A Plea for Economic Education

14 November 2007 at 10:10 am Peter G. Klein 14 comments

| Peter Klein |

As economists have long emphasized, individuals need not understand the full benefits of participation in the division of labor to benefit from it. But when the market is continually under attack from special interests and from ideologues both left and right, a little knowledge goes a long way. Jeff Tucker puts it nicely:

The old-style classical liberals [Adam Smith, Hayek] reveled in the fact that [the market’s] “impersonal forces” worked without anyone really being aware of them, or having to understand them. The checkout lady at the store just shows up, pushes buttons, gets paid, and stays or leaves based on her assessment of her own well-being. Everyone else does the same. The pursuit of self-interest generates this amazing global matrix that benefits everyone.

The old liberals reveled in the fact that no one had to understand it, but then the system itself came under attack, and needed defense. It had to be understood to be explained, and explained in order to be preserved.

This is why Ludwig von Mises set out to revise liberal doctrine. It is not enough that people participate unknowingly in the market economy. They must understand it, and see how, and precisely how, their smallest and selfish contribution leads to the general good, and, moreover, they must desire that general good.

All of which is to say that in an enlightened world, it would be a good thing for that cashier to understand economics from the point of view of those who pay her. It would be good for striking workers to understand how they are harming not only their bosses but also themselves. It would be good for voters to see how supporting government benefits for themselves harms society at large.

An economically literate public is the foundation for keeping that amazing and wild machine called the market working and functioning for the benefit of the whole of humanity.

Entry filed under: - Klein -, Classical Liberalism, Education.

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14 Comments Add your own

1. Steve Rosenbaum | 14 November 2007 at 11:10 am

I think there are two challenges that need to be addressed in economic education. First, a lot of economics flies in the face of historical religious doctorine and other beliefs of the past which developed with a misunderstanding of how a lot of things work. Simply put if you asked who has done more for the world Bill Gates or Mother Theresa, you’ll probably here Mother Terresa which misses the point on how people are really helped. How many people think, big business is evil, making money is evil, materialism is evil and selling is beneath them.

Second, topical education like economics over suffers from the fact that in schools is knowledge or theory based. Economics education like most other education needs to be transformed into “what am I going to do with economics and how can I get really good at it? Another way to look at this is what is proficiency in economics and how do I get there as fast as possible?
2. Vladimir Dzhuvinov | 14 November 2007 at 11:11 am

The “public” is so economically illiterate about the market not because of education, but because their workplaces speak the language of a centrally planned economy. Employees come to experience the market in an unbalanced way: all their productive life is shaped by the centrally planned economy of the corporation, their participation in the market is only as consumers. It is no wonder that when their material wellbeing gets threatened, some choose to attack the market, demanding from government restrictions on liberalism and more protectionism.

Yes, I find this a sad situation. Very few people understand that the real gap causing the growing income disparity is the gap between the market and the corporation. And the only real way to close it is for corporations to become more like their market environment, by adopting mechanism from it.
3. Steve Rosenbaum | 14 November 2007 at 11:44 am

Just a quick comment on income gap. It’s really is a fairly meaningless concept. This is because there is a finite limit at the bottom. There really isn’t much room below zero. In fact, if you owe a million dollars you might be considered rich by some. Guy like Donald Trump sometimes get billions in the hole.

On the other end there really isn’t a limit. So if people are allowed to continue to earn and invest, the gap will get bigger. But I don’t think we want to tell Bill Gates to put all his money under his matress.

Try this, a worker starts at $10,000 per year. Each year his income increase by 10%. Now let’s assume that Warren Buffet puts his 40 billion in a 1% savings account. After the first year our worker is making $11,000. Warren Buffet just added 400 million. The gap just got larger.
4. Vladimir Dzhuvinov | 14 November 2007 at 12:13 pm

Offtopic:

Steve, I’ve been left with the impression that the income disparity concerns were fueled because the earnings of the poorer grew at a slower rate than those of the richer. In other words, people see it as a problem of diverging growth rates rather than differences in absolute money terms.
5. Patrick Reno | 14 November 2007 at 1:45 pm

I have long thought that economics should be taught in middle and/or high school, and not just as an elective for one year. Not sure if it is required at this point as I have been out of school for a while now. Economics is one of the most underestimated subjects in schools, and I agree with the post that if everyone had but a layman’s understanding of economics, then many of this country’s problems wouldn’t exist.

As for Steve’s example, interesting point of view, but I do think most people are concerned about percentage of growth, not absolute dollars. But it takes a lot of money to make a lot of money in more cases than not. I think that is where the gap really comes from. Also the instant gratification notion. If people at the lower end of the earning spectrum would invest some of their money, even a little bit, they would eventually make it to the ranks of the millionaires.
6. Steve Rosenbaum | 14 November 2007 at 2:54 pm

Higher percentage returns come from a higher risk/reward ratio. People who make a lot of money are more willing and able to take risks. The only way in a growing dynamic economy to close the gap is to take money away from one group and give it to another which creates a disincentive for risk taking. Or we can just tell pepole who are doing well to stop what they’re doing so the others can catch up, which of course they never will.

It’s basically the limited pie philosophy sponsored by people who think that other do well because they inherit money or they steal it from others. In some cases, it’s that basic belief systems that keeps them where they are.

Study the life store of Larry Ellison is you want to see how to close the gap.
7. John McG. | 14 November 2007 at 10:49 pm

The posting is so true. And so is its converse: As long as the check-out ladies et al. remain unenlightened, freedom’s chances of surviving diminish all the time.
8. Steve Rosenbaum | 15 November 2007 at 12:32 am

I don’t know maybe we’d all like to go back a hundred years when 90% of the population lived in poverty and the average life expentancy was 35. I worry less about the check out ladies that are unenlightened than the college professors stuck in the golden years that never existed.
9. Twofish | 15 November 2007 at 12:11 pm

I think that the centrally planned corporation exists because central planning is sometimes the optimal form of economic organization within a market economy.

The problem with economic education is that it does no good for people to replace left-wing anti-market dogma with right-wing pro-market dogma. Rather I think that economic theory should start by first teaching a variety of different economic theories, and then by making available first hand information about economic institutions really work. People then can try to figure out how to fit the theories with experiences.

The issue that I face is that large corporations don’t like to talk about what they are doing since there is a perception that talking will only get you in trouble. This is a problem because what they happens is that only bad corporations and the worst parts of corporations get publicized.
10. Twofish | 15 November 2007 at 1:03 pm

It is difficult to get a man to understand something when his salary depends upon his not understanding it. – Upton Sinclair

My experience is that having people understand economic theory doesn’t really change behavior that much. When people are in a situation they stand to lose something immediately in exchange for some long term and hard to define benefit for the common good, people forget about the common good.

Also one of the consistent themes that I’ve heard from people who have started their own companies is that it is economically irrational to do so. If your goal is to make money, don’t start your business since the risks are much too high. People who do start their own companies usually have some desire to do so that can’t be described in terms of utility functions.
11. Steve Rosenbaum | 15 November 2007 at 1:12 pm

One thing to keep in mind is that more than 80% of all millionaires are first generation. This stat actually goes back to the late 1800’s. What entrepreneurs know about making money doesn’t require an economics education. It’s a simple theory. You make something that people want and you sell it for more than it cost you. The top 1% in this country is populated mostly by people who started their own business. Take a look at the Forbes 500 and you’ll be surprised by the background of these people. It includes our famous Harvard dropouts as well.
12. twofish | 16 November 2007 at 12:17 am

Curiously the entrepreneurs that I know wouldn’t be much deterred by high taxes. Entrepreneurs have a bit of economic irrationality to them, and so I don’t think most would mind giving a lot of their wealth to other people, as long as they get recognition.

One other observation is that the very wealthy are less opposed to high taxes that one would otherwise assume they would be, in part because money is not a huge motivating factor in their behavior. There comes a point in which you have more money they you can possibly spend, but people that are self-made generally keep wanted to make more, because it satisfies some deep psychological need. In the case of entrepreneurs it is usually the desire to create. In the case of people in corporate bureaucracies the motivating factor often is the power.
13. twofish | 16 November 2007 at 12:27 am

One thing that often surprises people is the degree to which people working in Wall Street investment banks tend to not be “economic conservatives.” Investment banks are huge bureaucracies, and the people in them are generally not allergic to working in large bureaucracies. Also people who work on the raw edge of markets everyday see some of the limitations of said markets. Lots of Rubin Democrats in the banks.

People like George Soros and Warren Buffet have warned against market fundamentalism, and I don’t recall anyone out of a major Wall Street investment bank that has recently called for unfettered capitalism. (Hedge funds are different.)

One of the funny ironies involves sitting at a trading desk, and going through a maddening socialist central-planning bureaucracy trying to get a phone installed.
14. Comments on economic education « Twofish’s Blog | 16 November 2007 at 12:29 am

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