E. Angus Powell Endowment for American Enterprise
Richmond, Virginia
Economics needs a press agent. Although it is taught at every university and is a requirement for elementary and secondary students in 32 states, economics and economists are still mocked in the media and joked about everywhere.
Then why should students study economics? One sort of answer touts economics as a body of knowledge. In the introductory college course, this body of knowledge is called the "principles of economics." In a list prepared for use in K-12 teaching, the National Council on Economic Education's Framework for Teaching the Basic Concepts summarizes 22 important concepts.
This content is important, but by itself that may not be enough to clinch a spot for economics in the K-12 curriculum. After all, the school curriculum is already crowded. Why does economics deserve a spot in this "standing- room only" curriculum?
Our answer assumes that economics is much more than a bundle of concepts. It is a unique way of thinking that offers insights into the seemingly chaotic confusion of human behavior in a world of different values, resources, and cultures.
Note the emphasis on human behavior. Economics is not the study of money. Almost every aspect of human behavior can be analyzed using an economic approach. It is this distinctive approach, not a definite set of conclusions, that counts.
According to John Maynard Keynes, "The Theory of Economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions." 1
Keynes doesn't tell us exactly what this "apparatus of the mind" is. But we will take up this challenge and try to describe the essence of the economic way of thinking.
Everything has a cost
This is the basic idea that "there is no such thing as a free lunch," meaning that every action costs someone something--in time, effort, or a lost opportunity to do something else. Opportunity cost is the value of the next-best alternative or what someone gives up by choosing one alternative over another. The economic perspective sometimes is unpopular because of its focus on costs. Potential benefits are more fun to discuss than potential costs. Many a party has been spoiled by assertions of the economic perspective. That perspective reminds us that this can be a world of competing sorrows with more trade-offs than solutions.
People choose for good reasons
This is the most important principle of economic thinking. People always face choices, and when they choose, they look for the most advantageous combination of costs and benefits. This behavior is self-interested, not selfish.
In his Nobel lecture, Gary Becker makes the case this way:
Unlike Marxian analysis, the economic approach I refer to does not assume that individuals are motivated solely by selfishness or material gain. It is a method of analysis, not an assumption about particular motivations.
Along with others, I have tried to pry economists away from narrow assumptions about self-interest. Behavior is driven by a much richer set of values and preferences.
The analysis assumes that individuals maximize welfare as they conceive it, whether they be selfish, altruistic, loyal, spiteful, or masochistic. Their behavior is forward looking, and it is also assumed to be consistent over time.2
The key to this analysis is that only individuals choose; those individual choices drive society. According to Paul Heyne, "All social phenomena emerge from the choices individuals make in response to expected benefits and costs to themselves."3
Incentives matter
Economics is really about incentives. Economic theory is based on the idea that changes in incentives influence behavior in predictable ways. Incentives are nothing more than changes in costs and benefits, which in turn influence choices. Supply and demand analysis is about incentives. Price controls are about incentives. Profits and business behavior are about incentives. Government decisions are about incentives.
According to Steven Landsburg, "Most of economics can be summarized in four words: 'People respond to incentives.' The rest is commentary. 'People respond to incentives' sounds innocuous enough, and almost everyone will admit its validity as a general principle. What distinguishes the economist is his insistence on taking the principle seriously at all times."4
People create economic systems to influence choices and incentives
Economic activity doesn't occur in a vacuum. Cooperation among people is governed by written and unwritten rules. As rules change, incentives and behavior change. For example, why have market economies been successful? Market economies depend upon private-property ownership. People work harder and use resources more wisely when they own property. Private property thus creates a whole structure of incentives. But rights to own property cannot simply be asserted. Ownership of property depends upon rules that establish and protect property rights. The rules in turn depend upon a system of governance.
People gain from voluntary trade
People trade when they believe the trade will make them better off. When two people trade voluntarily, they each give up something they value for something else they want. The trade is made when both parties consider the benefits of the trade to be greater than the costs.
It is people, not countries, that trade
International trade policy is hotly debated, but the logic of individual trades rarely is disputed. Everyone specializes and trades some of his or her labor for a vast array of goods and services. This system of specialization and exchange makes people better off. Any effective economic system must encourage specialization and exchange. Self-sufficiency is the road to poverty.
The price of a good or service is affected by people's choices
Goods and services do not have intrinsic value; their value is determined by the preferences of buyers and sellers. Economists describe these preferences, and their effects, in terms of supply and demand. Labor, materials, and time are all costs of production and contribute to the price of goods and services. No supplier would willingly produce something that could not be sold for more than it cost to produce. However, consumers are equally important in a market economy. Just as producers want to sell at the highest price, consumers want to buy at the lowest price. The actual price is determined through the interaction of buyers and sellers.
Economic actions create secondary effects
Good economics involves analyzing secondary effects. Frederic Bastiat, a 19th-century economist, stated that "the difference between a good and a bad economist is that the bad economist considers only the immediate, visible effects whereas the good economist is also aware of the secondary effects, effects that are indirectly related to the initial policy and whose influence might only be seen or felt with the passage of time."5 In this respect, an economic system is like an ecological system. One action may create many unintended consequences. For example, rent controls make apartments more affordable to some consumers, but those same controls make it less profitable to build and maintain rental housing. The secondary effect is a shortage of apartments and houses to rent. Higher taxes provide more revenue for government, but they also create negative incentives to work, save, and invest. A wise policymaker considers both initial and secondary effects.
Can teachers really teach the economic way of thinking, or is this econ stuff just too abstract to be practical? The principles of an economic way of thinking are only a starting place for teachers to work from. Teachers can't just hand these principles to their students and say, "This is economics." They must use creative approaches to apply these ideas to all sorts of situations. That is what the following teaching suggestions accomplish.