Arnold Kling  

Economic Literacy

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The online Wall Street Journal hosts a discussion with Russell Roberts and William Polley on the topic of economic education. Roberts writes,

Whenever I teach a seminar on basic economics, I always survey the audience: What proportion of the American labor force earns the minimum wage or less and what is the standard of living of the average American today relative to 100 years ago?

Even among highly-educated groups such as journalists or congressional staffers, the median answer is depressingly similar -- they think 20% of the American work force earns the minimum wage or less. In fact, the actual number is something less than 3%.

Polley writes,

I'd argue that part of the problem is the mechanical way that economics used to be (and sometimes still is) taught at the introductory level. Many people in the media and in positions of authority, if they took economics at all, learned a very stylized version of the subject. They may have taken courses that consisted of solving two equations in two variables for supply and demand, calculating income/expenditure equilibrium with fixed prices, and the like. This stylized approach was not always directly relevant to the real world at the introductory level. The perceived disconnect between economics and the "real world" haunts us to this day. Solving simultaneous equations is not considered relevant anymore by the people we are most trying to reach. Finally, unless you have a deep understanding of the model, there's a good chance you'll misinterpret something

For Discussion. If your goal were to have first-year economics understand, say, the role of markets in addressing the disruption in gasoline supplies caused by a hurricane, how would you propose to teach this?

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CATEGORIES: Economic Education

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The author at Financial Rounds in a related article titled Economic Literacy (via Econolog) writes:
    Arnold Kling at EconLog has a nice post on Economic Literacy. He links to the most recent Wall Street Journal Econblog - a discussion between Russell Roberts and William Polley , titled "Knowledge Deficit". [Tracked on September 22, 2005 8:43 PM]
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Timothy writes:

Probably by role playing a bilateral negotiation of price between two students. Make one student play the role of oil refiner, give him/her some arbitrarily defined cost structure for the firm (including, of course, some fixed costs) and have him/her work out how much revenue he/she needed to generate to cover it all over the period. Nothing complicated, just a little algebra. Give some amount of raw input s/he was getting pre storm, cut it in half for the post storm.

I'd have the other student play the role of some arbitrary fuel buyer, on the wholesale level, with some equally arbitrary budget constraint and need for fuel. Then I'd let them bargain to a solution.

I would make them wear funny hats while doing this (top hat and monocle for the producer, a large sombrero for the consumer), and perhaps silly costumes. I might, for instance, don a cowboy hat and serve as a sort of auctioneer during the bargaining process. That part isn't strictly needed, but my own experiences with undergrads in my econ classes is that you need something funny or weird to keep most of them engaged.

Bottom Line: No graphs, no overheads, little math. Break things down to a tangible example, then expand from there into the more complicated ideas like the futures market and whatnot.

Timothy writes:

Econ classes I took, that is. Other students, usually bored. I was always excited.

Randy writes:

I think what is needed is real life demonstrations of how markets really do solve complex problems. The basic issue in economic illiteracy is a lack of trust. If I don't trust those greedy SOBs to look out for my best interests, then I'm going to demand that somebody control them. What I need to understand is that the actions of those greedy SOBs really do work out to be in my best interests.

Aaron Chalfin writes:

Instead of reducing economics to a bunch of mechanical rules, economic problems need to be put in real world contexts.

Timothy has a very good idea. I would extend it even further. Assign x% of the class to be oil producers and (1-x)% of the class to be oil consumers. Given them a cost/demand schedule as Timothy suggested and let them trade. Repeat a few times. Next install a price ceiling. Have the students tarde again.

See how many students end up without gasoline in both scenarios.

John writes:

I'm a Senior at Purdue University majoring in Economics. My introductory Econ class had at least 600 people in it. I went for the quizes and the tests, but didn't go to a single lecture. I think most Econ students should do what I did and read Henry Hazlitt's Economics in One Lesson rather than attend their classes. They can teach themselves what's in the course rather easily (I did well anyway) and then get a much deeper understanding of Economics from Hazlitt.

And for that matter why do you need to learn anything more than the most basic elasticity in an introductory course. Most students definitely don't find it interesting at all learning about cross-elasticities and income elasticities.

nelziq writes:

To some extent it will be difficult or impossible. By that point its like trying to teach evolution at pat robertson university. No matter how studious the student or engaging the proffessor, existing preconceptions will prevent most students from really internalizing the lessons.

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Eric H writes:

Don't know if these will work, but ...

* Assign them this, MarginalRevolution, and EconBrowser as homework, with occasional pop quizzes based on comments.

* Hand out baubles, bangles, and beads (red, white, and blue poker chips?) at random and then give each of them a desired mix assignment (1:1:1, or 1:2:3, or any 10, etc.). Knowing what the proportion was beforehand, you should note some relative price of each at the end.

* Look at what happens if you keep the same goal, but then use a mix in which one good (beads or white chips) was much shorter than in the first round.

* Play again, with one area (e.g. right, front corner) of the class getting drastically shorted the chosen commodity. What happens to the price/availability in that region vs. the rest of the class?

* Play again, but some area of the class gets hit with a price cap. What happens to them?

I'd teach from Sowell's Knowledge and Decisions.

However, I vaguely remember an episode of the television series, The Paper Chase, where the professor teaching Contracts assigns more work than any one student can possibly complete on their own. Which leads the law students into a natural contractual situation. They end up working together with each having to research a few cases and exchange their work for that of the others.

Introduce monopoly money into the assignment, and you'd have a pretty good demonstration of how an exchange economy works.

Bob Knaus writes:

First, reserve a stand at the Saturday morning farmer's market.

Then, make each student draw $100 cash out of his/her personal account. Send them to the wholesale produce market at 4AM Saturday. Have them buy whatever they want. Take them to the farmer's market so they can sell it. Should be done by noon.

As soon as each student is able to turn a 100% profit, he or she is done. The others get to do it the next Saturday, and the next, until they get it right.

That should pretty much internalize the basics of micro into just about any numbskull.

Plus, you don't need a classroom or a prof. And instead of paying money to learn econ, you earn it.

Colby Ricker writes:

For an intro class, use a booze example. It will resonate best with the Freshman, and the upperclassmen will have a nice jolt of nostalgia.

For example, every freshman hall has the one kid that has a has an older brother or sister or friend or former liason. And that individual usually supplies most of the people on the floor, directly or indirectly.

Ask the students how they think market forces ensure that the supply is properly distrubuted.

If nothing else, it engages the students.

Tom writes:

Call me orthodox, but I would stick to the basic supply and demand model. The model is simple, but powerful, if one understands it. The reason why I would teach the gasoline disruption with the supply and demand model is because a common error I see in the public is not being able to distinguish between a change in demand and a change in the quantity demanded. I see this basic error reflected in my local newspaper. For example, it has been reported that the price of gasoline has been rising despite the fact that the demand for gasoline has been falling. Some one who understands supply and demand sees through this error immediately. The rising price of gasoline causes the quantity of gasoline demanded to fall. The point being that the newspaper does not understand the difference between a movement along the demand curve caused by rising prices, and a shift in the demand for gasoline, which is not a function of price.

The second point I could make about gasoline, using supply and demand, is to show the effect on price given different slopes of the demand curve. A relatively flat demand curve vs. a relatively steep demand curve will have different quantitative effects on price with a small reduction in supply. The demand for gasoline has a steep demand curve, so a small reduction in quantity would cause a larger increase in price than if it had a flatter slope.

It could also be shown using supply and demand that with an increase in price people begin to conserve on the usage of gasoline. Gasoline becomes rationed by price and the less essential usages of gasoline, e.g. long drives in the autumn to look at leaves, become eliminated.

Supply and demand can show that government controlled gasoline prices, which are below the market price, will cause the quantity of gasoline demanded to increase, while at the same time, the quantity of gasoline retailers are willing and able to supply decreases, causing shortages.

I could go on and talk about how the Gulf Coast sends most of its refined petroleum to the East Coast through the Plantation and Colonial pipelines; and how the Gulf Coast sends most of its crude oil to the refineries in the Mid-West. This piece of information is used to show the connection between the markets in Gulf and other parts of the country, so that if Hurricane hits one part of the country this can affect you the student who is 2,000 miles away. But, the most essential part would be drilling the supply and demand model in to their heads.

Brad Hutchings writes:

Well... I would do a class simulation. There has to be an unfair distribution of wealth, so start the course off by having a graded multiple choice exam on textbook econ to see what they know and distribute some wealth (points).

Next, we need a comodity that everyone must have. I say we use the answer key. Have enough answer keys for 20% of the students. Each day for a week, have a sealed bid process for spending 20 minutes in a padded room with no pencils or anything with the answer key. Tell them they have to pass with 80% to get a B on the exam, 100% for an A, otherwise they get an F. Make the stakes really high. So students who already have near 80% are like gas guzzling SUV drivers. Let them bid too, even if they just want to screw the students who need the most help. While this is going on for a week, explain that people hoard in free markets when stuff is priced too low. Encourage it. Make the low scoring students suffer with anxiety.

Record each student's sealed bid each day of the week. Graph it and analyze it the following week. Simulate a price cap. Simulate odd-even days. Show them how their bids are the best way to allocate the resources. Students who don't pass? Instant history majors.

Jim Glass writes:

For a real intro course, I'd start with the fact that life expectancy through the whole world through all history, thousands of years, was all of 20 -- in really successful societies, like the city of Rome at the height of the empire, as high as 25.

Then some sort of systemic change in how economies work somehow started in, oh, Holland, and spread to Britain, and then North America and then onward ... and in a relatively short period of years life expectancy tripled into the 60s and kept rising, and wealth rose even more ... and we can see this great rise in life expectancy and welfare happening around the world today as we speak, in proportion to the degree that this systemic change has taken place (not at all in central Africa, rapidly occuring in Asia, mostly occurred in the US, etc.)

And of course nobody planned it. No philosopher or King or whatever figured it out and said "lets do this". It just happened.

Then I'd ask: what happened to change the status of humanity at that point, exactly? What precisely, in terms of actions and behavior and laws, started increasing welfare and how? And why then and there, never anywhere else in the history of the world? Why are we so lucky as to be so rich and long-lived today. I'd try to have the class figure it out for themselves.

I'd think one could make a list of specific factors that one could then carry forward to this day.

E.g., there is one big free lunch in econ, contrary to the popular saying: voluntary trade.

If a person with an orange who prefers an apple, and a person with an apple who prefers an orange trade apple for orange, then they are both better off, while there is still one apple and one orange, and an increase in welfare has appeared out of nothing. Free lunch!

Extending this principle in all directions, one might see how people voluntarily trading goods and labor and technical innovation could over a couple hundred years create a whole lot of welfare out of nothing. And trade really got moving in Holland and England back then.

But it's really not so easy as it seems even to just trade an apple for an orange. The person with the apple might pull a knife and take the orange, or not reveal the apple has a worm in it, or trade what turns out to be not his, or promise to deliver and reneg ... etc., etc., any one of which would make repeated trade impossible. Or if there's an authority to settle such disputes it might demand extraordinary tribute, or demand all the apples and oranges for itself outright, or make a favorable deal with whomever was more influential, the apple owners or orange owners, etc.

All of which might seem rather par for the course for most of humanity through most history.

So an explosively welfare increasing "trade take off" never happened in the history of the world until Holland, England etc.

I bet if one ran down the actual historical societal changes that made the take off possible then it would be both an interesting story, and one with lessons that could be carried forward to today and applied to judging the wisdom of things like rent control, tariffs, taxes, economic regulations and trade with China, without any calculus or even algebra necessary. (They could come in 202.)

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