Thursday, July 29, 2004

These are trained professionals, do not try this at home 

My colleague Brooks pointed out an article by David Morris in last Sunday's StarTribune about the Federal Reserve Bank of Minneapolis' economic literacy program.  This year they had a contest of students answering the question "What role, if any, should the government play in addressing income inequality? "  Mr. Morris, who is affiliated with a leftist group in Minneapolis, is unhappy with the essays of the winner and first runner-up (in the standard category:  here are the first and second place essays in the advanced category -- note that the second essay quotes a paper by our friends at PowerLine -- I had no idea they did economics!)

Mr. Morris states:
This is economic literacy? What's going on here?

The bank's introductory essay on economic literacy, "Why Johnny Can't Choose," offers a clue. The title was consciously purloined from, "Why Johnny Can't Read," an essay that arguably launched a thousand reading literacy efforts. But even the casual observer recognizes the fundamental difference between reading and economic literacy. Johnny needs to learn to read because he can't read. He already knows how to choose. What the Fed wants is to ensure that he chooses correctly.

This is rubbish.  The concept of consumer sovereignty implies that no economist can define what choosing correctly means.  What economic literacy teaches in part is what it means to choose rationally.  Rationality simply means consistent preferences and acting towards meeting those preferences.  Economic literacy also teaches people to view all costs of making a choice, those which are seen and those which are unseen.

Choice is the essence of human action.  But people choose with a purpose.  Economic literacy is about understanding what purposeful choice means for your own actions and the actions of others around you.  If you have ever watched your teenager with money, you appreciate what this means.

What does "correctly" mean? Part of the answer can be gleaned from a 1998 bank-sponsored questionnaire titled, "Are You Economically Literate?" Here are some of the questions:
� "Which of the following occurs when one country trades wheat to another country in exchange for oil?"
The correct answer? "Both countries gain." Why? Because, the Fed tells us, "all other answers are ruled out, for if one country did not benefit, there would be no incentive for it to participate in additional exchanges."

What part of this is difficult to understand?  All trade is voluntary, and nobody knowingly engages in a trade that worsens them.  If you think trades are involuntary, you need to spell that out.
� "In a market economy, individuals pursue their own self-interest. Does this serve the public interest because of the ... ?" The Fed offers four answers. All presume individual greed serves the public interest.
Adam Smith: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages. "  That is what economics teaches, Mr. Morris.  If you don't like economics, that's fine, but do not presume to tell the Fed that they have not done their job.
� "What would happen to employment if the government mandated a minimum wage above what employers currently pay?" The economically literate answer? "Employment would go down."
That is a matter of some debate, true, but teaching that markets with prices above equilibrium tend to produce surpluses of the good being sold -- in this case, labor -- is again part of what any literacy course would teach.  What is your problem here, if not simple hostility towards markets?

And then later he comes to the absolute laugher (or Laffer, if you wish):

The Fed might inform students that even conventional economic thinking supports fairness. The theory of marginal utility tells us that the more of something you have, the less satisfaction you get out of having a bit more. Thus a dollar taken away from a very rich person and given to a very poor person makes society as a whole better off because the loss of satisfaction from the very rich person is far outweighed by the gain in satisfaction by the poor person.

This is simply wrong, because the utility of two people cannot be compared.  If you take my fifth beer away from me and give it to someone who has no beer, society isn't necessarily better off, since you have no idea how much I like beer versus the person to whom you gave the beer.  If this is the level of economic literacy you have, Mr. Morris, I suggest you leave teaching economics to someone else.

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Posted by King : 12:29 AM