend and intellectual combatant, Hayek, would have understood Keynes advocating some of his policies in an emergency for social stability and as a counterweight to short term disequilibria. Hayek has explicitly acknowledged this. However, they denied it was useful for long term growth and full employment. They would have argued that reducing barriers to wage and price adjustment were the long term cure. They viewed Keynes' policies as merely a palliative and as embraced by FDR (who cannot blame his policies on Keynes) actually restrictive in allowing the adjustments necessary to restore employment and higher levels of production.

Therefore Hazlitt's views are not as different from contemporary economists about labor and productive rigidities as is sometimes implied, he just was arguing at the time that such rigidities should be addressed, whereas now, as then, most economists have given up, preferring to find ways to work around them in politically popular ways, or ways that suit them ideologically. Maybe that is reality, but it is different from saying that the principles espoused do not work. A simple example is comparing our market economy to Western Europe's. The heirs of Keynes have found that their short term cures have led to levels of idle labor and unproductive assets as a norm that require a severe recession in America to reach. Luckily we have not had one since 1982.

Hazlitt and Hayek predicted that such a pattern of higher peaks and higher lows in these factors would occur over time (along with inflation) if Keynes’ and his heirs policies were followed. So if so-called classical views are inadequate to handle avoiding recession, what are we to make of policies which have created such high levels of unemployment and lost production in times when there is no recession? I’ll take our last recession over Europe’s ongoing issues any day. Once again we are hearing even Liberal-left economists complaining of the same issues in Europe which Hazlitt railed against so long ago.

There is no perfect world. The dreams of Samuelson, Phillips and a host of others that they could manage their way around the economic breakers with a few simple macroeconomic tools have evaporated. In the end microeconomic issues are the fundamental determinant of unemployment, not withstanding the possible short term benefits of macroeconomic levers in a crisis. A monetary collapse (as in the depression) may require a monetary stimulus, but whatever stimulus you apply it will not be effective without removing the obstacles to adjustment. The 1930’s are a perfect illustration of that.

As for Hazlitt’s lack of explaining his assumptions, I think that is very unfair. Now the book doesn’t try to answer DeLong all these years later but let us see what Brad is getting at one at a time.

“We all know that the market system is an amazing decentralized social planning and allocation mechanism,”

“if externalities are small,”

Given the topics addressed by Hazlitt this is out of left field. While we are at it why don’t we ask him why his book doesn’t address the clothing choices of Berkeley professors? However, let me make a couple of responses that Hazlitt might if it were really relevant to what Hazlitt was dealing with in the book. What evidence does Brad have that externalities are dealt with by government effectively either? Government attempts to ameliorate such externalities cause all kind of unforeseen problems and externalities of its own. He also might argue that such externalities can be addressed by government when it makes sense, preferably through market based incentives. Funny enough the environmental movement is now beginning to adopt that view, as has Delong at times. It is unfair to act as if Hazlitt is an anarchist who saw no role for the state.

"if returns to scale are in general diminishing,"

Delong will have to do better than this. Talk about assumptions. First he has to prove it matters to Haslitt’s case. I say it doesn’t, but I cannot really rebut the argument because there isn’t any. Second, even if it did matter, who has ever been able to prospectively (or for that matter, with any validity, retroactively) decide if returns to scale are diminishing or not? They are increasing and decreasing at firms all the time as new processes are discovered, deployed or naturally arise. That is precisely why we have markets, to discover in concrete circumstances what processes work best. In fact, given two different firms with different methods but providing the same service, one might find scale an advantage, another not. There is no one best way.

"if we are happy with the distribution of wealth and the concommitant (sic) distribution of economic power it gives rise to,"

Once again we have some huge assumptions here. First whether a distribution of wealth is even an issue if it provides more for those at the bottom. Second, that the cost to the poor and others of a redistributive program is worth the benefits. Third, that such managing of the distribution can even be done or that there is any “we” that a government or even Delong can possibly pretend to represent, given no distribution would satisfy any particular group of people. Fourth, that the power of political groups is somehow more benign than of wealth. Especially since political power for the wealthy is often a product of making economic decisions a political act in the first place.

Now I cannot say what the right distribution is, and neither can Brad, but Economics in one Lesson cannot be critiqued as not addressing a question beyond its scope, because Hazlitt would have certainly said he had no idea what the best distribution would be. He also would have said that interfering with the price mechanism in such an endeavor would risk creating unemployment. That may be wrong, but it is hardly an indefensibe position.

"and if Say's Law holds--if supply does indeed create its own demand, and we don't have to worry about large-scale unemployment and deep depressions."

Umm… it seems to me that the book to a large extent explicitly is devoted to educating people to endorse policies making the economy more likely to respond to Say’s Law. I’ll leave aside that Brad either doesn’t understand Say, is misrepresenting Say, or is just sloppy as Patrick Sullivan has pointed out. Delong’s argument seems to be that since we have recessions, Say’s Law cannot hold, and therefore any attempt to make the economy more flexible so that it can respond to Say’s Law are futile. A rather circular argument. It is also one that I think Keynes’ himself would have snorted at. Of course I think Keynes’ was trying to justify short term measures by dressing things up in a new theoretical outfit. I don’t think he really believed it all himself. Just my own opinion, no need for anybody to go ballistic.

Once again, I think even Brad argues that Western Europe’s labor and other markets are too rigid. If he feels that way it implies he believes that Say’s Law has an effect. I hope for Europe’s sake it does because otherwise there are no answers. Running deficits, raising social spending or inflating the currency are in ill repute because they have been done already, so what is left? Of course Brad is building a straw man. Hazlitt does concern himself with unemployment and depressions. Brad’s issue is that he has a belief in his macroeconomic tools will do what he wants. Maybe he is right, but this is an inadequate critique of why.

This has been rather hastily dashed off and I am simplifying, but then so is Brad.

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