Teaching Economics
Remarks before the Annual Conference of theTexas Council on Economic Education
Houston, Texas
February 19, 2004

Someone once said, “If economics made sense, we wouldn’t need economists.” To that I would add, “If economists made sense, we wouldn’t need teachers.”

I have several excellent Ph.D. economists reporting to me—all smarter, better educated and graduates of more prestigious universities than I am. No doubt they could teach economics to graduate students better than you and I could—graduate economics being highly abstract and mathematical. But they’d be teaching future economists to teach future economists to teach future economists—far above where the rubber usually meets the road. I doubt they’d be all that effective teaching useful elementary economic concepts to your students, most of whom probably won’t take economics again.

You see where I’m going with this. I’m taking away your excuse.You don’t have to be a professional economist to teach important economic concepts at an elementary level. Just like you don’t have to be a weatherman to see which way the wind blows (to introduce a little Bob Dylan).

But what to teach? What to teach students on their way to further economic study isn’t what to teach on a one-shot basis. I reached this conclusion teaching night school at Johns Hopkins in the 1980s. In the middle of a wonderful lecture, I’d ask myself if I should have brought my sons to audit the class that night and absorb my wisdom. The answer was invariably no. Because tonight’s lecture wouldn’t mean much without last night’s and tomorrow night’s.

So, what do I recommend? First, I wouldn’t spend too much time on concepts that are little more than common sense—concepts they’ll learn anyway. By common sense, I mean things like:

• A balanced budget is generally preferable to budget deficits.
• Saving is important, for the individual and for nations.
• Debt is dangerous. It should be handled with care.
• High investment returns usually reflect high risk of loss.
• If something sounds too good to be true, it usually is.

(That last one isn’t limited to economics, but it’s too important to ignore. As is the power of compound interest, which I would put at the top of the list for financial literacy.)

Such common-sense conclusions are important, but don’t require any particular expertise to teach. Rather than common sense, I suggest you concentrate on uncommon sense—concepts that are less intuitive, or even counterintuitive, and not likely to be understood by most taxicab drivers. Examples might include answers to such questions as:

• Why are government actions to raise wages, fix prices or save jobs probably bad ideas?
• How can a complex market economy work without somebody or some government agency in charge?
• How can an unplanned market economy satisfy our individual wants and needs better than a centrally planned and controlled economy?
• Why is free trade a good idea for most of us despite the hardship it imposes on a few of us?
• Since virtually all economists believe fervently in free trade, why is it so difficult to convince the public and politicians?
• How does good Fed monetary policy bring about price stability?
• And how does price stability contribute to faster productivity growth and greater prosperity?

In an election year especially, a good thing to discuss might be why not everything that is desirable in our lives should be provided by the government. Why individual decisions and purchases hit the mark better than collective decisions and purchases.

Your students may not appreciate the value of economic education at first. They might ask that snotty teenage question, “If you’re so smart, why aren’t you rich?” Economists don’t do much better on that score than schoolteachers. Like you, they’d prefer to turn that question around and ask, “If you’re so rich, why aren’t you smart?”

Actually, why economists don’t usually get rich from their special knowledge is itself an interesting topic for discussion. And has to do with how well markets work. Inefficiencies that give rise to a potential for profits are discovered and eliminated so quickly that they hardly seem to have existed. That’s why it seems like all the really good deals have already been taken and all the really good investments were made in the past. Certainly, the best time to buy stock or real estate is always years ago. (Or the best time to find a good husband or wife, for that matter.)

While efficient markets may frustrate those trying to get rich by discovering unexploited anomalies or inefficiencies, they are a boon to those of us coasting along, looking for a free ride on an up escalator.

If we were lonely Robinson Crusoes, having to be self-sufficient, we’d be poor indeed. But markets enable us to specialize narrowly and benefit from the specialties of others.

Except for your own job, markets are forgiving of your versatility limitations. For example, we can benefit from a rising stock market with a minimum of stock research. We can take advantage of low Chinese wages without going to China to shop. We can eat oranges in the wintertime. We don’t have to worry much over which is the best lane in traffic or the shortest line at the check-out counter. We do worry about those things, but we don’t have to because others do and pretty much even them out for us. We can count on the market to do our work for us. Which leads to apparently paradoxical outcomes, such as, “Nobody goes to that restaurant anymore. It’s too crowded,” which some attribute to Yogi Berra. (Of course, Yogi says he never said everything he said.)

At the national level, of course, there is a strong connection between economic literacy, sound economic policies and the Wealth of Nations. That’s why North Koreans are starving and making bombs while South Koreans are living well, hip deep in bandwidth and cloning humans. In the postwar world, remember economic conditions in East Germany vs. those in West Germany? Remember East Berlin and West Berlin and which way Berliners voted with their feet? Remember the wall? Remember when John Kennedy visited Berlin and said, “Ich bin ein Berliner”—“I am a Berliner”? (I’ll bet you don’t remember when President Nixon visited Peking and said, “I am a Pekinese.”)

Remember when Khrushchev said he would bury us? That his communist system would outperform our capitalist system? Remember, later, when his communist system collapsed of its own deadweight and left capitalism as the last “ism” standing? Did we win the Cold War because we’re smarter than the Russians? Not hardly. They are better chess players than we are. Which settles the intelligence issue.

When Bobby Fischer won the world chess championship in the 1960s, I bought a chess set and learned just enough to teach my sons to play. One of them started winning chess tournaments. Since he was already winning tennis tournaments and knew how much work was involved, he dropped chess like a hot potato. So did I. Chess is hard, and frankly it made my head hurt. But it doesn’t make Russian heads hurt. They like it and are good at it.

No, the outcome of the Cold War wasn’t based on intelligence. Our economic system made the difference. They chose Marx and Lenin, while our founding fathers chose Adam Smith. We haven’t been as faithful to Adam Smith’s principles as we should have been. We’ve drifted, backslid. But the power of Smith’s ideas and the market is such that diluted capitalism beats full-strength socialism.

A few years ago, I went on a pilgrimage to find Adam Smith’s grave in Scotland. I found it in a churchyard in Edinburgh. There was a tourist-type souvenir shop nearby. I went in and asked what kind of Adam Smith souvenirs they had. They had none. They looked at me funny. Adam who?

It was even worse in France. Exactly a quarter century after Adam Smith published the Wealth of Nations in 1776, Frédéric Bastiat was born in Bayonne, France, in 1801. You might think of Bastiat as the French Adam Smith. Perhaps not quite as seriously scholarly, but Bastiat is easier to read and more fun. He promoted free trade and free markets with humor and satire. If he were alive today, he’d be a regular on Kudlow and Cramer. (Julia’s econ ed students would have called him “that Bastiat dude.”)

Bastiat’s 200th birthday was in 2001. I was invited to France to give the keynote address at his 200th birthday party. They had a bust of Bastiat in a little village square, and his hometown of Bayonne has a street named after him and a plaque at his birthplace. We visited these shrines, but leftist protesters hounded us everywhere we went. I had missed the ’60s in the U.S., and it looked like I was about to catch up in France, of all places. The protesters showed up everywhere and demonstrated against the economic principles of Frédéric Bastiat—and by implication, Adam Smith—the economic principles that finally, after many millennia, broke the cycle of poverty that had haunted mankind from the beginning to the Industrial Revolution. It left me incredulous. The protesters were only interested in the distribution of the wealth of nations—not its creation. They wanted to kidnap the goose that lays the golden eggs, cut it open and remove the last egg.

While I’m on the subject of graves, I’ve also visited the grave of Juan Peron’s wife, Evita, in Buenos Aires. It was better kept than Adam Smith’s. Of course, one might argue that nostalgia for leftist Peronism has contributed to Argentina’s current plight. Argentina shouldn’t cry for Evita, but Evita must be crying for Argentina.

But, I digress.

Let me get back to the opposite of free market economics, extreme socialism, or communism. Their ideal was “From each according to his ability; to each according to his need.” A noble sentiment. It even works well within families. But it doesn’t work within economies. The incentives are wrong—i.e., unrealistic. If we all own the means of production, in common, through the government, then nobody owns them. Common property is not private property. Without a profit motive and a private property incentive, why work? There was an old Soviet joke back in the days of communism: The workers pretend to work, and the managers pretend to pay them.

Under capitalism, we look out for No.1. We all try to better ourselves, not others. We are all trying to get rich—not make society rich, but ourselves. But Adam Smith explained that by trying to make ourselves better off, we inadvertently make others better off—as if by some invisible hand. We get rich by providing goods or services that people desire greatly and are willing to pay for. That’s why Adam Smith’s invisible hand is No. 1 on McTeer’s Top 10 List of things high school students should learn about economics. Incentives matter. Ideas matter.

The Dallas Fed is doing a video, which hopefully will become a public TV program, on Milton Friedman’s TV series Free to Choose. Our working title is Ideas Matter. You will certainly want it for your classroom. But back to incentives matter, lower case.

What incentive do I have to work hard, save and invest if I’m not working for myself or my family? What belongs to all of us collectively belongs to none of us. Why should I contribute more to the common pot than other people if they have equal claim on it?

How many times have you gone out to dinner with a group of friends? Each person orders for herself. Some have drinks; some don’t. Some have dessert; some don’t. When the check arrives, some idiot suggests splitting it evenly—usually the person who had the most expensive entrée on the menu. Everybody says fine, and pays her equal share. But just wait until next time. With everyone trying to eat and drink at the expense of someone else, the bill will be at least 30 percent higher.

What’s true of a socialized meal can’t be very different from socialized medicine or a socialized drug benefit. Not just socialism, but big government in a mixed system, faces moral hazard problems when those who benefit are separate from those who pay. If you doubt that moral hazard is real, just ask yourself when was the last time you washed a rental car before returning it.

Yet juries keep playing along with plaintiffs’ attorneys in the sham of trying to convert every accident or every good deed gone wrong into a lottery win for lucky victims. The big company or the big insurance company can afford it, juries rationalize, and their million dollar windfalls get folded into the cost structure of everything we buy.

By the way, who do those who rail against business think provides the jobs they complain about not existing? And once we put pharmaceutical companies in their place, who do we expect to invent the new drugs we need? Talk about killing the golden goose.

But even if you don’t quite kill it, there is a limit to how much abuse a goose can tolerate before the eggs stop coming. Wouldn’t it be better to take good care of the goose, with an eye on tomorrow as well as today?

And, of course, what’s good for the goose is good for the gander.

About the Author McTeer is president and CEO of the Federal Reserve Bank of Dallas.