The best books on Learning Economics

You’ve chosen books that are helpful for learning about economics, but to be clear: these are not textbooks for students studying economics. They’re books for the intelligent, general reader to learn what economics is about—and what the important issues are—without doing any actual economics. You’re a strong believer that’s possible, am I right?

Absolutely. In one of his books, Richard Feynman, the physicist, talked about how his subject, quantum electrodynamics, sounds incredibly scary, but the most difficult part is doing the calculations. You need a huge amount of skill to learn how to make those work. But understanding the principles is comparatively simple. The same is true in economics. You need an economics degree if you want to answer a question like, ‘If we add 10 points to the marginal tax rate, how much money will we get?’ But you don’t need one to understand the basics of what’s going on.

When you’re reading newspapers or watching TV: as an economist, do you feel that most people know what economics is about?

No, and a couple of the books I’ve picked make the point that the people you see on TV saying they’re economists aren’t that much different from the guys in white coats who used to be on ads for patent medicines. They mostly have some kind of economics qualification, but they’re basically there to pitch for a bank or similar institution. They’re there primarily to get the bank’s name in front of the viewers and secondarily to push the political agenda that the banks typically have. So they’ll comment on stuff that no serious economist would comment on—like, why did the stock market go up or down today—simply in order to be there on the TV.

You’ve given your book the title Economics in Two Lessons, suggesting that people can learn what it’s about quite quickly. Is the basic argument of the book that economics is first and foremost the study of opportunity cost?

Yes and certainly if I were organizing economics education, the first year course would be all about that. For the majority of students, that’s all they’d get. They wouldn’t get the graphs and stuff that they now get, which they forget straightaway. They’d learn to understand the principle of opportunity cost, and then those who want to go on and become professional economists would learn about supply and demand intersection, welfare triangles and all that, and then the calculus version of those: all the stuff you need to actually do work as an economist.

But if you understand opportunity cost—that the price of something really is what you have to give up to get it—you’re further along than the vast majority of economics graduates and quite a few professional economists.

Can you explain a bit more what opportunity cost is—maybe give an example?

If you look at the decision to study a degree at university, in most countries there’s a cost: a fee you have to pay or a debt you have to incur. But the real opportunity cost is the best available alternative to you. It could be going out and getting a job that doesn’t require a university degree or doing some other kind of training. It’s giving that up that’s the opportunity cost. That cost, typically, is much greater than the monetary cost you might be looking at taking on. So the opportunity cost of anything, for an individual, is what the individual has to give up to have it.

“If you understand opportunity cost—that the price of something really is what you have to give up to get it—you’re further along than the vast majority of economics graduates and quite a few professional economists”

In addition, though—and this is the second lesson of my book—a lot of the time your choice affects other people. The opportunity cost of your choice is what you and everybody else have to give up in order for you to make that choice. If I decide to drive down to the shop, I have to pay for the petrol, I have to put the time in to do it. But I’m also taking up space on the road that may seem more crowded for everybody else. That’s what we call an ‘externality’ in the trade. The crucial point is that some of the opportunity cost of my decision to drive is borne by me and some of it by other people. It’s the social opportunity cost that ultimately matters.

And so the books that you’re recommending for learning more about economics: do they all see the subject in this way?

They’re all influenced by it, but they take different lessons away from it and place different emphases on different parts of it. So the first book I suggest is Milton Friedman’s Free to Choose: that book very much takes the view that what matters is the individual choice. The problems of people’s interactions with others can all be solved reasonably straightforwardly without any real interference with individual choice and so the best thing governments can do is back out and leave people alone to make their own choices. Most of the other books I’ve picked criticize that view in various ways.

Yes, so let’s start by talking a bit more about Free to Choose, which came out in 1979 and was based on a TV series: Milton Friedman went around giving public lectures. The book is co-written with his wife, Rose. Free to Choose is a polemic but it’s quite interesting and persuasive, isn’t it?

It is. Of the people who take that view—it’s not my view—I find Friedman very much the most attractive. He’s somebody who genuinely believed that what he was promoting would be good for people, that all of the problems that critics pointed out could be met with a modicum of goodwill—which wasn’t really forthcoming when the policies he advocated were actually implemented.

I could have recommended older books, like the work of Keynes, for example. Friedman isn’t talking much about the macroeconomy, unemployment, inflation and so forth in this book. But he rose to prominence because he was central to the debates over macroeconomic policy against the Keynesians in the crisis of the 1970s. That’s what gave him the platform to push the idea that people know best what they want—which is something that most of these books agree on— and the more controversial idea, that left to themselves markets will mostly deliver the best outcome and government’s attempts to make things better will typically not succeed and indeed make things worse.

What’s so remarkable about the economic solutions the Friedmans are pushing in the book is how they link them to the word ‘freedom.’ They write, “economic freedom is an essential prerequisite for political freedom.” There’s talk about opting either for the “road to serfdom”—a reference to another book—or “a rebirth of freedom.” The chapter on free trade is called “The Tyranny of Controls.” They’re really trying to push buttons and equate their view of how the economy should work with political freedom of some sort.

Yes, and of course that fell in a heap just a few years afterwards when Friedman and others advised the Pinochet government in Chile. Their economic policies were implemented in the total absence of political freedom. In a lesser way, the Thatcher government in the UK also undermined this notion that free market governments would also promote freedom in the ordinary sense of the term. Similarly, looking at countries like China today, the markets are there but there’s been no movement towards political democracy.

I think when people imagine what an economist is, they think it’s Milton Friedman or someone on the right who believes absolutely in markets. In fact, many academic economists are probably more left-of-centre.

As I said, a lot of people imagine economists are like the people you see on the TV making predictions and explanations that are obvious nonsense. Professional economists don’t have a brilliant record, but at least we’re better than that.

When it comes to the idea of opportunity cost, it’s something that is thought about very widely across the profession. It’s sometimes said that if you get a left-wing economist and a right-wing economist in a room with a whole bunch of other people, pretty soon the economists will be arguing against everybody else. That’s because economists have a particular language to discuss their disagreements.

“We’re in a state where we really don’t know very much about how the macroeconomy works”

But it’s certainly true—especially over the last 25-30 years, I suppose—that the dominance of the Friedman view, which was a phenomenon of the 70s and 80s, has ebbed. There was a time, in the wake of the collapse of Keynesianism, when views like Friedman’s were dominant within the economics profession, but most of the interesting ideas since the 1980s have come, broadly speaking, from the left.

Free to Choose is still an important book to read though, isn’t it?

What it argues for is some version of the idea of state capacity, which has come up recently in debates about libertarianism. In the absence of an economics training, when something goes wrong, your immediate instinct is, ‘The government should do something to stop this!’ Before you jump to that conclusion, it’s worth looking at the arguments Friedman puts up for why, for example, we shouldn’t restrict imports from other countries, or why we shouldn’t use conscription to ensure that there are enough people in the army. He makes all sorts of arguments like this, some of which stand up pretty well to scrutiny, others of which don’t.

Friedman’s problem is that he doesn’t pay enough attention to the caveats and qualifications, which we’ll see in some of the other books we’re talking about.

Next up on your list of books for learning about economics is The Death of Economics, which is by the British economist Paul Ormerod.

This is the only book on my list that focuses on macroeconomics—the area of economics that looks at things like unemployment and inflation and the economy as a whole. Mostly macroeconomists are not thinking about the process of going to work or buying and selling stuff, they’re thinking about the big macro numbers that people talk about on TV. What I like about Ormerod is that he points out just how badly the profession has performed in this field. When I was first doing the subject, we thought that Keynes had solved all the problems. Before Keynes came along, there were people who thought they had the answers. Later, Friedman and the critics overturned a lot of Keynes, but then their own policies didn’t work either.

So we’re in a state where we really don’t know very much about how the macroeconomy works. My view—and other people like Krugman’s view—would be that we had a pretty good demonstration in the last 10-15 years that the ideas underlying austerity don’t work very well. But there are still plenty of economists backing those ideas. Ormerod does a great job in alerting people to the fact that although lots of ideas are put forward very confidently in this sphere, the actual degree of support for those ideas isn’t as strong as you might imagine.

The weakness in his book is at the end: he has a bunch of ideas about chaos theory and butterflies and so forth. It’s interesting reading but doesn’t seem to make much of an advance on the previous stuff.

What the book emphasizes is that when the macroeconomy isn’t working well, when there’s lots of people unemployed and unemployed resources and so forth, arguments like Friedman’s, about how the micro economy is working and how particular markets are working, are also suspect—because we simply don’t know that prices are reflecting opportunity costs. And that’s a theme in my book as well.

It’s interesting that The Death of Economics was first published in 1994—it predates the financial crisis when a lot of those criticisms came up a lot.

It reads as if it’s much more contemporary than it actually is. I read it when it came out and I reread it just now to speak to you, and it stands up very well in terms of the criticisms he’s making. There really hasn’t been much of a shift in the areas he’s talking about, indeed we’ve had another round of back and forth. After the global financial crisis, Keynesianism came back in, it worked pretty well in my view, but it was pushed out by the European Central Bank, by the Republicans in the US and by the Cameron government in the UK. And so we went through this long period of depression apparently having learned nothing since the 1930s.

He criticizes orthodox economics as not being practical or rooted in reality. He writes something along the lines of, ‘not everybody can be a Malthus or a Ricardo, but we can at least try and copy them in trying to answer the practical questions of the day.’ He talks about economics ‘extolling esoteric irrelevance.’ Do you agree with these kinds of critiques?

If you jump ahead to the other books, what we’re seeing is a retreat from not only esotericism but also from idealized theories which, even if they’re not very complicated, simply assume away a lot of realities—like real business cycle theory. Most of the other books I’ve chosen are much more grounded in data and closer to the realities of the world than was the economics of the late 20th century that Ormerod’s talking about, though I should say there’s still plenty of pointless theory going on, particularly in the area of macroeconomics.

Are you a micro or macro economist?

I try and do a bit of both. I can’t really get into macro because it’s this closed literature, so I try and approach it from various angles, and arm myself with lots of mathematics in order to speak the language. In the macro, what I’m trying to do is support an old-fashioned Keynesian view with more modern arguments. It’s not a venture in which I’ve been incredibly successful, I have to admit.

Which book shall we talk about next?

I’ve picked two books about inequality, partly because I care about it, but also because they’re nice books. One is by Tony Atkinson, who passed away recently. It’s called Inequality: What Can be Done? The other is by Thomas Piketty, Capital in the 21st Century, which was a big hit a few years ago.

Atkinson has a traditional, public economics focus. He looks at what has happened in terms of inequality, how we measure it, what kinds of tax and welfare and other policies we could use to reduce inequality. Atkinson did a lot of the groundwork on this topic, because when he was first working on it in the 1990s it was quite controversial, just showing that the long increase in equality that had occurred throughout most of the 20th century was being reversed. That coincided with—and here I would say that it was a result of—the macropolicies of people like Thatcher and Reagan. So inequality, which had been declining steadily, started to rise in the 1980s and has kept on rising.

The second point that comes out in the same literature is that contrary to the views often expressed in a “the Third Way” context, this isn’t a case of equal opportunity but more unequal prizes. What we see is that as inequality outcomes increase, so does inequality of opportunity. In the US in particular, not only has inequality gone up a lot, but if you’re born into the bottom part of the income distribution, your chance of getting out of it is has been diminishing over time.

At Five Books we first did interviews about inequality, for example with Daron Acemoglu at MIT, about a decade ago. So there was quite a bit of focus on inequality from economists back then. Do you feel that everybody’s been convinced that it’s a problem now?

Atkinson had to do a lot of work just to show that inequality was in fact increasing, because these things can be measured in different ways: you can look at income, you can look at consumption, you can pick different starting and end dates. There was both a large world financial lobby that wanted to deny what he was showing and a bunch of people who sincerely didn’t believe that this was the story.

That fight has, I think, been won. Similarly, the idea that equality of opportunity offsets the inequality outcome has largely disappeared, particularly in the case of the US which traditionally viewed itself as a land of opportunity. If you look at the political right, there’s no one with that optimistic view. In its rhetoric, the right is appealing to the so-called ‘left behinds’ and people like that. It’s not appealing to people who say, ‘Look, just get out the way, government, so I can get rich.’ It’s saying, ‘You’re poor, you’re miserable and it’s because of those bad people who are taking what you should have.’

What’s interesting is how inequality is happening across countries and political systems. Or have social democratic countries in Europe been a bit more protected from it?

It’s certainly much worse in the Anglo-Saxon countries and within that, oddly enough, Australia has actually come out comparatively well, because we had a relatively progressive version of the Third Way. What we saw was a big increase in inequality in most of the English-speaking countries when nothing much was happening, while the long-running trend towards equality was still increasing in social democratic countries in Europe. That turned around after the global financial crisis, when we see that movement towards inequality emerging in Europe as well. And indeed it wasn’t even immediately after crisis, but only with the sovereign debt crisis and austerity. Piketty finds evidence of it in France, his third country, but clearly the problems were much more severe in the UK and US. That coincides with the fact the US and the UK moved much faster and earlier towards the free-market policies that Friedman was advocating.

So is there any consensus yet about what to do about growing inequality or a way forward to reverse that trend?

I think it’s fair to say there’s now a dominant view within the economics literature which is way to the left of what is politically feasible. So, if you look at the kinds of estimates that people like Diamond, Saez and others have done, most of them suggest the top marginal tax rate, admittedly on very high incomes, should be around 70%. Now, in the US context, that’s the kind of view associated with the far left, people like Alexandria Ocasio-Cortez. So views are that on the extreme fringe of party politics are very widely held within the economics profession. It’s true there are economists who aren’t happy with these views, but they don’t have very powerful arguments.

The title of Tony Atkinson’s book suggests he’s focusing on practical things that can be done about inequality. What else does he recommend?

So there’s a bunch of stuff on the tax side. On the welfare side, he looks at things like universal basic income, which is the hot idea on the left at the moment. Possibly the idea I like best in the book is ‘participation income.’ This is not an unconditional payment like universal basic income, but if you’re doing something useful for society, you can be paid for it, whether or not it’s a market job generating market income. If you’re going to volunteer at the local school, for example, or raising kids, potentially—as long as you’re participating actively in society, you can get paid for it. It’s an attempt to get beyond the opposite trend, which has dominated social policy over the last 30 years, which is driving people harder and harder to find jobs that often don’t exist.

Is there anything else important to mention in relation to this book?

The other thing I wanted to bring in is that there’s a nice term from an American political scientist, Jacob Hacker, which is ‘predistribution.’ So far we’ve talked about, ‘Well given the incomes people get out of the market, how can the tax and welfare system change?’ but there’s also a fair bit in Tony’s book, and more generally, about ‘what can we do to make the distribution of incomes coming out of the market more equal?’

These are things like reversing the decline of unionism. That’s easier to say than to do, but I think it’s very clear now, even to people like the International Monetary Fund, that the decline of unionism under the pressure of policies like Thatcher’s and Reagan’s—and reinforced in most cases by the Third Way—has significantly contributed to the growing inequality of market incomes, inequality within the wage distribution, and a decline in the relative share of labour. Changing that is the other part of the story.

Strengthening labour unions, you mean?

Yes. The other thing that has come out—and this has really developed as a theme more recently—is paying more attention to monopoly power and challenging that. This is the view that businesses that have monopoly power in their markets often also have ‘monopsony’—sole buyer power—over their workers. The world’s a long way from the free market with lots of employers bargaining with lots of workers that Milton Friedman implicitly envisages whenever he talks about these issues.

So Thomas Piketty has a new book out, Capital and Ideology, which follows on from Capital in the 21st Century. Is it the latest one that you’re recommending?

I was hoping to read it, but these bushfires are driving us crazy here, so I’ll stick with Capital in the 21st Century. Although it’s a long book, I found it incredibly readable. Much of it is about the re-emergence of the inequality of 19th century. We’re going back to those levels, and Piketty illustrates this marvellously with discussions of 19th century English and French literature and talks about Jane Austen and Balzac. I’m a fan of David Lodge, the academic novelist. In one of his books, the central character is an English literature lecturer and he explains how, in these books, the hero or heroine normally ends up threatened with ruin and disaster and the only escape routes are marriage, emigration, a legacy or death. Obviously in Jane Austen everybody’s moving these 5000 or 10,000 a year around the chessboard. No one is earning a living and the idea that if you were poor you might make yourself rich by just working hard and saving your money and perhaps investing it just simply doesn’t appear. That brings in, in much stronger focus, this theme of inequality of opportunity that I’ve been talking about. As we’ve moved to these big accumulations of wealth, the chance of breaking out of it becomes smaller and smaller.

Are Piketty’s books historical, then?

Capital in the 21st Century is more data-focused, because where Piketty came to prominence was developing data on the top 1% of incomes. That really did change people’s views of what was happening. Certainly, until I read his and other, related, research, I thought inequality was a problem of the professional classes, of which I’m a member, and that everybody in that top 10-20% of the income distribution was pulling away. I thought it was something of a copout to say, ‘Let’s just tax the rich.’ When Piketty gets into the data, you really see that the metaphor is peeling an onion: the top 10% has done better than the other 90% but the top 10% of them, the 1%, has done much better again. The professional classes have held their own but not really gained much, and within that 1%, the top 0.1% has done really well and so on and so forth until you get to the 26 people who own more than the bottom three billion.

He mentions in Capital and Ideology that the book is based on the World Inequality Database, which he runs with a number of colleagues—in case anyone is interested in looking at some of this data.

Yes, this is still being fought about, to some extent, but the basic message is now pretty generally accepted, it’s very difficult to avoid it in the data. The people who are now trying to say, ‘It’s not so bad’ are definitely mounting a rearguard action.

I’m also quite interested in how often I hear people who I’ve never heard express any interest in politics or economics suddenly say there’s something wrong with capitalism. It’s almost part of the zeitgeist. But what exactly does capitalism mean in this context? I was hoping that was something Piketty’s books and yours might shed light on.

For Piketty it’s the idea that incomes accruing to capital or to people close to capital—the finance sector and top managers—are growing at the expense of everything else. That’s the technical meaning of capitalism.

“if you get a left-wing economist and a right-wing economist in a room with a whole bunch of other people, pretty soon the economists will be arguing against everybody else”

What I’m talking about more in my book is markets. Obviously markets and capitalism go together, in some sense, though people have imagined a market version of socialism. You can also criticize markets on grounds that are independent of the fact that they produce inequality. You can criticize the commodification and alienation that goes on. Or you can simply say, as I do in large parts of my book, that there are things that markets do well and things they don’t do well.

I noticed the footnote in your book, where you say you prefer to refer to libertarians like Milton Friedman as ‘proprietarians.’ This is a term Piketty likes as well. Can you explain a bit more?

Libertarianism is a contested term. It suggests people being free to pursue their own projects in various ways. Historically, there have been both left and right wing versions of it. In the US, the right wing version has definitely appropriated the term quite successfully. But what you see, when it comes to the crunch, is that the people associated with this group really only care about property and a fairly narrow range of government interferences that affect the owners of property, like gun laws.

US libertarianism has fallen over very badly in protecting individual rights, and can’t handle climate change and global warming. It could potentially handle it by emissions permits of the kind they’ve adopted in the European Union, but that would be an admission that property rights are a social contrivance created by the state—rather than a natural right inherited from some sort of mythical social contract in the past.

Let’s go on to the last book on your list of books for learning about economics, which is Good Economics for Hard Times by two of the winners of the 2019 Nobel economics prize, Abhijit Banerjee and Esther Duflo. This book is very much about using economics to try to find solutions to some of the pressing issues facing the world. As they put it, “economics is too important to be left to economists.”

It very much reflects the positive direction of economics over the past decade or two. It’s focused on data and randomized control tests. It’s about developing policy improvements that will make life better for people and working out which kinds of policy interventions actually work and which don’t—without an excessively dogmatic starting point. So the general spirit is to say, ‘Let’s look at interventions by making sophisticated use of data,’ rather than rely either on theory or on the fairly sloppy testing that was done in the past.

This approach has produced some striking results. Firstly, that in all sorts of ways, people are surprisingly rational, but also that people characteristically fall short of rationality in various ways. What it implies is that a lot of time (but not always) the best way to help poor people is to give them cash. That is something that runs totally against a lot of common sense—that you shouldn’t give money to poor people because they’ll just waste it—but also against the trends of the past 20 or 30 years in public policy.

This is such an interesting aspect of economics, that it often runs counter to a ‘common sense’ view. In the book, they talk a lot about a poll of 40 economists at the Chicago Booth School, and how their views on a series of issues compare to those of the general public. Economists seem to think about things in a completely different way.

Nearly all economists—from people you class as being on the far left in general political terms (like myself) to the right—have an appreciation of prices and how they work which is quite counterintuitive. In the absence of some kind of economics training, you get either this natural, medieval view of the ‘just price’— the idea that there’s a fair price for something and that’s what the price should be. Trade is really a matter—as Donald Trump would certainly see it—of the buyer trying to get more than the fair price and the seller trying to pay less. The idea that both parties can benefit is pretty much foreign to that way of thinking. The polar opposite of that is viewing the market as red in tooth and claw. It’s a Darwinian struggle and let the strongest win without any real concern for whether the prices bear any relationship to opportunity costs, my central theme. That appreciation of the power of prices in markets is uniform among economists, even those who would qualify it quite a lot.

Another area of disagreement is that the general public might think that if the government wanted to, it could intervene and protect every industry. But opportunity cost tells you that anything you do for one industry is going to come at the expense of another.

Near the beginning of the book, Banerjee and Duflo talk about ‘making economics great again.’ Do you share that view, that economics has a lot to contribute on key issues?

Yes, I believe it does. I’m heavily focused on climate change and the human activities that contribute to climate change are so complicated that trying to figure out what people should do and telling them to do it is an incredibly inefficient way of setting about things. The European approach of having an emissions trading scheme, it was confidently predicted, would deliver a big reduction in emissions at low cost. Of course, if we’d thought about things, we could have predicted that there would be lots of rip offs and general problems as well, but in the end that really is what happened. That’s because once you have these prices they give people lots of incentives to seek out the best ways of reducing emissions. So that’s one area where economists have pointed us in the right direction and it’s also an area where the popular impression of economists is almost a 100 per cent wrong. I’ve recently been working with natural scientists, preparing statements about climate change and the bush fire disaster. A lot of them still imagine that economists are all about economic growth and GDP when, in fact, the vast majority of the economics profession is on side with quite extensive and radical interventions to reduce carbon dioxide emissions, to decarbonize the economy and so forth. You can criticize this or that aspect of economics, but this is an area where there is a high degree of consensus within the economics profession.