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CHAPTER 18: Teaching Economics by Telling Stories * - Paul Heyne, “Are Economists Basically Immoral?” and Other Essays on Economics, Ethics, and Religion 
“Are Economists Basically Immoral?” and Other Essays on Economics, Ethics, and Religion, edited and with an Introduction by Geoffrey Brennan and A.M.C. Waterman (Indianapolis: Liberty Fund, 2008).
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Teaching Economics by Telling Stories*
I’ve been teaching introductory economics for over 35 years and I think I’ve finally figured out how it ought to be done. That doesn’t mean I now do it right. It’s very hard to teach introductory economics effectively, and I often blow it. But I think I know what I want to do and what I ought to be doing.
What Should We Teach?
If I’m going to persuade you, however, we’ll first have to establish a measure of agreement on why we want students to learn economics in the first place. What is it we hope they will take away from our classes?
Adam Smith began his inquiry into the nature and causes of the wealth of nations by asserting that almost all increases in productivity and hence in wealth could be attributed to the division of labor. Now the division of labor, or specialization, must obviously go hand-in-hand with exchange. Not quite so obviously, the division of labor will extend itself only if exchange can occur at low cost. You won’t specialize in the making of left-handed scissors unless you expect to find, without too much trouble, people who want these scissors badly enough to give you in return enough of what you want to justify your efforts. What this all comes to is that the growth of national wealth presupposes the evolution of an effective, low-cost system to facilitate the quick exchange of innumerable goods, services, and resources among millions of people who don’t even know one another.
Economics, as I understand it and try to teach it, is the discipline that takes as its primary task the explanation of such systems. It explains how people manage to advance the projects in which they are interested by furthering the projects of millions of other people whom they usually don’t even know. Economics, in other words, explains the working of markets.
Why Should We Teach It?
Why is it important that students learn how markets work? It’s not so that they can personally participate more effectively in the market system. I hate to admit this, but I don’t believe that a knowledge of economics is of much help to somebody who wants to get rich. It doesn’t hurt, and it may even convey a slight advantage. But the advantage is very slight. You get rich by knowing something that other people don’t know, or by working hard, or by choosing your parents carefully, or just by being lucky. You don’t get rich by studying economics.
The reason we should want everyone to have a basic understanding of economics, or of how markets work, is political. In a democracy, ignorance and misunderstanding on the part of the public lead to pressure on government to do all sorts of things that interfere with the effective operation of markets. A high level of economic understanding among the members of a society provides protection against many of the foolish things that governments are inclined to do in response to social problems and popular pressure.
That’s the political reason for putting economics into the high school curriculum. Is there an individual reason for learning it if it won’t make the student rich (except for the fact that somebody made it a requirement for graduation and graduation tends to increase lifetime incomes)? I think there is. It clears up puzzles. It explains important and interesting mysteries. People with any sort of intellectual life, or just with a healthy human curiosity about the world in which they live, cannot be comfortable participating in a social system that they don’t understand.
Moreover, social systems that impinge on us daily in important ways seem threatening when we don’t know how they work. They generate alienation and anxiety. So the best reason for anyone to learn economics is that a knowledge of how markets work empowers the knower. Economic understanding is a powerful antidote to the sense of impotence that comes from supposing that “they” must be in control because “we” are not. And if enough people learn good economics because it’s interesting and empowering, they will generate better government economic policy as a spillover benefit.
How to Make It Boring
Unfortunately, as I said at the outset, it is extremely difficult to impart that understanding. If we can rely on the reports from those who have taken courses in economics, most courses are not interesting at all. They are hopelessly boring. They don’t empower anyone; they put everyone to sleep. Why is that? How can a subject that deals with such important problems and processes be so boring?
The root of the difficulty, I have come to believe, is the fact that economics provides no clear and definitive answers to any significant social questions. I’ll say that again, because it’s true, important, and probably a bit surprising coming from someone who makes a good living by teaching economics and even enjoys it: Economics provides no clear and definitive answers to any significant social questions. It provides insight, understanding, a wider comprehension, sometimes even a good bit of wisdom. But it does not provide a clear and definitive answer to any important social question.
Most of the economists I know would not be very happy with that statement. They believe that economics is a worthwhile discipline capable of making important contributions to public policy. I believe that, too. I merely deny that economics can provide clear and definitive solutions to any controversial social problem.
Economics teachers who, despite this fact, insist upon teaching “clear and definitive” answers will end up either teaching arid definitions, whether verbal or mathematical, or trumpeting dogmatisms. And either one quickly becomes tiresome and tedious.
Here are some illustrations of arid definitions: “There are three factors of production: land, labor, and capital”; “In the long run, under conditions of perfect competition, price will be equal to average total cost of production”; “The balanced budget multiplier is equal to the investment multiplier minus one.” For additional examples, consult almost any of the questions that appear on high school Advanced Placement exams in economics. The distinguishing characteristics of this material are that it’s difficult to learn, it bores students, and it does not clarify, much less settle, any important social issue.
Here is a good example of what I call a “trumpeted dogmatism”: “Free trade makes everyone better off.” I call that a dogmatism not because I’m opposed to free trade (I’m the most uncompromising advocate of free trade that I know), but because the statement is both false and unilluminating. If it were true that free trade makes everyone better off, then people would not spend vast amounts of time and money seeking to impose restrictions on free trade. But people do oppose free trade, and very few of them are completely deluded in their belief that free trade will, at least in the short run, make them personally worse off.
Some statements of this sort, while not strictly true, are nonetheless illuminating, because they are useful first steps along the pathway to improved understanding. “Free trade makes everyone better off” is not helpful in this way. It arouses every instinct of resistance, especially among thoughtful students, who have learned that True/False statements containing the word “everyone” are invariably false. We should begin with the truth on this issue: that all persons who engage in voluntary trade expect it to make them better off. That’s a thoroughly defensible statement. And it’s a statement that establishes an important beachhead for subsequent assaults on the myths of protectionism. But notice that it does not by itself demonstrate that the North American Free Trade Agreement is good for the United States or that our government should not impose restrictions on imports from Japan. In order to reach agreement on such important social and political questions, we have to go beyond arid definitions and sweeping dogmatisms to something much more difficult: the telling of plausible stories.
We teach economics effectively, which is to say that we teach our students how markets work, when we help them trace out the probable consequences of selected market actions and market interventions. I’ll present two extended examples to show you concretely what I have in mind.
Stories About Mobile Home Parks
The first example deals with mobile home parks. I start off with a story. Stories are not the same as fictions. Stories are narratives: they recount a series of events, which may be true or fictitious. I prefer true stories, but I also use fictitious ones at times. The one that follows is true. It’s simplified, as all stories have to be, but it recounts events that have actually occurred. Here it is:
As the demand to live in mobile homes has increased in Seattle and other West Coast cities, largely in response to very high real estate prices, the demand for mobile home sites has also increased. But many of these cities, responding to pressure from neighbors who think that mobile home parks lower property values, have refused to allow the opening of new mobile home parks at a rate adequate to keep up with the demand. Meanwhile, many owners of existing mobile home parks in urban areas are converting their parks to other, more profitable uses. The predictable result is high and rising rental rates for the sites available to owners of mobile homes. This situation has led one angry mobile home owner to write to a local newspaper: “If you want to make money real fast, buy a mobile home park. You can raise the rent to your heart’s content, because the tenants usually can’t afford to move.”
I usually present this story to my students through an overhead projector. After they have had a chance to read it, we talk about it briefly to be sure we all understand what’s going on. Then I ask them to write a paragraph that will explain to the aggrieved mobile home owner why he is wrong: why people cannot in fact expect to make money real fast by purchasing a mobile home park and raising the rents. Notice that the letter writer has told a story. When I ask my students to explain in writing why he is wrong, I’m actually asking them to explain why his story is not plausible.
I usually ask them to compare notes when they have finished. Sometimes I collect the answers before we discuss them, sometimes afterward. Sometimes I’ll postpone the discussion to the next class period, after I’ve had a chance to read their “counter-stories” and to prepare stories of my own that take off from or amplify or present more plausible alternatives to the stories they have composed.
But it’s all stories. The stories I like, and to which I will want to introduce my students in the course of this exercise, tell about politicians kowtowing to the NIMBY sentiment and discriminating against people who would like to move to the city in favor of people who are already there; about people who want to live in mobile homes but can’t find sites and who start to bid up the rental rate on sites; about owners of mobile home parks who realize they can get more than they’re currently charging; about park owners who do not raise rents, either because they’re nice guys or because they’re not astute price searchers, who consequently confront long queues of aspiring renters, and who begin discriminating against potential renters on other criteria, such as pet ownership, age, size of deposit, race, and so on; about more astute price searchers who recognize in the below-market rents an opportunity for profit and consequently offer the owner a price beyond what he ever thought his park was worth, which he accepts—after which rents do go up; about the way in which people looking for a good deal bid up the prices of assets that are good deals, so that you can’t buy a good deal unless you know something that almost nobody else knows.
At some point in this festival of stories I raise a new question: What will happen if the city council responds to letters such as this one by legislating ceilings on what owners of mobile-home parks can charge for a site? I may ask them to write an answer; I may ask them to form groups and list probable consequences of such rent controls. What will emerge are stories, which we can examine together for their plausibility. A lot of students will tell stories about the unavailability of sites for people moving into the area. Some will talk about owners who convert their mobile-home parks to other uses when they are denied an opportunity to profit by raising rents. A few exceptionally astute students may talk about mobile home owners who rent or sell their home to someone else at premium prices, because the home has a legal entitlement to a below-market rental rate.
I will be sure that they hear stories about kind and gentle park owners who delayed raising their rents and hence got socked by the city council’s rent freeze, and who now sit and fume about the fact that those who were quickest to take advantage of the shortage are also those who managed to escape the freeze, proving again that no good deed ever goes unpunished; about the follow-up measures that the city council finds itself compelled to adopt: prohibitions on conversion of mobile-home parks to other uses, a commission to hear and arbitrate increasingly bitter and complex disputes between landlords and tenants, and so on.
Almost every major concept in economic theory can find illustration in the stories that emerge from reflection on the implausible tale told by the aggrieved letter writer. At no point do I attempt to draw a clear and definitive conclusion. I do not, however, object to students who draw their own conclusions about the arbitrary and unfair nature of all this, or who notice—as they can hardly help doing—that when legislators make special rules for favored groups, they produce a lot of consequences that no one had anticipated and that few would want.
Stories About Prescription Drugs
So much for my first example. For the second I have chosen an important and controversial public policy issue at this time: government controls on prescription drug prices.
I have learned to begin concretely. Here is one approach. Distribute to the students or display on an overhead projector the following information:
The Swedish pharmaceutical company ABAstra is charging $58 for a daily dose of Foscavir, or more than $21,000 for one year’s supply. Foscavir is a new drug that can prevent an AIDS-related blindness caused by cytomeglovirus retinitis, a disease that affects about 30% of people with AIDS. The cost of manufacturing a daily dose of Foscavir is less than $1. Why is ABAstra able to charge such a high price? List as many relevant factors as you can think of.
I like to add the following warning:
Note: “Greed” is not part of a correct answer. Since none of you knows the people who made the decision to set the price so high, you cannot know anything about their motives. More importantly, greed does not enable anyone to set a high price. Lots of greedy people have gone bankrupt because they could not manage to charge prices high enough even to cover their costs.
It’s a very good idea on this project to divide the students into manageable-sized groups and ask them to prepare a report listing the principal factors that enable the pharmaceutical company to charge a price so far above its actual production costs.
The first lesson to be taught is that when we run across a situation we don’t like—“outrageous exploitation of sick people,” for example—we should start by asking how the situation came about and why it persists. What’s actually going on here? That’s an extremely important lesson: for the dinner table, the conference room, the legislative hall, and the faculty lounge as well as the economics classroom. We all have a tendency, especially when we’re filled with indignation, to begin with the conclusions and subsequently to choose the facts that will enable us to reach our preestablished results. That does little to promote understanding; it merely hardens opinions already held. It does not lead to learning. And it fosters debate rather than discussion. Doesn’t it make far more sense to ask why, if the situation is as intolerable as it seems to be, it continues to exist? Social phenomena are not facts of nature, like mountains. They emerge from the choices individuals make in response to the situations they encounter, situations that are in turn largely created by the choices other people make. If we want to change society, we must first understand it. The first step toward understanding how markets work, and the beginning, I would say, of all social understanding, is the recognition that social phenomena are the product of particular choices in response to particular incentives. Incentives matter! To fix any social problem, we must alter the incentives. To do that, we must first discover what they are.
A primary objective of this specific exercise is getting students to see that the persistence of prices that are far above marginal costs requires explanation. We would not expect to find anyone consistently selling for $5.80 a chocolate chip cookie that cost only 10¢ to produce. We would want to know why anyone would be willing to pay that much for a mere cookie, however delicious, and why other people haven’t recognized the opportunity in this situation for huge profits and started to make a competitive cookie whose introduction would bring the price down. The goal is to tell a plausible story.
The story about Foscavir that I prefer marshals four explanatory factors. Given time and a few appropriate hints, your students should be able to come up with a similar list. (Always be generous; find what you’re looking for in what your students say or write, if you can possibly do so.)
A case study such as this one will give the imaginative and flexible teacher many opportunities to move back and forth between specific applications and the two basic concepts in economics, demand and supply. The first two factors listed above make the demand for Foscavir quite inelastic at low prices. The third factor keeps competition from pushing the price down toward marginal cost. The fourth factor introduces important considerations of politics and even ethics, which should never be dismissed as irrelevant or inappropriate to an economic analysis. We want to understand how markets work, and they do not work in isolation from political and ethical forces.
When members of the class have achieved rough agreement on why the situation exists, only then are they ready to begin thinking about what ought to be done. The teacher’s task at this stage is not to approve or reject any particular proposal but to ask, What will happen if we adopt this or thatproposal? and to assist the students as they attempt to predict the consequences. Predictions in economics should always be offered humbly, and so should criticisms of predictions. Rather than say to our students, “That won’t happen!” we should ask “Is that likely to occur?” The stories we tell can never be more plausible than the assumptions we’re making, and the prediction of social phenomena requires the employment of so many assumptions that we can’t possibly check on the plausibility of all of them. So humility is always in order.
Someone in the class is bound to suggest price controls, for example. “That will create shortages” is a poor rejoinder. “What will happen if we do?” is the appropriate response. Then together teacher and students can begin predicting the consequences of price controls. How will price controls affect the quantity demanded? How will they affect the quantity supplied? And how will they affect the development of new drugs in the long run? The last question is the crucial one. For if demand won’t allow pharmaceutical companies to make anything but losses on unsuccessful drugs, while competition won’t allow them to make anything more than a small profit on most of their drugs, and the law won’t allow extraordinary profits on a few successful drugs, what will provide the incentive for research?
After constructing and evaluating stories that tell how people are likely to respond to various suggested proposals for reform, you could shift gears radically. How should we finance research? Maybe it’s not something we can legitimately expect the private sector to do. You could point out that there are substantial positive externalities associated with pure research and that this creates an argument for at least some government funding. So ask your students to assume that all drug research is going to be funded by the national government, and to figure out how Congress might go about deciding in such circumstances how much money to allocate in total to drug research.
This can be an excellent exercise for driving home the concept of opportunity cost. The cost of more funds for drug research, which means more resources devoted to drug research, is fewer funds and fewer resources for other projects that we also value. After the students have encountered some of the principal difficulties, learning along the way that members of Congress don’t invariably vote for what even they believe is in the nation’s interest if something else is in the interest of their district, ask them to take the next step. Explain how Congress could go about deciding how much of that total to allocate to various diseases. I would expect the subsequent discussion to reveal, among other things, some of the differences between market demand and political demand, or between a demand curve and lobbying pressure. Then ask how the sum allocated to research on a particular disease should be allocated among the various research programs that different groups of scientists want to pursue. The students will come to appreciate through the ensuing discussion that it isn’t necessarily selfish to pursue the projects in which one is personally interested, but that neither can people—not even scientists—be given a blank check to pursue their own interests.
When your students have discovered for themselves how difficult it would be for the political process to allocate research funds in a defensible way, you might ask them to evaluate the following proposal:
Those who want to do research must raise their own funds. The total amount allocated to drug research and development will then be the total amount that interested people can raise. And the funds will naturally go to the diseases and particular research projects that these people choose.
I have tried this. The discussion that results is most interesting and instructive, especially because of the many contrary-to-fact presuppositions that students employ, such as that scientists will have to engage in fund raising, which they aren’t very good at (or for which we would say they have no comparative advantage), or that research will only be done on the diseases to which rich people are prone. It usually takes a good while and a bit of prodding for them to discover that this is in fact a description of the entrepreneurial system that we currently use to finance most drug research. You want them to begin reflecting on the role of the entrepreneur in an uncertain world and the way in which the possibility of profit and residual claimancy in an enterprise system places the power to allocate resources in the hands of people with an incentive to assemble and apply the best possible information and the most effective resources.
Only after such an extensive inquiry would you be in a position to ask what would happen if the government imposed price controls on prescription drugs. Price controls would undermine the information and incentive mechanisms of the entrepreneurial system and force the question of funding almost entirely into the political arena, where acceptable criteria for resource allocation cannot be expected to function.
How long might it take in a high school economics class to examine in this way the question of prescription drug prices? I don’t know. Not less than a week. Perhaps not less than two weeks. Done carefully, it might take three weeks. And that prompts the obvious objection: “I don’t have time to spend three weeks on the single issue of prescription drug prices.” And of course you don’t. But that’s not what I’m recommending. I’m recommending that you use the issue of prescription drug prices to teach your students how market systems work. You certainly have three weeks for that.
You can’t rush through an economics course and be successful, because economics must be taught dialectically and dialogue takes time. It takes time to find out what the problem is, more time to discover that “the problem” is really several problems, still more time to discern the main outlines of the situation in which the problems arise, additional time to explore possible causes and probable effects. It takes time to set the stage for the telling of plausible stories and more time to spell out those stories and to consider counter-stories. If you don’t have that much time, you don’t have the time to teach economics effectively.
I am not talking now about mere formal or technical economic theory. That can be taught by absolutely anyone with a graduate degree in economics, a standard textbook, and enough indifference to whining students to flunk everyone who refuses to read the textbook and master the theory. Formal or technical theory can be learned by any students with SAT scores high enough to get into college and an instructor who insists that they learn it. But a mastery of the formalities is not the same as really understanding how markets work. I have known dozens of economics students, many of them graduate students, whose command of technical theory would earn them an A grade in an economics course, who were incapable of seeing how this theory illuminated the working of actual economic systems.
I have even begun to suspect that a thorough knowledge of the formal theory is in some instances a barrier to the kind of understanding toward which we ought to be working. The theory, you see, is clear-cut, definitive, and yields precise answers—because it operates exclusively with precise concepts. Those who invest long years in its study develop a fondness for its clarity and—a favorite word—its rigor. Unfortunately, they also often develop a distaste for any economic analysis that lacks the precision and rigor of abstract theory. They don’t want to apply their nice clean concepts to the messy world of real market transactions because that will not yield the clear and definitive result so craved by economists who yearn to be scientists.
I think storytelling is a legitimate form of science. But if those who guard the citadel of Science decide that it’s not, then I will let them have their Science and I’ll stick to storytelling. For it is through the telling and hearing and critical consideration of stories that people come to understand how market systems work.
[* ] Unpublished typescript, provenance unknown. Reprinted by permission of Mrs. Juliana Heyne.