Teaching economics in schools

At the weekend I spoke at a conference in Berlin organized by the Friedrich Naumann Foundation on teaching economics to teenage school students. I took them through my preferred method, which is to avoid jargon and equations, but to build up understanding instead by starting with first principles and building up logically upon them.

Value, I said, is necessarily subjective. Because we are different we value things differently. Value is in the mind; it does not reside in the object itself, and it is because we value things differently from each other that we trade. From value I build up to price, and to specialization and trade, and so on. Those who have looked at my “Economics is Fun” videos on YouTube will see how this works. My audience took delight in the fact that my first 30 seconds dealing with value completely destroyed Marx’s labour theory of value, and with it ‘surplus’ value and exploitation and all the class hatred that follows from it.

My aim fundamentally is not to teach students a set of facts or rules, but to inculcate a way of thinking. I take the view that understanding is more important than learning.

Sometimes I teach this in schools by working through ten widely held and widely propagated views that are in fact wrong. These include claims that the world is running out of scarce resources leaving none for our children, or that the world will become so over-populated that it cannot sustain the numbers.

In showing why and where these are incorrect, I try to have the students thinking things through for themselves and taking a more critical attitude toward popular nostrums. My experience has been that young people appreciate this approach, and that it armours them in the years to come against much of the nonsense that politicians in particular talk about economics.

Some things about equality that Piketty should know

Dr Arthur Shenfield (1909-1990) was a distinguished scholar and a valued member of the ASI’s Academic Board.  In 1981 he published “Myth & Reality in Economic Systems,” based on a lecture series.  The essay “Morality and Capitalism” is very pertinent today, given the recent claim by Thomas Piketty that capitalism must lead to widening inequality.  It is worth reading Shenfield, not least for his pithy turns of phrase:

Thus it ill becomes socialists to assail the inequality of capitalism for, once achieved, socialism produces inequality more gross and obnoxious than anything observable in a developed capitalist country.  However, since there is some merit in a wide degree of a fairly equal condition insofar as it does not hinder desirable incentives of varieties of life styles, it is important to consider which kind of system is most likely to achieve it. The clear answer is capitalism.

Socialism ostensibly pursues equality but produces inequality.  Capitalism pursues liberty but in the process also reduces inequality.  We have already noted that in capitalism wealth comes to those who serve the masses.  Thus in capitalism the inequality of condition is little more than the difference between the Cadillac and the Chevrolet, the Parisian couturier’s model and the excellent mass-produced copies of it, caviar and the equally nutritious cod’s roe. In pre-capitalist societies it was the difference between the mansion and the hovel, between silks and rags, between exquisite luxury and frequent famine.

In socialist societies it is between the luxurious country villa and the miserable worker’s flat, between the special shops carrying high-quality goods imported from capitalist countries reserved for the Party elite and the endless queueing for the shoddy products of socialist industry imposed on the masses.

Gary Becker was right, part six: The family

Becker introduced the family into economic thinking and economic calculation into family life.  He spotted that a family is a miniature economic system like a small factory.  The basic goods it produces are things such as meals, residence, and entertainment.  The costs of these goods are compounded not only of the costs of their input, but include the time spent on producing them.  Since the family interacts with the wider economy including the place of work, there will be trade-offs between the two.

As real wages at work increase, it becomes relatively less attractive to spend time producing some of the family goods.  Some of these will be outsourced, buying in what was once done at home in order to free time for more valuable activity.  Examples include buying home-delivered pizzas or paying tailors to repair garments that used to be mended at home.  Sometimes people turn to outside institutions such as nurseries and schools to take over some of the activity that was once performed within the household.

Sometimes domestic production will become more capital intensive as work wages rise, with people buying labour-saving machines such as vacuum cleaners, washing machines and dishwashers.  The rise in the value of time at work has made domestic time relatively less efficient without them.  In place of the traditional dichotomy between work and leisure, Becker looked at the switch from more to less time-intensive production of home goods.

Becker noted some of the consequences of the large-scale entry of women into the workforce.  The wages they could earn at work made them less ready to spend as much time on domestic activity such as child rearing and childcare.  This provides an economic interpretation of the widely-observed decline in the fertility of societies as their economies develop.  Becker also thought it lay behind rising divorce rates in advanced societies.

Becker made a major contribution to our understanding of how families allocate time and assign tasks to the various members, so much so that we now routinely attempt to estimate the likely social and domestic impact of ongoing economic developments.

Gary Becker was right, part five: Human capital

Human capital is generally reckoned to be the skills, knowledge, and experience possessed by an individual or population.  It represents the value of our human capacities, and is what enables us to achieve our goals individually, or collectively in organizations and nations.  It can be invested in through education and training, and can improve both the quality and the level of production.  It has a rate of return that can be measured, albeit inexactly.

Gary Becker controversially compared the rates of return on human capital with the rates of return on children.

When human capital is abundant, rates of return on human capital investments are high relative to rates of return on children, whereas when human capital is scarce, rates of return on human capital are low relative to those on children.  As a result societies with limited human capital choose large families and invest little in each member; those with abundant human capital do the opposite.

We have empirical evidence that people in poor countries have large families.  They need the economic contribution the children will make to the family budget, and they need children to support them in old age.  As societies grow richer there are more opportunities to educate and train children instead of putting them to work.  Furthermore, social benefits, rather than children, can support the aged.  These factors explain why wealthier societies have lower population growth.  Indeed, most European populations are in decline, and it is immigration, rather than fertility, which contributes to those that are not.

It should be noted that the rate of return on human capital rises, rather than diminishes, as the human capital increases.  The more there is of it, the more worthwhile it is to invest in it.  This, in turn, implies better future production, both in quality and output.  Resources can increase even if population rises, contrary to what Malthus thought.

The doomsayers tell us that a massively over-populated world will have neither the food nor the resources to cope, and predict wars and starvation.  But set against them are the optimists, including Becker, who think that rising stocks of human capital will reduce population pressure and make more efficient use of resources.  Yet again, Becker seems to be on the winning side.

Gary Becker was right, part four: Immigration

Gary Becker proposed a remarkable  way of dealing with immigration.  He suggested selling the right to live and work in the US or the UK.  His proposal was that the countries should set a price ($50,000, for example), and admit foreigners prepared to pay it.  Of course certain categories such as terrorists or criminals would be excluded, but otherwise the doors would be open to those prepared to stump up the money.

His reasoning was that this would lead to the type of immigrants of most value to the recipient country.  Skilled people would be ready to pay because they would enjoy a bigger pay differential in moving from a poor country to a rich one than would poorer people.

Young people would be attracted because they would enjoy longer working lives in which to reap the benefit of their investment.  And those intending to settle permanently and make a commitment to the host country would have a longer time there to enjoy the benefits than those who intended to return to their own country.  All three categories make desirable immigrants.

Whether or not one agrees with the details, it is easy to agree with Becker on the principle that immigration should be encouraged where it is certain to make a positive contribution to the host country as well as to the immigrant.  Several countries already have schemes in place to achieve this.  St Kitts and Nevis offers citizenship as well as residence to those investing $250,000 in sugar industry diversification or $400,000 into real estate.  Dominica offers citizenship for an investment of $100,000.  The US will give a green card to someone investing $500,000 and creating 10 jobs for Americans, and Canada will let you in for 400,000 Canadian dollars.

The Becker proposal does deal with the objection that some raise about immigrants coming in and claiming welfare and health benefits.  The objection seems unlikely, in that most immigrants are young and healthy and seeking work, but we can be reasonably sure that no claimants would be coming in under Becker-type rules.  Many who oppose immigration are ready to make exceptions for skilled workers and those prepared to invest in their host country.  International businesses might well stump up the money required for them to transfer in skilled workers with none of the hassle and delays of conventional applications.

Once again Becker has shown how economics can be applied to areas other than the economy.