Policy Trade-offs

My son is involved in Special Olympics programs, and his current activity is basketball. At a recent game, I noticed that while his team was warming up, waiting for the other team to show, there were a large number of young boys from the local community shooting at other baskets in the gym.

I was reminded how policy decisions generally involve a trade-off between equity and efficiency. Certainly reserving the gym for my son's team to use for practice and games involves providing equity, given the small number of people on the team vs. the number of who could/would be using the facility.

Making the facility available to the larger numbers would be more efficient use of resources, but would not be equitable to the small group of Special Olympians who play on the team.

When discussing policy options with my students I used to ask them to analyze the proposal a number of ways, but always to consider equity vs. efficiency, and to remember that one frequently comes at the expense of the other.

Your thoughts, as always, are welcome.

Posted by TSchilling at December 22, 2005 2:56 PM

Comments
Equity versus efficiency may be an artificial dichotomy. We could parse the definitions of both, but given that value is totally subjective, and the practice of being able to measure value (the exercises of diminishing marginal utility) we can adequately state that the value the Special Olympian receives in utilizing the gym is likely far greater than the utility others would receive for that same time. Therefore, making the scarce gym space available to all increases the efficiency of distribution of this scarce space, and to get away from the 'cold, dismal science', makes all of us realize what is truly important, providing us an attitude adjustment in what really counts in the long run. Equity and efficiency may be the same thing.

Posted by: Robert Wiersema at December 26, 2005 3:58 PM

Utility and Value, Part II

One of the interesting things about teaching economics is that it allows students to see that it is the individual in society that makes up the composite--that the national data that is reported is nothing less than millions upon millions of individual choices that have been made and acted upon.

The blog Asymmetrical Information (link to this post is no longer available) once hosted an interesting discussion. The author posted her thoughts on handling money on December 9, 2005. There were a large number of comments, many of them attacking her (unjustifiably, I thought) for her allegedly New York-centric view of what constitutes the good life.

But subsequent entries (and comments) showed that her view was that value (as she defined it) arose from utility--what made things, places, events most useful to her. The postings and comments can lead your students down an interesting path about what constitutes value and whether value is determined in the production or the
consumption of a good or service.

As Rod Serling used to say, "submitted for your approval."

Posted by TSchilling at 6:05 PM Comments (0)

Simple Rules

Over at The Dismal Educators blog, the November 28 post lists Ten Rules of Economic Thinking. It's useful and could easily be posted in your classroom.

Another, similar item is the "Handy Dandy Guide" to economic thinking. It is used in many of the materials produced by the National Council on Economic Education, particularly their Capstone Course. The Handy Dandy Guide goes something like this.

1. People choose.

2. People's choices involve costs.

3. People respond to incentives in predictable ways.

4. People create economic systems which influence individual choices and incentives.

5. People gain when they trade voluntarily.

6. People's choices have consequences which lie in the future.

These, too, could be posted and referred to as you discuss economic issues and topics.

I look forward to hearing about similar lists or your comments about these lists.

Posted by TSchilling at December 12, 2005 4:33 PM

On the Margin

I recently had an opportunity to hear some college students present an economic analysis and monetary policy recommendation. I was reminded of something that often escapes our students.

One of the characteristics of monetary policy is the long lag time between change and full impact. This is because each change does not affect all players in the economy equally. Each change has a more significant impact on those economic players at the margin--at the point where the additional rise or fall in rates results in a
deal-breaker/deal-maker scenario. That relatively small number of transactions then ripples through the entire economy in the form of changed orders and decreased or increased consumption and production.

Many students don't get this.

Your comments are welcome.

Posted by TSchilling at 8:30 PM | Comments (0)

Catch 'em Where They Live (or Drive)

One way to get the attention of many of your students is to use cars and things car-related as examples when describing economic issues, events, and concepts. Way back in May of 2005, the Government Accounting Office (GAO) published a report on Motor Fuels: Understanding the Factors That Influence the Price of Gasoline. Is it pre-Katrina? Yes. Is it informative? Definitely. Is it useful for the high school class? Well, it has a lot of charts and graphs that your students are sure to find interesting and maybe even surprising.

And to help your students understand the whole “price-gouging” kerfuffle, you might want to check discussions Macroblog by David Altig, the Becker-Posner blog, Jane Galt (link to this post is no longer available), or or William Polley's blog.

I look forward to your comments.

Posted by TSchilling at 3:15 PM Comments (0)

How Do You Teach "Rich?"

In early stages of economics and personal finance classes, students often talk about their desire to be "rich." The topic often arises again when talking about income distribution or tax policy. But I always found it thought-provoking and instructive to ask the students to define "rich."

They frequently begin throwing numbers around, but I tell them they still aren't telling me enough. I like to ask them whether rich is defined by income, or by wealth, or by some combination of the two. This gets students to start thinking in terms of flows (income) vs. stocks (wealth). It also helps them realize that a person can be wealthy and yet have a small income (i.e. the "landed gentry" in their history texts that were land rich and money poor). That realization has implications that can contribute further to the discussion. And you can ask some interesting hypotheticals about people and companies that are wealthy, yet income poor, or those that have strong flows and are yet tottering at the edge of bankruptcy.

Feel free to share your thoughts.

Posted by TSchilling at November 16, 2005 3:58 PM

Comments
I remember reading, a number of years ago, an article in The Wall Street Journal titled something like, "The Poorest Man in the World." The article was about a Japanese business man who owned large amounts of Tokyo commercial real estate that, due to the collapse of real estate values, was worth considerably less than the money borrowed to buy it, leaving the gentleman with a negative net worth of several billion dollars, hence the label of "world's poorest man."

Yet, due to his creditors reluctance to foreclose, he continued to manage the properties, continued to live in a penthouse atop one of the large buildings, continued to ride in a chauffeured limousine, continued to live a life of luxury that a person with a net worth of several billion dollars more (i.e. a net worth of "zero") could only dream of living.

Was this man "rich?" Apparently at that time he was, regardless of his net worth.

Posted by: Max at November 20, 2005 3:00 AM

Utility and Value

As indicated in an earlier entry, I've been reading Nature's Metropolis. It's an interesting blend of history, economics and geography. But in the closing pages, I was reminded of the concept of utility. Not marginal utility. I'm referring to form, place and time utility. Aside from one of my earliest textbooks, I don't remember running across the concepts very frequently. However I have often referred to it when teaching.

In this context, utility refers to the "usefulness" or "value" that consumers find in objects. The old text I remember classified utility into form, place and time. Basically it said that consumers found a good/service useful because of the form(s) of the object, and/or when and/or where it was available. These qualities made a good/service useful to the purchaser of a good or service.

Nature's Metropolis gives very good illustrations of how time utility can add value to a good to the extent that a higher price is no longer an obstacle. It gives a number of illustrations that can be easily used in the classroom, showing how changing technology (frequently the railroad, but other technology as well) added time and place utility to a good or service, raising its value to the customer, often while reducing the cost.

For the geography and history teacher trying to integrate some economic understanding, the book is a great source. And likewise for the economics teacher trying to provide historical context or integrate geographic learning, the book is highly recommended.

If you have other books that you can recommend that do a good job of illustrating concepts and providing context, let me know.

Posted by TSchilling at 6:57 PM Comments (1)


Comments
It would be great to have a list of such books. I had a post about armchair economics reading list at
http://truckandbarter.com/mt/archives/2004/11/armchair_econom.html
-Paul

Posted by: paul at November 19, 2005 1:42 PM

Trade Negotiations

While the President is in Argentina to discuss trade issues, it may be an opportune time to discuss trade with your students. Here are some interesting quotes (admittedly all tend to favor free trade) to have your students react to, from a variety of sources.

"Trade is in its nature free, finds its own channel, and best directeth its own course; and all laws to give it rules and directions, and to limit and circumscribe it, may serve the particular ends of private men, but are seldom advantageous to the public." from An Essay on the East India Trade, by Charles D'Avenant

"The philosopher and lover of man have much harm to say of trade; but the historian will see that trade was the principle of Liberty; that trade planted America and destroyed feudalism; that it makes peace and keeps peace; and it will abolish slavery." - Ralph Waldo Emerson -

"No nation was ever ruined by trade." - Benjamin Franklin -

“You may be cajoled into imagining that your own special trade or your own industry will be encouraged by a protective tariff, but it stands to reason that such legislation must, in the long run, keep away wealth from the country, diminish the value of our imports, and lower the general conditions of life in this island.” spoken by Sherlock Holmes in The Hound of the Baskervilles by Arthur Conan Doyle

Submit other quotes you feel are good discussion starters.

Posted by TSchilling at 4:29 PM | Comments (0)

Economics of Cities

The most recent (Third Quarter, 2005) issue of the Federal Reserve Bank of Philadelphia's Business Review has an interesting article on the Economic Role of Cities in the 21st Century.

The article brought to mind a number of resources that can be recommended to any teacher wishing to tackle the topic in class. I'm not sure how many teachers, particularly in high school, spend a lot of time on the topic; economic growth does offer a good opportunity to integrate other topics such as interdependence, externalities, public and private goods, and the role of government, just to name a few.

The resources that were brought to mind were the following: The Economy of Cities and The Death and Life of Great American Cities both by Jane Jacobs and Nature's Metropolis: Chicago and the Great West by William Cronon. All three should be available through on-line or local bookstores.

The first two are books that grabbed my attention quite a few years ago. The Death and Life of Great American Cities was actually reissued in 1992, while the first title is at least 30 years old. Nevertheless, both were helpful to me in seeing the development of cities in economic terms.

The third book was given to me as a gift a few years ago and I've only recently gotten around to reading it. It is interesting because of the author's ability to weave together economics, history, geography, and environmental science. And because it has an interdisciplinary approach is helpful in providing information as well as anecdotes for the classroom.

Feel free to share any comments on these or other books on the topic, or ideas on their use in the classroom.

*UPDATE*
Another interesting article on urban economics is in the Federal Reserve Bank of Kansas City's Economic Review for the third quarter of 2005. The article is titled The Shared Fortunes of Cities and Suburbs.

Posted by TSchilling at 4:40 PM Comments (0)

Thinking and Acting on the Margin

I found a recent post on the blog site, The Big Picture (link to specific post no longer active)interesting. It made start to think about the difference between "thinking on the margin" and "acting on the margin." One of the "truisms" was that "seeing an opportunity and acting upon are two different things." This "truism" speaks to the fact that many people may think on the margin and recognize an opportunity to benefit, but not as many people act on the opportunity. I sometimes get to travel with this job, and I think one might construct a way to explain the difference based on airline customers.

Many travelers are experts at the "two bag" limit…or may seem to be. Most people seem intent on stuffing everything into two bags for stowing in "the overhead compartment and under the seat in front of you." Now we can argue what their true motivation is for adopting this behavior. If the motivation is to save time by not having to go to the baggage claim area, then we can proceed with the example. By packing this way to avoid going to baggage claim, one may surmise that they recognize an opportunity to gain a few minutes by skipping the baggage claim process.

But one could argue that those who "act on the margin" in addition to thinking on it, may choose to consider the size of the plane and where they’re sitting. If one were sitting in the back of a large plane (something more than 20 – 25 rows), it may actually be less aggravating and more efficient to check the bag. Given the fact that it seems to take interminably long for the people in the front of the plant to retrieve their bags and exit the plane, one might be able to find one's bag arrives at baggage claim by the time you finally deplane. You could get to the terminal, pick up your bag, and leave…now if only there wasn’t a "lost/damaged baggage" problem to complicate this example.

Your comments?

Posted by TSchilling at 7:34 PM

A Cycle of Adams Letters: Economics in History

I’ve been reading A Cycle of Adams Letters. It is a selection of letters and letter excerpts between Charles Francis Adams, Sr. and his son Henry, who are on diplomatic post in London during the American Civil War, and Charles Francis Adams, Jr., a union cavalry officer back in the states. The senior Adams is the son of President John Quincy and grandson of President John Adams.

For history or economics teachers, the work is interesting in two respects. First, the letters give a sense of “here and now” to the era studied. Second, and more importantly for this blog entry, there are some interesting insights into the economics of the conflict.

The impact of the cotton embargo on the English economy is discussed, and the resulting swings in the value of Confederate bonds floated in European financial markets as the war tides change are a great way to show how events in one economic system can impact others, often with significant results.

Also of interest was the “economic reasoning” exhibited by Charles, Jr. when he talks about the choices he faces as a unit commander in May of 1863. He refers to how horses are used up, rather than rested, and then new horses commandeered, all for the objective of keeping the maximum force in the field, in contact with the enemy. This is an interesting exercise in decision-making, given the context and the objective. And the context and objective help to clarify the concept.

I would note there are some concerns I have about classroom use. Many of the observations, particularly of Charles, Jr., about former slaves and black regiments are peppered with language that is offensive today.

I welcome your comments.

Posted by TSchilling at 4:17 PM

The Idea of Money

I recently overheard two people discussing what appeared to be a budget issue. At one point, one of the discussants said to the other, “You always view things from a money point of view.” While I didn’t hear the retort, the comment got me thinking about teaching about the concept of money.

There seems to be a hue and cry for teaching people to handle their money. But I’m not sure anyone wants to discuss the idea of money. I know there are textbooks that talk about the “characteristics” and “functions” of money, usually within a few pages. But I believe that most of us don’t really discuss money.

I’m inclined to define money functionally, and to try to get students to look at it in a similar way. Specifically, I like to talk about money in a traditional way, as a (1) medium of exchange, (2) store of value, and (3) measure of value. While all the functions can help people gain insights about handling money, the first two can be especially helpful. I think they help illustrate the larger role of money in the economy, and on a personal level.

The function of “medium of exchange” speaks to money as an intermediary, a tool to simplify trade. It allows us to specialize in labor and to interact with others without having to offer labor to every person with which we wish to trade. In short, it is a claim against goods and services of others, based on our labor and how the marketplace “values” that labor. (This can also lead into a discussion of the third function listed, but perhaps I will save that for another post on this site.)

The function of “store of value” is also pertinent. For money allows us to accumulate our expended labor for future claims against goods and services. It allows us to lay claim to goods and services at a point in the future, and even to plan for them. But do people see their finances, or the nation’s for that matter, through these lenses? Do they understand that what money allows us to do is to trade the product of our labor, for that of someone else?

To relate this back to the conversation I overheard, the issue becomes not one of money, but what claims to resources (present and future) do they have or will they have. How can they best allocate those claims? Is it possible to do a better job of helping students understand the personal resource choices (family budgets) and larger resource choices (state and national budgets) they face by helping them understand what money is?

Is there advantage to be gained by discussing money and how it is handled from a functional viewpoint? If we do so, can we help students to more easily identify the opportunity cost inherent in each choice? Will it help them see that doing one thing doesn’t come at the expense of “mere money,” but at the expense of other goods and services, either in the present or the future?

Send me your comments.

Posted by TSchilling at 7:28 PM Comments (1)


Comments
Good post and I plan to link to your site.

Posted by: Mike at October 24, 2005 7:29 PM

What is Economic Literacy?

There’s an interesting discussion on The Wall Street Journal Econoblog about economic literacy. Two bloggers (Russel Roberts at Café Hayek, and William Polley at William Polley) who I enjoy reading discussed the definition of economic literacy. They made a number of sound points, but two of them have long struck me as important to the discussion. One dealt with the difference between economic and financial literacy and the other with the development of economic theory.

As for the first point, I agree that many people seem to equate economic literacy with financial literacy. However, I would add that each compliments the other. I, too, have dealt with people who, upon hearing that I’m in economic education, immediately begin questioning me about the stock market. But I believe financial examples provide clear applications of economic concepts. They provide knowledge to help learn how to handle finances. And it can provide a big picture justification for handling finances well. Markets of all types are subject to the laws of supply and demand. Discussing a budget can be an exercise to help students understand opportunity cost and scarce resources.

As to the second point -- understanding the development of economic theory -- I think it too is given short shrift, or even misstated by people who do not understand it. The example of Adam Smith that was cited is excellent. People often summarize (incorrectly) Adam Smith by using a few points from The Wealth of Nations, without understanding the breadth and scope of that work. They then frequently ignore (intentionally or unintentionally) his other works, specifically The Theory of Moral Sentiments. Some say these works were written for two different audiences and then cite the “Adam Smith Problem”. But to read the works together is to get a truer understanding of Smith’s view of the world and vision for mankind.

After reading both works, one sees that Smith envisioned that, in an ideal world, the person acting in the economy would be "moral." While he understood many individuals weren’t, the pressures of society could encourage conformity to the rules. And these rules may be the foundation for the economic institutions. I’ve always understood economic institutions to include the rules and frameworks (formal and informal) that a society/economy constructs to guide decision-making. Thus by providing a "moral" structure to the rules, individuals are encouraged to make choices that are not only beneficial to themselves, but to their opposites in transactions of all kinds.

Smith's definition of morality was a product of his environment and background. That may be another issue for discussion as well as another reason to study the development of economic theory. For theory is developed to address problems and the issues of a time. You could argue that one needs to know the theory, the problem it addresses, and the context in which it was developed to decide a theory's continued relevance.


Posted by TSchilling at 4:37 PM | Comments (3)


Comments
A brief review of your site shows that you have been around for just under 2 weeks, and have posted twice. Yet already, you have a link at New Economist. Either you have friends, or congratulations are in order. Now, about that lazy, once-a-week pace of posting...

Posted by: Anonymous at October 3, 2005 6:43 PM


I really am impressed by your site. Very original & interesting content.

Posted by: Logan Dickinson at October 31, 2005 11:02 AM


Please keep updating me in economics textbooks and other economics related books. I am an economics student in University of Port Harcourt, Nigeria. I will be grateful if you help me out.

Posted by: reginald obiene at April 12, 2006 10:07 AM

Teaching About Price: Using Oil

I was a classroom economics teacher in a small Michigan high school during the late 1970s and early ‘80s. I remember using oil and gasoline when teaching price theory during that time. My students seemed to grasp the concepts easily. They heard about it. They read about it. Most of them had successfully navigated their right of passage—the driver’s license exam—and consequently had to deal with it. Concepts of elasticity and inelasticity were tossed back and forth. Discussion of rationing mechanisms other than price led to interesting debates about efficiency and equity in economic systems.

Now my experience is being repeated. And I find it is not mine alone. Other teachers and bloggers of my generation are reflecting on their experience using the "real world" of that period to illustrate principles and theories for interested students. But that has made me rethink my lesson. I find myself asking "What was the real point?" And I think it is this...Prices are important. They give us information to make decisions—to make choices. And prices can make us uncomfortable. They tell us how the rest of the world values the products and services available to us…what others are willing to offer…and then ask us to evaluate our choices in light of that information. They ask us "How badly do you want this?" "What are you willing to give up?"

I sometimes think it is possible that we, despite all our protests to the contrary, don’t want the freedom that comes with making choices, at least not hard ones. Economist Joseph Schumpeter may have been right when he said, "Humanity does not really care for freedom, the mass of people quickly realize that they are not up to it: what they want is being fed, led, amused and above everything else, drilled. But they do care for the word."

Gasoline prices are forcing us to face this. Our students may ask "why" or seek someone to blame. But the lesson is "the market is working." The market mechanism, price, is asking us what we value...what we are willing to give up for the economic choice to drive. Those that don't want to choose, have yet to learn the lesson of the market.

Many people want to believe that somewhere there is a person or group that can identify and make the hard choices, and that the costs of those choices can be placed on a third group. But I suspect that is a holdover of childhood, when parents frequently stood between the child and the harsher realities of the "economy." Being an adult means there comes a time to recognize that choices must be made—and corresponding costs accepted. And then the question is "Who should make the choice?"

One person may not mind paying extra for something if it is the most important thing to them. They may be more than willing to sacrifice other things in turn. But other people may see the product only as an "evil necessity" and begrudge every small increase as it cuts into other desires or limits other activities. Still others resent having to give up anything. But prices reveal to each of us the choices to be made. They don’t take the choice away. They shine a light on them. They actually help us to make the choice.

The lesson of price theory in economics may be that we don’t have like the price mechanism, but it is important to understand how it works and why it exists. It gives us power and it helps us choose.