Experiencing Economics

Keynote Speech By Donna Broughton

(The following was the Keynote address presented at the opening banquet of the 2003 De-Mystifying Economics presented by the Powell Endowment and the Richmond Federal Reserve Bank. Many of its reflections were later incorporated into the Powell’s Center’s booklet, Keystone Economic Principles. )

Experiencing Economics

My name is Donna Broughton and I have been teaching at Elijah House Academy here in Richmond for the past 10 years. The Academy is a private school serving Richmond’s inner city children in grades one through eight. We were encouraged by the folks at the Powell Endowment to consider adding economic literacy to our curriculum. They shared with us lots of practical, hands-on, child-friendly ideas to help us as teachers understand economic concepts and effectively share them with our students. We did this one step at a time, so it did not overwhelm us and we could evaluate the effectiveness of what we were doing before adding the next layer.

Economics is a necessary part of everyone’s education because it is such an integral part of our daily lives. It has always struck me as odd that it is usually relegated to the “bells and whistles” part of academia when it is, in fact, so important for every person. We sometimes think it is a difficult subject to teach to children because until we face the real world of jobs, and bills, and providing for a family, and planning for our old age, its meaning and relevance can seem a bit murky. The next couple of days will really help you with practical ways to bring all that into focus for your students.

I personally loved studying economics in college because it gave me a rational overview of the external things that impacted me and it helped me to develop the ability to discern which things I could change and how to change them, and which things I could not change but could adapt to or manage better. In other words, it helped me take charge of my own life, instead of just reacting to life. I believe we, as a nation, endanger our very freedom by neglecting to teach our children about the fundamentals of our economic system. We fail to give them the tools they will need to navigate the responsibilities and obligations of adulthood. We must help our children make conscious, informed choices, rather than letting circumstances make those choices for them.

When I was asked to share my thoughts with you, I was delighted to have the opportunity, but worried whether I could find the right words to convey to you the importance of the subject. Economics is not just a word in a textbook, but rather something that you experience every day in a hundred different ways. It is not a complicated philosophical idea, it really is an explanation of practical living. And I knew I wanted you to see with me its ubiquitous nature. Once we understand what it is, we begin to realize that we experience it daily in every aspect of life.

The definition of economics I learned in college is that it is the study of the allocation of scarce resources among competing interests. It is important to understand that these resources don’t just refer to tangible things you can buy in a store. For example, pleasure is an economic resource; time is another resource; cleanliness can be an economic resource. When we talk about “scarce” resources, we are really talking about all resources – there simply is not enough of whatever you are talking about for every person in the world to have all he wants of it. And the question becomes, how do we determine who gets what, and how much do they get? How is a scarce good allocated?

There are varying economic models that make such a determination. The continuum of economic systems runs the gamut from totally free markets with no restraints to the other end which is anchored by command economies. At one end of the spectrum, you have a totally unfettered free market system, in which no restrictions are placed on either the producer or the consumer. In a command economy a central government decides which goods should be produced, how and where they should be produced and at what price; there is little if any choice for the consumer. This is the communist style system.

The United States has opted for a modified free market economy in which the government does have oversight of some elements of the economy, but we are fairly close to the free market side. For example, monopolies are regulated rather than having free reign. We have laws which require truth in advertising. Many regulations are designed for consumer protection.

It is an interesting coincidence that the year 1776 gave us two of Western civilization’s most important documents. In that year, Adam Smith published The Wealth of Nations and Thomas Jefferson wrote the Declaration of Independence. These two documents not only complement each other well, I believe they have a symbiotic relationship. Jefferson powerfully endorsed the political freedom of a people and Smith gave voice to that same yearning for freedom in the realm of economics. You may be familiar with what Smith described as ‘the invisible hand.’ He thought that in a free society, individual people, acting on behalf of their own personal interests (you can even use the words “selfish interests”), would in fact produce that which benefits the whole of society. This is not to say all producers are motivated only by selfishness, but even if they are, the outcome is still the same. If an individual producer wants to enrich himself, he needs to pick a product people want. If they don’t want it, they won’t buy it, and the producer will not make any money. So even though a producer’s primary motivator is his own personal welfare, he finds it necessary to make something people want. If he doesn’t care about making a profit, neither will he care about making a product people want. It is that desire for a profit that functions as Adam Smith’s ‘invisible hand,’ ultimately benefiting all of society. The quest for profit is an absolutely necessary ingredient in a free market system. Another necessary component of a free marketplace in which you are free to make or not make a product, and I am free to buy or not buy that product has to do with competition – who may enter the marketplace? Artificial barriers to producers or consumers create distortions in the marketplace and can sabotage the benefits which would otherwise accrue to society in general. The more freedom that exists in the political arena, and the more freedom in the marketplace, the greater the benefit to society. FREEDOM is the key word here; no authority tells either party what to do. This is what we mean by a “free market economy” – and no transactions occur unless both the seller and the buyer benefit. It is a win/win situation.

Let’s look at a little more concrete example. Let’s say my family thinks I am a particularly good cook, so I decide to open a bakery. I’m doing it to make money. If I don’t think I can make any money, I won’t risk the money or the time to open that bakery. I may well feel very good about offering nutritious food to my community or providing employment to the few people I might need to help with the shop, but I’m not going to sell bread for less than it costs me to make it. I plan to make money for my efforts. You, as a consumer don’t buy my bread because you like me and want to see me make money for my efforts. No, you will buy bread if you think you need it, and you pick my store because either it is of a better quality or cheaper in cost than other bakeries. No transaction will take place unless we both benefit. In this country economic transactions are emphatically not a “zero sum game” as the economically illiterate sometimes think. The idea that you can benefit only if someone else loses by an equal amount, or that your gain is someone else’s loss, is simply bogus.

Even more important, a free market system is not just a nice thing to have, it is an essential ingredient of the political freedom we enjoy in America. In his book, Free to Choose, Milton Friedman, the Nobel-winning economist (and my personal economic hero), convincingly articulates the belief that freedom in the marketplace intensifies freedom in the political arena. He takes his case a step further by noting that the opposite of this freedom, the combination of economic and political power in the same hands, is a sure recipe for tyranny (p. 3, Free to Choose). Our political freedom is inextricably tied to our economic freedom and any lessening of one corrodes the other.

Hand in hand with freedom is responsibility. When we are free to make our own decisions, we become responsible for the consequences of those decisions. This is another reality of a free market economy. This is why it is imperative to understand what is really going on in our economic life; if you are responsible for the consequences of your decisions, you sure want to know exactly what you have decided and why you decided it, rather than allowing amorphous events or other people make those decisions for you.

So how do we make these decisions properly? That’s something you are going to learn about as you participate in this workshop. Essentially, making wise economic decisions requires you to understand what is really important in your own life. Those decisions are different for each of us, which is why command economies don’t work very well. You want to keep checking with yourself over and over about what it is you really want to have or really want to accomplish and then you say “yes” to the things that promote those goals and “no” to the things that block them. We all know that there are trade-offs in life, but we don’t often articulate, even to ourselves, exactly what those trade-offs are. Economics gives us a handy way to organize this.

I think you will find as you participate in this seminar that the teaching of economics is actually very well suited to young children. Most education involves telling children what they need to know and telling them about the consequences of not knowing it. But except for the artificial construct of making them take quizzes and tests, they rarely get to experience those consequences. Most often, the consequences come years later, when the children are no longer in school. It may be a cliché, but it is true: experience is the best teacher, and economics lends itself quite nicely to experiential teaching. It can be incorporated into just about any subject you want to teach, and central to the teaching is the requirement that the children make choices. This piques the children’s interest because they rarely think they make a lot of choices in a classroom setting. But there are always consequences to choices, and that, too, is an integral part of teaching economics. Sometimes the consequences are good and sometimes they are not so good. If good, they are naturally self-reinforcing. If the consequences are not good, it is very important that teachers not shield students from the consequences. It actually makes for an even better teaching experience, because you can show the students how to learn from mistakes. They have already realized a mistake was made because they didn’t like the consequences. So now you have an opportunity to show them how to think through the initial choice and see where it went wrong, and how to find some other choice with potentially better consequences. The more often you provide these economics lessons which involve choices and consequences, the more the students will learn.

What you are actually doing is modeling real life for them. Most school facts tend to be clearly defined, but life is rarely so neat. Your students will make many choices as they grow up, and the mistakes they make will not always take place in the protected environment a school affords. They will need to draw on this positive attitude of thinking through what choices they make – preferably before they do something, but if not, then how to understand that their consequences are the result of their choices and they can make different, better choices in the future. Instead of tuning out words that sound too “preachy,” economics provides us with a wonderful way to let children’s own experiences prepare them to make better adult choices.

It is dangerous to divorce the study of economics from a moral framework. Sometimes we might be tempted to look at the selfish or arrogant behavior of some in the market place and mistakenly attribute such behavior to an economic system, rather than to the human frailties they are really observing. If this is a concern of yours, I hope you will be reassured as you learn more about the study of economics. In fact, a free market economy cannot flourish in a society without a moral code and the rule of law. Our system is predicated on these concepts. We must be fully cognizant of the rights and responsibilities of the individual. We must promote the rule of law. The free enterprise system requires honesty, trust, and transparency. It cannot exist without them.

Professor Quentin Schultze of Calvin College (professor of Communications in Grand Rapids, Michigan, in an interview with Ken Myers based on his book, Habits of the High Tech Heart: Living Virtuously in the Information Age) asserts that increasingly in our society, efficiency and control are the new yardsticks by which we measure virtue. I fear he is right. I also believe that the Enron scandal and the corporate collapses of the past two years are clear examples of what happens when efficiency and control become the gods of the marketplace. Such a mentality would allow one to set one’s own rules and manipulate data not for the purpose of sharing knowledge, but for something quite the opposite: to actually hide the larger truth. It is what allows businesses to think about nothing more than the “bottom line”, or to view investors as ‘suckers’ who can be made to provide an unending cash flow. Please understand these scandals are not the inevitable result of a free market system, but instead reflect an assault on the free market system. We have seen companies try to subvert the requirements of honesty, trust and full disclosure and in their place substitute efficiency and control. And we have seen the penalties paid by all sectors of society for this crisis that grew out of deception and a blatant disregard for the law. But, bad as that is, our country now has the opportunity to take corrective measures. We need to restore honesty and trust to the system. And this most definitely includes schools inculcating moral and ethical values in all of our nation’s young people.

We sometimes are reluctant to teach economics because, again, if we are uninformed about the way our economy works, we misunderstand the role that the free enterprise system plays in the disparity of wealth in the world. I would suggest to you that it is our freedom, both political and economic, that accounts for the plenty we enjoy in this country vis a vis the rest of the world. And the answer to the disparity is not to pull away from the economic model we have, but to enable everyone to participate fully in it. In other words, the objective should not be to tear down the top, but to bring up the bottom, to provide the “have-nots” with the knowledge they need so that they may become the “haves”.

I believe economics really needs to be taught within a moral context. We should realize that profit is a good thing and not something to apologize for. It is what allows us to provide good jobs for millions of our citizens. The fact that some people misuse profits, or misuse power, is not surprising, but that is a problem we should address, not one we hide from. It is critically important both for each individual and for our nation as a whole that we give our children the tools they need to be productive citizens and that we place those tools in a proper moral context.

America is held together not by ethnicity or religion or even by its history. It is held together by the ideals of freedom and liberty, by the promise of opportunity available to all. That opportunity truly is there for everyone, but we all know the reality is that poorer children have more obstacles to overcome in order to avail themselves of the opportunity. It is the schools which must level the playing field. We must give all our children the knowledge they will need to participate fully in the economic life of our country. And they must believe that these opportunities exist for them. We can help them develop the habits and attitudes that will make it a reality. You will be hearing much about how to do that over the next couple of days.

As teachers, we have undertaken an awesome responsibility. We have the opportunity to address the poverty of the soul that so often accompanies the economic poverty in our cities and the materialism of the affluent. We must give the children hope. We must show them that they can contribute to the betterment of our communities. We must help them to aspire and to believe in themselves. We must show them that the American dream is for them just as much as it is for everyone.

This is not a false dream. I leave you with this encouraging piece of information. There is a perception that the poor are hopelessly mired in perpetual poverty, but the social underclass is not really as big as one might think. According to statistics compiled by W. Michael Cox of the Federal Reserve Bank of Dallas, this country enjoys an astounding fluidity in the movement between income brackets. “…Only 5% of those who started out in the lowest income bracket in 1975 remained stuck there in 1991. In fact, nearly 80 percent of those who started out on the bottom made it into the middle class by the early 1990s. Almost 30 percent ascended to the top income bracket.” (http://www.wired.com/wired/archive/4.11/wealth_cox.html, Wired Magazine, Issue 4.11, Nov. 1996)

We must have eyes to see and ears to hear the wealth of opportunity that exists for our students, and we must prepare them to make appropriate use of it. They are precious human beings entrusted to our care, and we can do no less.