Teaching Economics in Troubled Times

Theory and Practice for Secondary Social Studies

Mark C. Schug, William C. Wood

• Publisher: Routledge
• Year: 2011
• ISBN:
  9781136880674
• Edition: 1
• Topic: Education
• Subtopic: Education General

In the Great Recession of 2007-2010, Americans watched their retirement savings erode and the value of their homes decline while the unemployment rate increased and GDP sank. New demands emerged for unprecedented government intervention into the economy. While these changes have a dramatic impact on society at large, they also have serious implications for the content and teaching of economics.

Teaching Economics in a Time of Unprecedented Change is a one-stop collection that helps pre- and in-service social studies teachers to foster an understanding of classic content as well as recent economic developments. Part I offers clear and teachable overviews of the nature of today's complex economic crisis and the corollary changes in teaching economics that flow from revising and updating long-held economic assumptions. Part II provides both detailed best practices for teaching economics in the social studies classroom and frameworks for teaching economics within different contexts including personal finance, entrepreneurship, and history. Part III concludes with effective strategies for teaching at the elementary and secondary school levels based on current research on economic education. From advice on what every economics teacher should know, to tips for best education practices, to investigations into what research tells us about teaching economics, this collection provides a wealth of contextual background and teaching ideas for today's economics and social studies educators. Additional information and resources can be found at the authors' website neweconteaching.com.

PART I
THE CHANGING ECONOMIC SCENE

1
WHAT EVERY HIGH SCHOOL STUDENT AND TEACHER NEEDS TO KNOW ABOUT ECONOMICS

James Gwartney and Mark C. Schug

In teaching economics to students before college, most often we have only one opportunity to get it right. Most high school students will not go to college. For those that do, only a handful will study economics. American students will have many opportunities to study U.S. history and American government in the K–12 curriculum. However, they will only study economics once—in the high school economics course or perhaps in a related business or social studies course.

We need to get the economic content right the first time around. What economics is most important for high school students to learn? We think the central focus of an introductory course in economics should be teaching students how to think economically. The Great Recession of 2007–2010 underscores the importance of having widespread economic understanding. For example, a better understanding of the credit markets would have contributed to reducing the severity of the financial collapse. Economic thinking should have suggested to lenders and borrowers alike that changes in the rules of lending which, in turn, provided incentives for high risk-taking would almost certainly lead to a collapse. Moreover, widespread economic understanding would have helped citizens to better analyze the policy alternatives that were implemented and those that were not.

In a market economy such as that in the United States, Canada, and other parts of the world, our individual choices largely determine the course of our lives. At the same time, as voters and citizens we make decisions that affect the laws or “rules of the game” that guide these individual choices. To choose intelligently, both for ourselves and for society generally, we must understand some basic principles of human behavior. That is the task of economics—to explain the forces that affect human decision-making.

The following paragraphs introduce ten key elements of economic analysis, ten factors that explain how our economy works. You will learn such things as why prices matter, the true meaning of cost, and how trade furthers prosperity. You don’t need a PhD in economics to be able to teach economics well. Most of what high school students need to know is summarized in these ten principles. These principles serve as a starting point for classroom teaching.

1 Incentives Matter

All of economics rests on one simple principle: that incentives matter. Altering incentives, the costs and benefits of making specific decisions, alters people’s behavior.

Understanding incentives is an extremely powerful tool for understanding why people do the things they do because the impact of incentives can be seen on almost every level, from simple family decision-making to securities markets and international trade.

In fact, markets themselves work because both buyers and sellers change their behavior when incentives change. Prices act as powerful incentives. If buyers want to purchase more of something than sellers are willing (or able) to provide, its price will start to rise. As the price increases, however, sellers will be more willing to voluntarily provide the good or service. Eventually, the higher price will bring the amount demanded and the amount supplied into balance. What happens if it starts out the other way? If prices are too high, suppliers will accumulate inventories and will have to lower prices in order to sell their products. These lower prices will encourage people to buy more—but they will also discourage producers from stepping up production since at the new, lower price the product will be less profitable. Gradually the amount demanded by consumers will once again come into balance with the amount produced by suppliers. This process does not work instantaneously. It takes time for buyers to respond fully to a change in price and for producers to step up or cut back production.

Remember the record nominal high gas prices in the summer of 2008? While a lot of people felt the pain of higher prices at the pump, there was no panic in the streets or lines at the gas pumps. Why? The response of buyers and sellers to changes in gasoline prices illustrates the importance of incentives and the role of time in the adjustment process. In 2008 gasoline prices rose dramatically. In response consumers immediately eliminated unimportant trips and did more carpooling. Gradually, however, they also shifted to smaller, more fuel-efficient cars to reduce their gasoline consumption further. At the same time suppliers of petroleum, the raw material of gasoline, increased their drilling, adopted techniques to recover more oil from existing wells, and intensified their search for new oil fields. In response to market-based incentives, the supply of petroleum, a resource some predicted would be exhausted by 2000, today stands at 1.343 trillion barrels.

Incentives also influence political choices. The person who shops in the mall doesn’t behave all that differently from someone who “shops” in the voting booth. In most cases voters are more likely to support political candidates and policies that provide them with personal benefits. They will tend to oppose political options when the personal costs are high compared to the benefits they expect to receive. For example, in a recent poll most Americans favored the idea of expanded health care as long as someone else—the wealthy— paid for it. The same poll found that when asked if they would pay for health care with a tax on all Americans, 75 percent were opposed to expanding health care.

There’s no way to get around the importance of incentives. It’s part of human nature. For instance, incentives matter just as much under socialism as under capitalism. In the former Soviet Union, managers and employees of glass plants were at one time rewarded according to the tons of sheet glass they produced. Because their revenues depended on the weight of the glass, most factories produced sheet glass so thick that you could hardly see through it. The rules were changed so that the managers were compensated according to the number of square meters of glass they could produce. Under these rules Soviet firms made glass so thin that it broke easily.

Some people think that incentives matter only when people are greedy and selfish. That’s wrong. People act for a variety of reasons, some selfish and some charitable. The choices of both the self-centered and the altruistic will be influenced by changes in personal costs and benefits. For example, both the selfish and the altruistic will be more likely to attempt to rescue a child in a three-foot swimming pool than in the rapid currents approaching Niagara Falls. And both are more likely to give a needy person their hand-me-downs rather than their best clothes.

Even though no one would have accused the late Mother Teresa of greediness, her self-interest caused her to respond to incentives, too. When Mother Teresa’s organization, the Missionaries of Charity, attempted to open a shelter for the homeless in New York City, the city required expensive (but unneeded) alterations to its building. The organization abandoned the project. This decision did not reflect any change in Mother Teresa’s commitment to the poor. Instead, it reflected a change in incentives. When the cost of helping the poor in New York went up, Mother Teresa decided that her resources would do more good elsewhere (Howard, 1994). Changes in incentives influence everyone’s choices, regardless of whether we are greedy materialists, compassionate altruists, or somewhere in between.

2 There Is No Such Thing as a Free Lunch

The reality of life on our planet is that productive resources are limited, while the human desire for goods and services is virtually unlimited. Would you like to have some new clothes, a luxury boat, or a vacation in the Swiss Alps? How about more time for leisure, recreation, and travel? Do you dream of driving your brand-new Porsche into the driveway of your oceanfront house? Most of us would like to have all of these things and many others! However, we are constrained by the scarcity of resources, including a limited availability of time.

Because we cannot have as much of everything as we would like, we are forced to choose among alternatives. But using resources— time, talent, and objects, both manmade and natural—to accomplish one thing reduces their availability for others. One of the favorite sayings of economists is “There is no such thing as a free lunch.” Many restaurants advertise that children eat free—with the purchase of an adult meal. In other words, the meal isn’t really free. The patron pays for it in the price of the adult meal. Because there is “no free lunch,” we must sacrifice something we value in order to get something else. This sacrifice is the cost we pay for a good or service. Both consumers and producers experience costs with everything we do.

All choices involve a cost. As consumers, the cost of a good helps us balance our desire for a product against our desire for other goods that we could purchase instead. If we do not consider the costs, we will end up using our resources to purchase the wrong things—goods that we do not value as much as other things that we might have bought.

Producers face costs too—the costs of the resources they use to make a product or provide a service. The use of resources such as lumber, steel, and sheet rock to build a new house, for example, diverts resources away from the production of other goods, such as hospitals and schools. When production costs are high, it is because the resources are desired for other purposes as well. When consumers want valued resources used in a different way, they bid up the price of those resources, and producers use fewer of them in existing ways. Producers have a strong incentive to supply goods for as much or more than their production cost, but not for less. This incentive means that producers will tend to supply the goods that consumers value the most.

Of course a good can be provided free to an individual or group if others foot the bill. But this merely shifts the costs; it does not reduce them. Politicians often speak of “free education,” “free medical care,” or “free housing.” This terminology is deceptive. These things are not free. Scarce resources are required to produce each of them. The buildings, labor, and other resources used to produce schooling could, instead, produce more food or recreation or environmental protection or medical care. The cost of the schooling is the value of those goods that must now be given up. Governments may be able to shift costs, but they cannot avoid them.

With the passage of time, people often discover better ways of doing things and improve our knowledge of how to transform scarce resources into desired goods and services. During the last 250 years, we have been able to relax the grip of scarcity and improve our quality of life. This is the result of increased productivity in response to market forces. However, this does not change the fundamental point: we still confront the reality of scarcity. The use of more labor, machines, and natural resources to produce one product forces us to give up other goods that might otherwise have been produced with those resources.

3 Decisions Are Made at the Margin

If we want to get the most out of our resources, we should undertake actions that generate more benefits than costs and refrain from actions that are more costly than they are worth. For example, a family that wants to purchase a home will save for a down payment by working long hours to earn money and by spending less on entertainment and eating out. High school students who want to go to college will spend more time studying and devote less time to video games than they would if they didn’t care about college. This weighing of costs and benefits is essential for individuals, businesses, and for society as a whole.

Nearly all choices are made at the margin. That means that they almost always involve additions to, or subtractions from, current conditions, rather than “all-or-nothing” decisions. The word “additional” is a substitute for “marginal.” We might ask, “What is the marginal (or additional) cost of producing or purchasing one more unit?” Marginal decisions may involve large or small changes. The “one more unit” could be a new shirt, a new house, a new factory, or even an expenditure of time, as in the case of the high school student choosing among various activities. All these decisions are marginal because they involve additional costs and additional benefits.

We don’t make “all-or-nothing” decisions, such as choosing between eating or wearing clothes—dining in the nude so that we can afford food. Instead we choose between having a little more food at the costs of a little less clothing or a little less of something else. In making decisions we don’t compare the total value of food and the total value of clothing, but rather we compare their mar...

Table of contents

• Contents
• INTRODUCTION
• PART I THE CHANGING ECONOMIC SCENE
• PART II MAKING ECONOMICS COOL IN SCHOOL
• PART III RESEARCH FINDINGS IN ECONOMIC EDUCATION
• Contributors
• Index