David R. Henderson  

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One of my former students, a student who performed very well in my class and has kept in touch on economic issues, sent me a link to John Cassidy, "A New Way to Learn Economics," New Yorker, September 11, 2017.

In the piece, Cassidy is very gung-ho on a lengthy e-book called The Economy. It is published by the Core team and is being used in some economics courses. Its main virtue--and here I agree with Cassidy--is its price: zero. The book has lecture outlines, graphs, interviews, and questions for the reader to test his or her understanding.

I don't have time to review it in full but I did check a few things. Do not regard this as a complete review. These are quick impressions.

The Big Positive

The biggest virtue I've seen so far is the hockey stick. It shows just how dramatically standards of living have improved since 1800. The graph, if you don't read it carefully, understates the growth of living standards because, as the authors point out, it's a ratio scale. That is, going from a per capita income of, say, $250 to $500 gets the same vertical increase as going from $500 to $1,000 even though the latter increase is twice the former.

Oddly, though, even on this big positive there's a negative. The authors take only two of the three important things from the graph. They write:

. For a very long time, living standards did not grow in any sustained way.
. When sustained growth occurred, it began at different times in different countries, leading to vast differences in living standards around the world.

What's the unmentioned conclusion and, in my view, by far the most important? Not that for a long time living standards didn't grow but that, almost everywhere living standards have exploded.

Three Negatives

1. In discussing private property, the authors write:

PRIVATE PROPERTY
This means that you can:

enjoy your possessions in a way that you choose
exclude others from their use if you wish
dispose of them by gift or sale to someone else ...
... who becomes their owner


I didn't notice anything wrong with that. But to test myself, I took the quiz. And guess what? This economist, with a Ph.D. from a top institution at the time (UCLA) and who has taught for almost 40 years, got the answer wrong.

Here was the question:

Which of the following are examples of private property?

computers belonging to your college
a farmer's land in Soviet Russia
shares in a company
a worker's skills


I suggest you figure out your own answer before reading what follows.

I answered that all but farmer's land in Soviet Russia were private property. (I was assuming that "your college" means a private college, as, possibly, the authors assumed also. If it was a state university, it's hard to say that the computer is private property.)

Wrong, according to the authors. A worker's skills are not his property. Why? It goes back to the definition. He can't sell his skills or give them away. But that makes me challenge their definition. I don't think an essential part of private property is that one be able to sell it or give it away.

2. The inflation section is horrible.

First, the really horrible one: it does not even mention the Friedman insight that "inflation is always and everywhere a monetary phenomenon." That is, according to Friedman, there has never been a sustained inflation without a prior increase in the money supply. Even if the authors disagree with this, they should mention it. Maybe they can find counterexamples here and there, but they're pretty rare.

What's the authors' explanation of inflation? Are you ready? Here it is:

Inflation arises from conflicts among economic actors, when they are powerful enough that their claims on goods and services are inconsistent.

Second, in analyzing the effects of inflation on debtors and creditors, fails to distinguish between anticipated and unanticipated inflation. The authors write:
More generally, using the same logic as we used when discussing the government's debt in the previous unit, inflation means that:

Borrowers with nominal debt will benefit: Those with mortgages on fixed nominal interest ratenominal interest rate The interest rate uncorrected for inflation. It is the interest rate quoted by high-street banks. See also: real interest rate, interest rate.close loans, for example, will benefit from inflation, because the debt stays the same in nominal terms, and so becomes smaller in real terms.
Lenders with nominal assets will lose: Banks or others who have loaned money at fixed nominal interest rates will lose, because when the sum is repaid it will be worth less in terms of the goods or services it can buy. Very high inflation will wipe out the value of nominal assets, which happened in Zimbabwe in 2008-2009.


But if, say, a 4% inflation rate is anticipated when lenders and borrowers enter contractual agreements, and then the 4% inflation rate actually comes about, there is not a wealth transfer from lenders to borrowers.

Notice that they mention Zimbabwe. That should have keyed them to mentioning the monetary cause of Zimbabwe's inflation, and then to looking at monetary policy more generally.

3. The section on the Great Depression was the worst part I looked at. It could have used some wisdom and data from Milton Friedman and Anna J. Schwartz's classic book, A Monetary History of the United States, 1867-1960. They don't even mention it and, not surprisingly, therefore, don't mention the 30% drop in the money supply that Friedman and Schwartz documented. At least I couldn't find it. The authors appear to judge monetary policy during the Depression solely by interest rates. This flushing of Friedman and Schwartz down the memory hole is, in my view, the biggest weakness of the book I've seen so far.

HT2 to Tom Pilkerton.


Comments and Sharing


CATEGORIES: Economic Education




COMMENTS (14 to date)
Jon Murphy writes:

Wrong, according to the authors. A worker's skills are not his property. Why? It goes back to the definition. He can't sell his skills or give them away.

Isn't that what one does when one works or volunteers?

Are you not giving away your personal skills in economics (and do I not receive/benefit from them) when I read this blog?

Do I not sell my labor (my skills) when my neighbor pays me to rake his lawn?

I agree; their definition seems skewed, in particular toward rivalrous, excludable, and physical goods, which seems to me to be problematic.

David R Henderson writes:

@Jon Murphy,
Isn't that what one does when one works or volunteers?
You sell or give away the product of your skills, but not the skills themselves.
I agree; their definition seems skewed, in particular toward rivalrous, excludable, and physical goods, which seems to me to be problematic.
Right.

Peter writes:

I was going to send you this very thing for comment, David, but was certain you were already in the know.

Juan Manuel Pérez Porrúa Pérez writes:
Wrong, according to the authors. A worker's skills are not his property. Why? It goes back to the definition. He can't sell his skills or give them away. But that makes me challenge their definition. I don't think an essential part of private property is that one be able to sell it or give it away.

Isn't this trying to reduce everything to property rights? The power to dispose of property by sale, gift, etc. is essential to the functioning of the property system, because this is the way peaceful (and presumptively welfare and value improving) transfers of property are effected. Imagine that you own a plot of land near a lake, but you have no capital to build a bed and breakfast. If you can't sell or lease the plot it might go undeveloped by someone who does have the capital to exploit that opportunity.

I would classify the right to work, to use that expression, as part of contract rights. That's the way some 19th century lawyers conceived the question. The same principle of voluntariness applies, when a worker contracts with an employer to work for him.

Iskander writes:

David, my Econ 101 course used this textbook and I'm glad you agree with me that the inflation/monetary policy part was poor. The book also has some political bias. Mankiw's book is a much better introduction. I found the mathematical reference sections good for my very first introduction to utility curves etc but I would not recommend it.

Mark writes:

Jon Murphy:

"Do I not sell my labor (my skills) when my neighbor pays me to rake his lawn?"

Do you? Wouldn't it be more appropriate to say you lease your skills?

Wouldn't the equivalent of a permanent sale, applied to one's skills, be to voluntarily sell oneself into slavery in perpetuity?

Indeed, even the sale of a fixed number of hours of labor (or the completion of a specific task) is legally limited compared to material property. If I sell a car but fail to deliver it, courts can order the car seized and transferred to its rightful owner; but they won't (perhaps with rare exceptions) compel one to perform unfulfilled contractually agreed upon labor (though they could still demand recompense be paid as a substitute).

Though I also think it's not necessarily true to say something isn't one's private property because one can't sell it. Historically it wasn't uncommon for the sale of certain land outside of one's family to be forbidden, because one's progeny were believed to be entitled to it as inheritance; its use and the sale of gift of its fruits, however, were not limited. Obviously there are gradations of private property.

Micke writes:

If the question was:


X arises from conflicts among economic actors, when they are powerful enough that their claims on goods and services are inconsistent - what is X?


would "inflation" strike anyone as a good answer? I wouldn't have come up with it even if given ten tries.

Jon Murphy writes:

@Mark

Do you? Wouldn't it be more appropriate to say you lease your skills?

I see the point you're making here (and Prof. Henderson made a similar point earlier to me). I don't quite agree, but I'm having a hard time formulating my response, which is why I haven't responded. You raise a good point.

Though I also think it's not necessarily true to say something isn't one's private property because one can't sell it...

This is a good point. If you haven't already, check out Richard Schlatter's book Property Rights: The History of an Idea. Unfortunately, the book is out of print and hard to find, but it's a great concise history of property rights and their evolution from Ancient Greece to the modern (in this case, the 1950's) world. He raises the very issue you discuss here and discusses how rights were developed to limit abuse by property owners. In other words, rights didn't say what you could do with your property, but what you couldn't. So, excluding things with un-saleable qualities actually goes against the original purpose of rights!

Miguel Madeira writes:

"I don't think an essential part of private property is that one be able to sell it or give it away."

But, if not, why the "farmer's land in Soviet Russia" (I imagine that this is about the individual plots of the kolkozians) is not also private property?

The Other Mark writes:

James Madison on Property,1792:

"This term in its particular application means "that dominion which one man claims and exercises over the external things of the world, in exclusion of every other individual."

In its larger and juster meaning, it embraces every thing to which a man may attach a value and have a right; and which leaves to every one else the like advantage.

In the former sense, a man's land, or merchandize, or money is called his property.

In the latter sense, a man has a property in his opinions and the free communication of them.

He has a property of peculiar value in his religious opinions, and in the profession and practice dictated by them.

He has a property very dear to him in the safety and liberty of his person.

He has an equal property in the free use of his faculties and free choice of the objects on which to employ them.

In a word, as a man is said to have a right to his property, he may be equally said to have a property in his rights".

Aaron McNay writes:

I would agree that the section on the great depression is pretty bad. However, I would say a couple of things.

1. David says that it does not mention "A Monetary History of the United States, 1867-1960." However, the monetary policy section of the "Policymakers in the Great Depression" 17.3 section does provide a chart (Figure 17.8) that does reference Friedman and Schwartz's "Monetary Trends in the United States and the United Kingdom, Their Relation to Income, Prices, and Interest Rates, 1867–1975." This section also does say that monetary policy during the depression was contractionary and contributed to the depression. Again, I think this section does not spend enough time talking about monetary policy, and should at least mention the supply of money when talking about monetary policy instead of only interest rates. However, I am not sure this particular issue is quite as bad as David makes it sound.

3. While the monetary policy section of this chapter is still pretty bad, I would argue that the fiscal section of 17.3 is just as bad. For example, federal outlays increased by nearly 30 percent from 1929 to 1931, while the federal budget went from a surplus of $600 million (1940$s) to a deficit of $428 million (1940$s). However, the authors say that government purchases hardly changed and that the federal government ran a small budget surplus in 1931. The authors also say that the New Deal helped accelerate the recovery from the depression, when I think there is a considerable bit of published work done that calls this into question, or outright refutes it.

Overall, reading the several of the sections that David highlighted, I get the impression that the authors are reporting the state of economic knowledge as it was sixty years ago, while repeating "common knowledge" statistics in several areas that are not actually correct.

Jack PQ writes:

A great free intro econ text is Preston McAfee's. It's smart and really teaches the economic way of thinking, instead of just graphs and definitions. Unfortunately, and maybe because he used it to teach Caltech undergrads, it is pretty math-heavy for a first course. Granted, the math is not hard, and it's not crazy to require calculus 101 before econ 101, but it's not typical.

David Seltzer writes:

Worker's skills are his/her property as he/she has sovereignty and ownership of his/her person. Anything that issues from that person is their property. Self ownership, hence liberty are core!

David Leach writes:

A worker doesn't sell their skills they sell their time - it is the time that is private property. If they work for someone for four hours at the end they will have lost that time but they will still have their skills. In fact, due to the experience gained their skills could be great at the end. The value of their time reflects the desirability of the skills they possess - the same way the value of piece of land depends on its location. In the same way, you buy and sell the land, you don't buy and sell the location.

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