Harold Demsetz’s essays in From Economic Man to Economic System are an interesting read. They range over a few subjects, including the selfish gene versus the selfish economic agent, and demographics. But most circle around the idea of property and markets, and Coase’s analysis of externalities on the one hand and firms on the other. Demsetz’s main aim, in my reading, is to argue that the proper scope of markets is wider even than in the free-market interpretation of the Coase theorem. It will be familiar territory to many readers. But there was one point that I’m mulling over, which is that transaction costs don’t determine what happens inside the firm versus in the market – rather, they may change the way firms are structured (more or less verticallyintegrated) but mainly affect the division between household and ‘economic’ production. “Zero transaction cost maximizes the importance of firms in the economic system by raising the percentage of total output of goods produced withing specialised production units as compared to the percentage  produced within self-sufficient households.” This is wrong – there are other reasons for firms to exist – but interesting. Another reason why economic analysis needs to bring household production fully into the picture.

Thanks to a long train journey, and despite the fact that one of them was packed with boozing and singing Newcastle United supporters, I finished two books: the 25th anniversary edition of The Economist’s View of the World and the Quest for Well-being by Steven Rhoads, and Brett Frischmann’s 2012 book Infrastructure: The Social Value of Shared Resources. This comment is about the first of these, a book I was surprised not to have heard of before: not only do I read a lot of books about economics, but it was also a best seller.

It’s easy to see why it did do well. It’s well-written, clear and jargon-free. It starts with basic concepts that become second nature to an economist but others find somewhat unnatural: opportunity cost, marginalism and the role of economic incentives. The book goes on to a section about government and markets, the economic concept of efficiency (ie. Pareto optimality and the welfare theorems) and then equity and externalities. It ends with a section on the ‘limits to economics’, namely well-being, non-fixed preferences and political economy. This is all key basic material and useful concepts to non-economics people taking public policy course.

Having said that, I didn’t much like the book because it equates ‘how economists think’ with ‘they think markets work best, governments fail except where there are specific externalities to fix’. I spent the first two parts of the book (not literally) shouting at it: no, that’s the Econ 101 version! That’s not how we *really* think (or at least not all of us). I liked the third part much better but would argue that economics has much to contribute beyond these specific ‘limits’.

To give a specific example, there’s a section in the first chapter, ‘Engineers versus Economists’ which argues that engineers, well, over-engineer big civil projects, whereas economists armed with cost-benefit analysis prevent this wasteful spending – or ought to if only political vanity didn’t get in the way. This is just too over-simplified to be useful to public policy students. First, for all the compelling evidence of over-budget and late big projects, infrastructure is necessary so just saying no to engineers is useless. Secondly, politics rather than engineering alone play a big part in building concreet white elephants. This is a subject one can’t discuss without political economy. I teach this each year and would ask my students to go out of their way not to read this section.

So all in all, some good things about the book but not one I’ll be using. Needless to say, I like my own text on this area (Markets, State and People) better 🙂

Like buses, books about the state of economics seem to come along together. Tomorrow sees the publication of my latest, Cogs and Monsters: What Economics Is and What It Should Be – more on that tomorrow. Do join the launch event if you can.

Meanwhile, I read Steve Keen’s recent book The New Economics: A Manifesto. His focus is far more on macroeconomics than is mine, and some of his arguments (about macrodynamics and Minsky’s insights) will be familiar to readers of his earlier book. This new book also covers the environment: its critique of the Nordhaus approach to integrated modelling, that led to a downplaying of the costs of delaying action against climate change, will find hearty agreement among the environmental economists I know. However, even very mainstream people like Daron Acemoglu have joined the call for a more urgent economics of climate change.

I like the book, which is aimed at students embarking on an economics degree, to open their eyes to the limitations of what they’re likely to be taught. Yet having said that I agree with a lot of the arguments in The New Economics, I don’t share the sense that a monolithic ‘mainstream’ of neoclassical economists is determined to resist change becuase they are bad or stupid people. But then, I don’t regard myself as heterodox, and I’m always keen to point out how much brilliant work is going on in the subject, albeit generally in applied micro, because there’s a lot of misundertaning about what economists generally do. My diagnosis is a combination of not stopping to think and institutional inertia (top 5 journals, promotion criteria, disciplinary silos etc.) But more on my book in tomorrow’s post!