There will be few moments in my life as exquisite as Wednesday when Peter Costello* came up to the University to launch the second edition of my Free Market Economics: an Introduction for the General Reader. It was a rare moment when the political side of my life, the academic side and my recognition of the importance of classical economic theory were brought together all at once, and was a moment I could share with my friends and family.
I may sometimes give the impression that the book is mostly about Keynesian economics and macro which is not the case at all. That is why I started it out, but the oddest thing for me was to find that as I wrote each chapter, that I harboured views that are far outside the standard textbook treatment. This starts even before we get to supply and demand, but I promise you this, by the time you finish with supply and demand you will know you are in a different economic world. Of course, there are demand-side market forces that limit the price that can be charged for a product, and forces on the supply side that put some kind of lower limit on the price. But the notion that there is a single equilibrium price for a product where two lines cross on a two-dimensional plane is unsupportable by even the most casual empiricism. As I point out to my classes, the price of a cup of coffee, starting from the $1 at the 7-11, to prices four and five times higher that are charged, all within a mile of the front door of our building, ought to make you appreciate that there is something else. I do teach the traditional S and D analysis, but my students also are made to understand that prices are not set by these two curves, but by entrepreneurs who are making decisions about their optimal pricing strategy, given all of the forces of the market that surround them. And most importantly, I do not let them forget that the information in a demand curve can never be known by anyone, ever. It is strictly for teaching purposes. Entrepreneurs in the real world have to work these things out for themselves in real time.
But if I have a villain on the microeconomic side, it is the MR=MC analysis and diagram. If economics had gone out of its way to find some means to cloud minds about what goes on in markets, I don’t think they could have come up with anything worse.
I teach Keynesian economics, of course, but I won’t teach that. You can find it discussed in my book, but it’s in an appendix. Over the years of teaching this diagram and the explanations that surround it, I found that after going through markets and then supply and demand, you would come to this and stop a class cold. Eventually some could draw the diagram and some might have seen the point, but there would not have been many. I do, of course, teach marginal analysis, but not like this. If you would like to see how I do it, as just part of the way this book is different from any economics book you know, Quadrant Online put up a few pages of the book under the heading Margin of Success.
As I said at the end of my presentation, there are three features of the book that I stress over and again: the role of the entrepreneur, value added and the crucial importance of uncertainty. Each is part of what must truly be understood by marginal analysis: entrepreneurial decision making in the face of the unknown future. And the point I make about the entrepreneur, as I said on the night, is that we now talk about market forces and the invisible hand, but the reality is that there is only one force that matters in a market economy, and that is the entrepreneur. And I don’t mean entrepreneur as in someone who innovates and causes change. I mean entrepreneur as in the captain of a ship in the midst of a storm a thousand miles from land.
* For non-Australians, Peter Costello is the nearest equivalent we have to Ronald Reagan. He ran the economy for eleven of the best years economically this country ever had. Not only was the Asian Financial Crisis a non-event when every one of our major regional trading partners was in recession, but we ended up with 5-6% at the same time. And not only budget surpluses year after year, Australia was, until Labor took over, the only country in the world that had ZERO DEBT! The momentum given to the economy by Costello meant that we travelled through the GFC with hardly a ripple. Our problems have come since due to the debts and deficits Labor piled up. We will never see zero debt again in anyone’s lifetime, and will be lucky even to see our budget balanced any time this side of 2025.