Tuesday, September 20, 2005

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.

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