Saturday, July 11, 2015

John Quiggin: Clarifying Or Confusing?

My second favorite liberal, John Quiggin, recently shared another draft segment from his upcoming book... TISATAAFL.  Contrary to market economists... Quiggin argues that there is such a thing as a free lunch.  The basic problem with Quiggin's argument is that he incorrectly defines the original saying.

When an economist says that there's no such thing as a free lunch... he's saying that everything has an opportunity cost.  But "everything" doesn't truly mean "everything".  "Everything" means every allocation of a resource.  Every allocation of a resource has an opportunity cost.  This is fundamentally true because there isn't a single resource that can be allocated only one way.  Every resource can be allocated a gazillion different ways.  Because there isn't any resource that can be in two places at the same time, or used and unused at the same time...allocating a resource one way means that you must sacrifice the opportunity to allocate that same exact resource another way.

In theory... the fact that opportunity cost is all about allocations should be a given because economists, by definition, are all about how resources are allocated.  Economics isn't about what people say, it's about what people do.  And doing is allocating.

For example... right now I'm allocating my time to writing this blog entry.  Is there an opportunity cost?  Of course!  I'm sacrificing every single alternative use of my time.  Perhaps if I wasn't allocating my time to this blog entry I'd be allocating my time to attaching epiphytes to trees.  But here I am instead!  Evidently... right here right now... in this unique set of circumstances... a hot lazy summer sunny Saturday SoCal afternoon... my valuation of x is greater than my valuation of y.

x > y

This is really straightforward.  Yet, Quiggin gets this really wrong...

In this section, I’m working on Lesson 1, leading up to the point (my restatement of what’s usually called the First Fundamental Theorem of Welfare Economics) that an ideal competitive equilibrium is one in which there are no unexploited potential gains from technical improvements or mutually beneficial exchange. For reasons I’ve spelt out already I don’t want to use the term “Pareto-optimal” to talk about this. I also want to confine “efficient” to its normal meaning of “technically efficient” and avoid the common economist practice of extending this to cover various definitions of “market efficiency”. So, I’m talking about “free lunches” or, more formally, benefits with no opportunity cost.

According to Quiggin, there is such a thing as a free lunch because there are some benefits that do not have an opportunity cost.  Benefits that don't have an opportunity cost?!  Ack.  He then goes on to build his argument on top of this extremely flawed foundation.  The logical result is a continuation of confused comments.

So Quiggin is confusing... but he is in the right ball park at least!  Which is a big part of the reason that he's my second favorite liberal.

There's a lot more that I could say on the subject.  But circumstances have changed.  The sun went down... and the drought tolerant epiphytes that are growing on my trees are pretty thirsty.  Therefore...

x < y

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