March, 2012 Blog - 21st Century Economic Education

[Greg Timmons]

This year’s political election contains a plethora of rhetoric related to the economy. Candidates on the left are accused of “instilling policies that promote class warfare,” “raising taxes on the job-creators,” and “promoting a socialist agenda.” Candidates on the right are accused of “belonging to the party of ‘NO,’” “favoring Wall Street and ignoring Main Street,” and believing that “corporations are people.” 

Sometimes it’s easy to get lost in the rhetoric and the emotion of the campaign. But it is important that our students understand the basics of economics and finances in order to understand what their leaders are telling them. It is also important that young people have a deep understanding of basic economics in order to effectively participate in the global economy.

 Economics is the study of the production, distribution, and consumption of goods and services. Economists study the changing habits of consumers who buy goods and services and analyze the shifting relationship between supply and demand. The United States economy is based on capitalism and a free market system. Characteristics of this system are

• private ownership of property
• competition among producers
• producers’ decisions about what goods and/or services to produce and what prices to charge
• consumers’ choices about what goods and services to buy in the market place
• profit motivating producers to voluntarily produce the goods and services desired by consumers
• consumers having the final say regarding what goods and services are produced through their sovereignty to buy the goods and services they need
• need as a measure of the demand and its effect on the supply and the price of goods and services
• government’s involvement in the economy being limited so that economic choices are made by producers and consumers in the free market

 The study of modern economics dates back to Adam Smith and his opus “The Wealth of Nations.”  His depiction of an “invisible hand” is used to describe the self-regulating nature of the marketplace. Smith believed that when an individual pursues his self-interest, he directly promotes the good of society by keeping prices low while building an incentive for a wide variety of goods and services.  This notion of allowing the market to make economic decisions—the producers and consumers decide what products to produce and buy—keeps the market open and in control of those who participate in it. Wealth is created for producers and workers through selling the goods. And wealth is created for the consumers in the amount and wide variety of goods available to them.

 Wealth provides many advantages. When people have higher incomes, they buy more goods. Producers can, in turn, produce more goods to sell. All people are less dependent on government and have more political and economic freedom. Market economies produce income that allows the private and public sectors to accomplish important social goals, such as reducing poverty, improving the environment, creating quality health care, investing in research and education, supporting the arts, etc.

 It is sometimes considered a bit jingoistic to describe how this theory of wealth translates to the United States.  The U.S. is a wealthy nation. Its citizens enjoy one of the highest per capita incomes in the world. U.S. citizens have some of the most liberal economic and political freedoms in the world. The Constitution—the foundation of the government—provides important protections of private ownership and free trade to produce wealth for its citizens. By and large, Americans enjoy the benefits of an attentive and responsive government that encourages continued growth and accumulation of wealth and has the potential to respond when wealth production is threatened.

 

With few exceptions, those countries with controlled economies discourage free markets and have impoverished citizens with little freedom. The foundations upon which the government was formed do not protect the property and lives of its citizens, but of those in power, which is limited to a few self-selected people. Governments with controlled economies are very slow to respond to the needs of their citizens, because that is not their goal.

 Sometimes students’ discussions on the best conditions for wealth creation can be relegated to “we’re better than them” (as happened in many classrooms during the Cold War), but the truth is countries with free markets enjoy the benefits described above, and those with controlled economies don’t.  Just look at the economies of North and South Korea. The people of both countries share a common history, culture, homogeneous ethnic composition, similar geography, and the same language. Yet the economy of South Korea today is 14 times larger on a per capita basis than the economy of North Korea. In every economic indicator—GDP, per capita income, infant mortality—South Korea is far ahead of North Korea. [1]

 As teachers, we are not in the business of producing wealth for our students. Nor is our mission necessarily to teach our students to become wealth producers. But we do have an obligation to teach our students the fundamentals of the American economy and to prepare them for a life in that economy in a world of continuing interconnectivity and interaction. To make sure this happens, we need to make sure students have a fundamental understanding of 21^st century themes: global awareness; financial, economic, business and entrepreneurial literacy; and civic literacy. [2]

 For several years now, we have been hearing about how the opening of trade and markets has created a more interdependent world where the people, businesses, and governments are more integrated with other countries. Tom Friedman and others have written extensively on how Americans need to not only get on the ship, but lead the way.[3] Globalization provides enormous economic opportunities for the majority of people in both rich and underdeveloped countries. Economic education helps explain this with the law of comparative advantage, which states that free trade is mutually beneficial as long as countries specialize in producing the goods and services where they are comparatively more efficient and can produce these at a lower cost. For example, suppose Country A can produce more units of wheat than it can manufacture TVs while Country B can manufacture more TVs than it can produce units of wheat. Country A  has a comparative advantage in growing wheat, and Country B has a comparative advantage in manufacturing TVs. Trading Country A’s wheat for Country B’s TV clearly benefits both groups.

 The charts below explain how this works. To make this simple, let’s say Country A and Country B produce only two products: wheat and TVs. The chart “Before Specialization” indicates that, all things being equal, it takes 4 hours for Country A’s workers to produce 5 units of wheat and 4 hours to produce 1 television. Country B’s workers take 4 hours to produce 5 televisions and 4 hours to produce 1 unit of wheat. But if both countries specialize in what they do best (indicated in the “After Specialization” chart), Country A workers can produce 10 units of wheat in 8 hours and Country B workers can produce 10 televisions in 8 hours. Each country can keep half its production of the product it produces for domestic consumption and trade the other half for the good it can’t produce as efficiently.

 Comparative Advantage

Before Specialization	Hours Worked	Production and Consumption
Country A	4 4	5 units of wheat 1 television
Country B	4 4	5 televisions 1 unit of wheat

 

 

After Specialization	Hours Worked	Production
Country A	8	10 units of wheat
Country B	8	10 televisions

 Teaching the fundamentals of economics provides a great opportunity to bring real-world issues into the classroom. Students of the 21^st century need to know about the overall benefits of opening up trade—benefits not only for Americans, but for underdeveloped countries too. But teaching the fundamentals also requires teaching about the problems of free trade and the political implications. Increased international competition creates a threat to U.S. companies who lose sales and workers who lose jobs to foreign businesses and workers. Tradeoffs have to  be identified and discussed. U.S. consumers benefit from lower prices, and U.S. businesses and workers benefit from increased productivity and opportunities, but workers will be displaced and will suffer. Now the political side of economics enters the picture. We teachers need to go beyond the rhetoric of political slogans like the ones presented in the opening paragraph. Questions need to be asked and creative ideas need to be discussed: Can the costs of free trade be mitigated? Can workers be retrained? What is the cost if workers are or aren’t retrained? What obligation do companies have for their workers? What role, if any, can or should government play? How can a short term problem become a long term gain?

 A good place to start for effectively teaching economics is the National Standards in Economics produced by the Council for Economic Education. Created by a diverse group of economics educators, the twenty standards represent important ideas on economics education for grades 1-12. Studies show that economics textbooks generally cover most of the economics standards and are uniform in their coverage of basic economic concepts. [4]

 However, it is important that we not start and stop with textbooks. Effective teacher training is also needed. Studies examining economic education programs show that teachers who know more about economics have students that learn more about economics.[5] Time spent teaching and the quality of the materials are also important. Just as class minutes have been reduced for history and civics, so too have they been reduced for economic education under the regulations of No Child Left Behind. We need to begin this process in the elementary grades with effective and engaging lessons that instill early in students a solid understanding of economic fundamentals. We need to carry this through the grades so that students have experience with these fundamentals in simulations, case studies, and other activities that incorporate active learning strategies and authentic assessment. To do less will simply leave our students with little more that political rhetoric to determine their economic future.

 For more on this topic, view the Friedman-Gates discussion on the New York Times website. 

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[1] Schug, Mark and Lopus, Jane, “Economic and Financial Education for the 21^st Century” Social Education, November/December, 2008

[2] See Teachers Center May, 2011 Blog http://we.teachinteract.com/profiles/blogs/may-2011-21st-century

[3] Friedman, Thomas, “That Used to be Us” NY Times Book Review  http://www.nytimes.com/2011/10/03/books/that-used-to-be-us-by-fried...

[4] Leet, Don R., Ten Observations on High School Economics Textbooks,  California State University Fresno http://www.csufresno.edu/cerecc/documents/leet_Ten_Observations_HS_...

 

[5] Watts, Michael, What Works: A Review of Outcomes and Effective Program Deoivery in Precollege Economic Education, The National Council on Economic Education, 2005.