Friday, September 23, 2005

What is Economic Literacy?

There’s an interesting discussion on The Wall Street Journal Econoblog about economic literacy. Two bloggers (Russel Roberts at CafĂ© 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)

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

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.