In Search of Economic Education
Recently, CSE has become engaged in a debate over the content of social studies textbooks in Texas. Language has become shrill, with our opponents accusing CSE of being “right wing book burners” seeking to censor teachers and students. In reality, CSE has raised legitimate concerns about the portrayal of various economic systems. For example, one textbook notes, “In a communist system, the central government owns all property, such as farms and factories, for the benefit of its citizens.” The tragic history of the last century suggests that centrally planned economies fared very poorly in terms of providing benefits to their citizens. The Soviet Union ultimately collapsed, China quietly began a policy of dismantling its state-run enterprises, and Cuba is hardly a worker’s paradise.
Sadly, economics is a subject that receives short shrift in most high school classrooms. Which is unfortunate, because economics plays a powerful role in our everyday lives. Misinformed or incorrect economic reasoning can create disastrous policies that cost taxpayers and consumers billions of dollars. In totalitarian states, the costs were even higher, with millions losing their lives due to poor economic planning. A better understanding of economics allows us to more accurately evaluate government policies and understand the forces that shape our economy.
Perhaps the most fundamental issue in economics is scarcity. Resources are limited, while at the same time, the wants and needs of individuals are virtually infinite. With limited resources, it must be remembered that using resources to satisfy one person means that the needs of someone else will not be satisfied. In fact, this holds true for the individual as well. Spending money to watch a movie means that the money is no longer available to spend on dinner. Somehow, decisions must be made about where resources should be used. The question arises, then, as to how scarce resources should be allocated in order to provide the greatest benefit to society.
Ultimately, there are only two options for allocating resources. The first is to allow individuals to make decisions in the marketplace. The alternative is to allow government to allocate resources, determining what to produce and what consumers should be allowed to buy. The centrally planned economies of communist nations attempted to implement this approach. And while the asserted goal may have been to benefit all citizens, the actual outcomes have been disastrous. To avoid similar mistakes in the future, it is important that social studies textbooks include a serious examination of how societies allocate resources and how this affects the citizenry.
The Market
The market is an entirely voluntary approach to the problem that begins with respect for every individual’s property and their right to keep or exchange that property as they see fit. Individuals can determine what to do with the resources they own in a voluntary manner. People can make their own decisions about whether to buy or sell goods and services, including decisions about whether to sell labor or go to work. And importantly, when people agree to exchange, both parties to the exchange benefit. Economists refer to this as mutually beneficial exchange.
Often the market is misrepresented as a zero-sum game; that is, one person’s gain is another person’s loss. But when exchange is voluntary, neither party would agree to a deal that makes them worse-off. Why trade if you lose? In fact, the market is better described as a positive sum game—all parties win. Individuals make exchanges that provide value to both the buyer and the seller. Zero-sum games are more descriptive of government programs that allocate resources, where taxes are collected from one group of people to provide benefits to another.
The market provides a wealth of information and transmits that information very efficiently through prices. Everyone has unique information about resource use. Farmers know if it is a good growing season, producers know whether the costs of raw materials are increasing, and grocers know which products sell well. All of this information is made available through prices. Most people in the marketplace don’t even have to know any particular details to make resources allocation decisions. Whether it was a bad winter or the price of fuel that makes transportation more costly, all consumers need to see is the higher price tag to know that a resource has become scarcer, and that it may be necessary to cut back use of that product.
Fortunately, these same price signals provide important signals to producers as well. Rising prices indicate opportunities to earn a profit by bringing more of a product to market. As more of the product is brought to market, prices fall as the good becomes more readily available. This means lower prices for consumers, but it also signals producers that they should not waste scarce resources producing the same thing any more, because there is an ample amount in the market to satisfy consumer demands.
The market is a dynamic and evolving process that allows society to efficiently allocate scarce resources. The information generated in the marketplace allows far-removed people, who will never come into direct contact with one another, to make sensible decisions about how scarce resources are used. Moreover, prices and other information in the marketplace alert entrepreneurs to find new ways to satisfy customer demand, often by finding new ways to provide the same products using fewer resources.
This idea that individuals pursuing their self-interest could provide benefits to society as a whole was one of Adam Smith’s (the founder of economics) great insights. He dubbed this the “invisible hand”:
Every individual…generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
Over time, market-based economies have proved to serve their citizens well. Markets can coordinate activities in way that generate growth while keeping downward pressure on prices. Historically, the United States and other market-based economies have created the prosperity necessary to increase the well-being of their people. Moreover, as other nations adopt market-based policies to replace more centralized economic strategies, they have grown as well.
The State
The alternative to a market economy is to allow someone other than the individual to make decisions about resource allocation. Typically, this means the government. Under economic systems like socialism and communism, the government allocates resources. In fact, even in the mixed economy that now typifies the United States, the government plays an important role in allocating resources. Through taxation, the government takes resources from individuals to be allocated along lines determined by politicians and bureaucrats. Through regulation, bureaucrats and politicians tells individuals what they can and cannot do with their resources.
This approach was taken to its extreme in totalitarian states, where government fiat dictated how resources were to be used. In communist states, for example, a central authority made all allocation decisions. Private property and profits were denounced in favor of a managed economy. Yet, turning to history, it is difficult to suggest that the centrally planned economies did much to enhance the well-being of their citizens. As tsarist Russia’s economy was reassembled by the emerging Soviet Union, an estimated 20 million citizens lost their lives. While much of the bloodshed may have been due to factors beyond simple economics, there is significant evidence to suggest that collectivization and the implementation of communist economic policies were to blame for a large number of deaths.
As Martin Amis points out in his recent Koba the Dread (2002), implementing communist economic practices exacted a high human price. Collectivization was an attempt to centralize agricultural production by destroying private property rights and requisitioning all grain from the farmers (with the hope of exporting the grain to generate revenue to industrialize the country). Famine followed the bloody campaign to force rural villages into collective farming: “About 5 million died in the Ukraine, and about 2 million died in the Kuban, Don, and Volga regions and in Kazakhstan. These were formerly the richest agricultural lands in the USSR.” (p. 141). Amis also notes that during the collectivization roughly four million of those killed were children (p. 120).
Likewise, China’s attempts at centrally managing the economy proved disastrous as well. Despite the abject failure and famine associated with the Soviet Union’s collectivization program, China embarked on its own collectivization program in the 1950s. As in the Soviet Union, the collectivization was an effort to generate the resources to industrialize the nation. China’s Great Leap Forward would rely on the efficiencies of large-scale farming that were supposed to result from collectivizing the individual rural farmers. The elimination of private property and the creation of a centrally managed agricultural sector did little to boost China’s output; in fact, it precipitated one of the worst famines in world history. From 1959 to 1961, an estimated 30 million people died in China as grain output plummeted.
The transition to a centralized economy without property rights destroyed many of the incentives that exist in a market based economy to allocate resources efficiently. Self-interest no longer promotes efficient outcomes. Without property rights, for example, the incentives to produce efficiently are eliminated, because there is no one to claim any savings as a profit. Both Russia and China had seen famines before, but the results were not as disastrous. The change in incentives and lack of property rights decreased output at the very time when more output was needed. In addition to altered incentives, the planned economy no longer had a price mechanism to coordinate the activities of producers and sellers. Consequently, production decisions were made on poor information often did not reflect the conditions that existed in various markets.
Economics Matters
While no economic system can eliminate the problem of scarcity, history has demonstrated that market-based systems tend to coordinate and allocate resources more efficiently than do centrally planned economies. The lessons of the 20th century should not go unheeded, and any discussion of comparative economics cannot ignore the high costs of ineffective economic systems. At this point, there is ample history and empirical evidence to demonstrate the inherent shortcomings of centrally planned economies. Teaching students these important lessons is an important first step toward avoiding similar calamities in the future.
Economics can be a powerful tool that provides insights into public policies and how they affect individuals and economies as a whole. Incorporating this information into social studies texts in a way that offers cogent comparisons of different economic systems is critical if students are to develop an understanding of economic thinking.
Economics is about choice in an uncertain world filled with scarcity. In a free society, voluntary exchange in a free market provides an efficient mechanism for allocating scarce resources. In centrally planned economies, governments attempt to allocate resources. Yet, without the information generated by the price system and with a lack of incentives to produce and consume resources efficiently, centrally planned economies have not performed well. This is a lesson that is much cheaper to learn through a textbook than through costly and tragic central planning proposals.
CSE will continue to its efforts to promote economic education in social studies texts. This means more than simply asserting that an economic system benefits everyone. In a world of scarcity, all economic systems must address tradeoffs. What is important is how the economic system affects incentives and the ability to coordinate the activities of individuals throughout the economy. Theoretical and empirical work on past attempts at economic planning have generated important lessons and provided a great deal of insight into communist and socialist economic planning. Incorporating these findings into today’s social studies text is an important goal that will remain an important issue for CSE.
