Front of Central Hall

Teaching Introductory Economic Concepts

Gary Wolfram, Hillsdale College

I. Introduction

It is important to realize that most students who are taking an introductory economics course will not go on to become professional economists.  Indeed, most will not go on to become economics majors.  For many, the introductory course will be the only the economics course they ever take. A good introductory course will get across the key concepts of how the economy works rather than emphasize techniques that will be later used in intermediate and advanced courses.  It is as easy to teach intermediate microeconomics to someone who has a firm understanding of how markets work but who has not been taught that the marginal cost curve cuts the average total cost curve at its minimum as it is to teach someone who has memorized the graphs but is lacking in an understanding of the concepts that underlie that graphs.  Indeed, it is more likely that there will be more students in intermediate economics courses if we instill in them a passion for economics, which generally does not come from giving them detailed mathematical analysis.

II. Every Picture Tells a Story

I suspect that many of us, when someone finds out that we teach economics, hear something like: “Oh, I had an economics course in college.  It was boring and full of graphs.”  It need not be the case that a course full of graphs be boring, but unless one follows the insight of Rod Stewart in his classic Every Picture Tells a Story, it will be boring.  It is the story that is interesting, and the picture is interesting only if one knows the story.  If I recorded an album, it would include “Every Equation Tells a Story,” since what is true for graphs is also true of equations.

My first point is, really, that we need to make introductory economics courses interesting.  This should not be hard, since economics is very interesting.  What is odd is that as a profession, we have managed to take something very interesting and make it “the dismal science.”  It is important that we give students a reason to take economics other than that it satisfies an elective.  There are lots of opportunities to do this.  Poverty in sub-Saharan Africa, falling birth rates in Italy, the lack of entrants into the priesthood in the United States, all can be analyzed using the most basic economic concepts.  It is not necessary to burden students with first order conditions for maximization before we take them on the journey.

III. Economics as a Way of Thinking: Seeing and Observing

An introductory course should less focus on the science of economics, and more on the art of the logic of economics.  Statements, even if they are true, are merely assertions if one cannot explain the logic of the argument.  I may teach my students that an increase in the minimum wage will result in unemployment.  Economist can all agree that if the demand for labor is not perfectly inelastic, then an increase in the wage above equilibrium must result in unemployment.  But if students do not understand the logic of how we arrive at this conclusion, then what they have learned us just assertions and they will not be able to distinguish between correct assertions and incorrect ones.

On my first day of class I refer to the Sherlock Holmes story, A Scandal in Bohemia. In the story, Watson finds himself near the apartment that he used to share with Holmes and decides to stop by for a visit.  Holmes, in the course of conversation, asks Watson how many steps there are leading up from the hall to his room.  Watson replies that although he treaded them hundreds of times he does not know how many there are.  Sherlock says, “You have not observed.  And yet you have seen.  That is just my point.  Now I know that there are seventeen steps, because I have both seen and observed.”  What we should be teaching students in introductory classes is to both see and observe.  They should, for example, be able to see that a military draft will allow the government to obtain soldiers at low cost to the federal budget, but observe that the opportunity cost of a draft is the lost private sector production that results from conscripting people.

Being able to observe is really a matter of following the logic of an argument to its conclusion.  Bastiat in his famous paper, “What is Seen and What is Not Seen,” made the point: There is only one difference between a bad economist and a good one: the bad  economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen. We need to teach our students to be good economists. This requires that they think like economists.  Paul Heyne, one of the best economics teachers ever, emphasized this with the very title of his principles text, The Economic Way of Thinking. I had the good fortune to use the first edition of this text at Berkeley while a teaching assistant and it made my introduction to teaching economics a pleasant and insightful one.  Heyne lead students through the process of logical thought that is economics.

Many students that appear on our first day of class, when they think of economics, think of money.  But, of course, money is only a small portion of what economists analyze, and all of microeconomics is done with little reference to the theory of money and credit, primarily dealing with relative prices and a unit of account.  Students in introductory courses can be brought into a broad realm of interesting issues and can be taught enough in the first few classes to get to the “foreseen” that gives them a feeling of knowing something that others do not.  Indeed, we should be giving them a tool to understanding that those who have not had economics do not have.  If we are successful, they will be talking to their parents and other students about the issues of the day, and create a further curiosity from those who listen to them about how to analyze these issues.

IV. The Market as a System

One of the most important concepts to convey to the student is that the market is a system and it is the behavior of rational self-interested individuals within this system that economics is concerned about.  This system, while it has elements of competition, can best be described as a system that relies on coordination and cooperation.  Mises, in Classical Liberalism, refers to the market system as one of cooperative action. What alone enables mankind to advance and distinguishes man from the animals  is social cooperation.

The market system is a social order that allows mankind to cooperate, with each person specializing in producing what he or she is best suited for and exchanging this production with others.  Adam Smith, with the opening sentence of Chapter 1 of Book 1 of The Nature and Causes of the Wealth of Nations states: “The greatest improvement in the productive powers of labour, and the greater part  of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.” This division of labor, cooperation of individuals, and coordination of economic activity is carried out in the marvelous system of the market.  It is crucial that an introductory economics course convey to students a grasp of how this system operates. It is also crucial that students learn that it is the market system that results in wealth for the masses.  Mises pointed out that “it requires only a moment’s reflection to realize that the fruits of all technological and industrial innovations make for an improvement in the satisfaction of the wants of the great masses.”  Marx and Engels, in The Communist Manifesto, acknowledge that: The bourgeoisie, during its rule of scare one hundred years, has created more  massive and more colossal productive forces than have all preceding generations together. The market system is powerful in its ability to produce efficiently. It is useful to use the Index of Economic Freedom and/or Economic Freedom of the World Report to encourage students to take an empirical look at the relation between economic well being and a system based on markets, individual liberty and social cooperation.  In fact, I use as the theme song to my class the Tom Petty classic, You Don’t Have to Live Like a Refugee.  The point that I make is that there are plenty of people in the world who work much harder than we do and may be equally as smart as we, but because they are mired in a system that doesn’t allow them to produce very much they will remain in poverty for the rest of their lives.   Removing them to a market system or reforming their system would greatly improve their lives.

The vast majority of students in our colleges have little idea how wealthy they are or how poor much of the world is.  By emphasizing the poverty of sub-Saharan Africa and showing the faces of refugees to them we may personalize poverty and inspire students to ask questions like “Why are we so rich and they so poor?”  After all, isn’t this why Adam Smith wrote An Inquiry Into the Nature and Causes of the Wealth of Nations?  If we can show them that if we alter the economic system the lives of millions of people will be improved, millions of children will no longer die of dehydration from intestinal diseases, and numerous cases of economic distress will be eliminated, then it is possible they will become interested in studying how these economic systems work.  Often young adults will be lead by their heart as well as their head and introductory economics can be a place that appeals to both.

V. Markets and Morality

In teaching introductory economics we must not forget the morality of the market process.  A basic economic concept is that you obtain things in a market system only by providing what others want.  The voluntary exchange system ensures that no one is forced to give up anything in exchange that they do not wish to.  No one is required to give up their labor without receiving in return the value of the opportunity cost of their time.  No one is forced to purchase anything.  You will not be able to sell what you make unless someone is willing to purchase it at a price that pays for the opportunity cost of the resources used to make it.  Mises made this point in the first chapter of Economic Policy: Thoughts for Today and Tomorrow, where he writes that there is no such thing as a chocolate king to emphasize that producers do not control the system—consumers do.

It is hard to imagine a system that is more moral than one in which you are rewarded to the extent you make things for other people.  Another story I like to relate concerns when the son of one of my best friends was telling me about his band and what kind of music he likes to play.  I told him, “Ross, if you want to play in your garage you can focus on what kind of music you like to play.  If you want to make a living at it, you need to figure out what kind of music I want to hear.”  We do not get to decide what we are going to produce.  We can only produce those things that others want at a price the pays for our costs.  This means that one only gets wealthy by pleasing others.

VI. Fundamental Concepts

In a one-semester microeconomics course it is possible to focus on a set of fundamental concepts that describe the market system.  These key concepts are rational individualism, self-interest (as opposed to selfishness) demand, elasticity, supply, marginal benefit versus marginal cost, individual, opportunity cost, voluntary exchange, information problems, economic profit, prices, and incentives.   Any student who comes out of an introductory course with a firm grasp of these concepts will be able to move easily into an intermediate level theory course, and those who do not go further in the study of economics will be able to intelligently analyze public policy issues.

Teaching introductory macroeconomics is a more difficult task as students like subjects where there is a consensus.  Macroeconomics is not such a subject.  I find it useful to teach macroeconomics with a history of economic thought approach.  This allows me to show the development of modeling of the macro economy in an organized fashion.  As in microeconomics, it is useful to emphasize the system and the logic of the argument rather than detailed mathematical modeling.

It is also important to connect the microeconomic foundations with the macroeconomic models.  Labor markets are one of the key points of macroeconomics, and these can be analyzed using the simple supply and demand curves of micro principles and showing disequilibrium.  It is useful in discussing money to emphasize the services provided by money, particularly in the reduction of transactions costs.

VII. The Political System

The market system acts within the political system.  Mises articulated the political philosophy that is consistent with market capitalism in his 1927 work, Liberalism.  There are certain aspects of the political structure that are necessary for market capitalism to work well.  Chapter 1 of the book discusses each of these, but they include property rights, freedom, equality under the law, inequality of income, peace, and tolerance of religion.  Each of these characteristics furthers the social cooperation that is necessary for the voluntary exchange and incentive crucial for markets to work.  As Buchanan and others have suggested, the institutional framework within which market participants act matters. Thus, an introduction to economics should provide a basic analysis of what rules and institutions are necessary for markets to operate efficiently or even to operate at all.

A simple example is to take Hayek’s definition of liberty—being able to act according to one’s own plan. A market system of voluntary exchange is based upon the principle of each individual acting according to his or her own plan.  The individual chooses his consumption bundle and chooses her labor force participation and production.  The political system in which markets operate would thus require a political system based on individual liberty.  As I tell my students, it is not by coincidence that Wealth of Nations was published in the same year as the Declaration of Independence.  The beginnings of market capitalism were consistent with the intellectual flowering of the concept of individual liberty.

A centrally planned system of organizing resources, such as socialism, is not consistent with individual liberty in the Hayekian sense.  Individuals acting according to their own plan are not likely to come to the same set of outcomes as that envisioned by the central planner.  It becomes fairly clear once one thinks about it, that socialism requires production and consumption be set by the plans of the central planner rather than the spontaneous order of a system of individuals acting on their own volition.

An introductory economics should include a discussion of the problem of decentralized information and the difficulties of coordinating economic activity.  The classic tool for doing this is Leonard Reed’s Freeman article, “I Pencil.” One can find a similar story in Wealth of Nations where Smith discusses the production of a woolen coat.  Reed’s article is retold in Friedman’s Free to Choose as well.  The purpose is to have students observe the cast amount of coordination and information that is involved in producing among the simplest of products.  Students should also observe that a central planner would find it impossible to ensure that every retail outlet in America has the correct amount of pencils at every moment in time, from the Wal-Mart in Coldwater, Michigan to the Target in Fresno, California.

VIII. Conclusion

My final point one must be enthusiastic in presenting the material.  Students will be bored if it appears that you are bored.  Students will be engaged when it is clear that this is something you really care about.  Students have to feel a connection with the material.  I try to use them as examples and pick situations they may be familiar with.  For example, when teaching marginal benefit I will use students in the class, such as Abigail, Anne, and Liam and say that Liam and Abigail are boyfriend and girl friend.  Abigail sees Liam on a date with Anne one day and confronts him saying, “I saw you on a date with Anne.  You must like her better than you like me.”  I then use the idea of diminishing marginal benefits of dates with Anne and Abigail to show that the total benefits of dates with Abigail are at each number of dates greater than the total benefits of dates with Anne, but the marginal benefit of the first date with Anne is greater than the marginal benefit of the 4th date with Abigail.  This also leads to Abigail’s strategy of saying: “If you go out with Anne then you can’t go out with me,” thus forcing Liam to choose between totals rather than making decisions at the margin.

Introductory economics is the gateway to a way of thinking that provides powerful insights into how and why the world works the way it does.  Teaching these classes allows us to create an interest and curiosity that will lead to further study of economics.  We should be attracting students and inducing them to go further in economics.  Once they have a passion for the subject, our intermediate theory classes can serve to ground them well in the mathematical technique necessary for advanced study.  The logic of the argument remains crucial, but the story is what will capture the students.