Economics for Life

Background

When people ask me what I do, I say, “I teach Economics at York University.” While I am a Full Professor, a productive academic with an active research program (past President of the History of Economics Society) and honourable service commitments to my school,my professional identity is largely tied to my teaching.

As a young assistant professor, the immortality of publishing articles in journals that would forever be in libraries was an important goal. But over time, I came to realize how few people would read those articles, let alone be affected by them. Most of my, and I suspect your, “academic footprint” on this earth will be through our students. Over a career, we teach tens of thousands students.

As economists and teachers, what do we want our lasting “economic footprint” to be? There is a wonderful old Saturday Night Live skit by Father Guido Sarducci called “The Five Minute University.” His premise is to teach in five minutes what an average college or university graduate remembers five years after graduating. For economics, he states it’s the two words “supply and demand.” That’s it.

The serious question behind the skit, the one that motivates this book, is “What do we really want our students to remember of what we teach them in an introductory economics class?”

Microeconomics

I think the essential microeconomic concepts are opportunity cost, marginal analysis, and external and implicit costs, which are behind the “Three Keys to Smart Choices,” which form the core of (Micro)Economics for Life.

Economics for Life: The Three Keys

Key 1: Choose only when additional benefits are greater than additional opportunity costs.

Key 2: Count only additional benefits and additional opportunity costs.

Key 3: Be sure to count all additional benefits and costs, including implicit costs and externalities.

These three keys are essential for students to remember five years after graduating. They contain the microeconomic core of what it means to think like an economist. The nice to have list matches the chapters of this book. The let go list included more intricate economic concepts and tools that have been excluded.

Microeconomic concepts not covered include:

  • Tools for understanding utility maximization, including the equalization of MU/P, indifference curve analysis\
  • Detailed elasticity concepts like cross-elasticity and extreme (zero, infinity) values
  • Detailed derivation of firms’ cost curves from production functions and a wide range of short-run and long-run cost curves (average variable cost, average fixed cost, long-run average cost) beyond MC and ATC. There are no discussions of nuances of shutdown points, intersections of cost curves, or scalloped LRAC curves.
  • Detailed models of perfect competition, monopolistic competition, oligopoly, perfect price discrimination, pure monopoly, or monopsony. (Instead, market structure distinctions are collapsed into a continuum based on elasticity of demand and a firm’s pricing power.)
  • Graphical demonstrations of efficiency based on areas of consumer and producer surpluses and deadweight loss

I consider these exclusions to be a major strength of the textbook. The excluded topics detract from the student’s accepting the value of the basic economic analysis that will enhance her decision-making throughout her life. As one strays beyond the core concepts and stories set out in this book, diminishing returns set in rapidly.

It is far more valuable, I believe, for most students to understand and apply the core economic concepts well than to be exposed to a wide range of concepts they will not master and therefore will likely soon forget.

Economics for Life is designed to get students interested in economics as a way of thinking that will help them make smarter choices in their lives. This is reflected in the narrative style of the book. The economic concepts are not presented as theories that must be learned but as concepts to enhance the students’ decision-making skills. The concepts emerge logically from the narrative as an economic way of choosing the smart direction to take when faced with a choice. For example, in Micro Chapter 3, Show Me the Money: The Law of Supply, we begin with a student working part-time, who gets a call from his panicked boss requesting more hours of work. When the student doesn’t offer up many additional hours, the boss offers double time. When that elicits more hours, but still not enough, the boss offers triple time. In having the student think through that choice about how many hours to work, we develop the law of supply.

The scenarios form the basis of each chapter and show the students how to use economic concepts to make smart choices. The concepts are not presented as theoretical ideas that must be learned in isolation, or as formulas for a set of  problems.

Macroeconomics for Citizens

The essential concepts for macroeconomics are not as clear-cut. Economists disagree far more about macroeconomics than microeconomics. So I have incorporated that disagreement into the core of (Macro)Economics for Life as “the fundamental macroeconomic question.”

If left alone by government, do the price mechanisms of market economies adjust quickly to maintain steady growth in living standards, full employment, and stable prices?

Not only do economists disagree over this question, so do the politicians our students will be voting for, not only five years later, but for the rest of their lives. I believe the essential macroeconomic concepts students must know to answer that question for themselves — the macroeconomics they need to know as citizens—are included in this textbook.

Economics for Life: Role for Government "Hands-on"

Role for Government "Hands-on"

Where disagreements exists, this book divides economists, politicians, and citizens into two camps based on their answers to the fundamental macroeconomic question.

The “Yes—Left Alone, Markets Quickly Self-Adjust” camp believes that markets effectively channel self-interest to promote efficiency and economic growth, and are the most flexible way for the economy to adjust to changes. The “Yes” camp allows for business cycles, but believes they are caused largely by external shocks or government policies. Because they believe government failure is worse than market failure, they advocate, Chicago-style, a “hands-off ” role for government.

Economics for Life: Role for Government "Hands-off"

Role for Government "Hands-on"

The “No — Left Alone, Markets Fail to Quickly Self-Adjust” camp believes the self-adjusting mechanisms of markets can be slow and weak, so that business cycles, unemployment, and inflation will recur regularly unless the government steps in. The “No” camp believes business cycles are caused internally as unintended consequences of normally functioning markets — due tovolatile expectations, money and banking, and Keynesian-style coordination failures between input and output markets. Because they believe market failure is worse than government failure, they advocate a “hands-on” role for government.

I sympathetically present the strongest case for each camp. These camps, of course, are metaphors for extreme positions. No economist — or political party — fits entirely into either one. Think of the camps as the end points of a continuum along which economists and politicians are located. The extreme answers of the “Yes” and “No” camps are intended to sharpen students’ thinking about macroeconomic issues.

The core concepts include an aggregate supply and aggregate demand framework, complete with shocks and output gaps, that is developed in Macro Chapter 4. But the heart of the framework is the enlarged circular flow diagram, which recurs throughout the book.

Economics for Life: Enlarged GDP Circular Flow

Economics for Life: Enlarged GDP Circular Flow

I believe that most essential macroeconomic issues can be presented simply and intelligently using this diagram.

Concepts not covered in this textbook (the ones I let go) include:

  • Detailed measurement concepts like net domestic income at factor cost, chained-dollar real GDP, and differences between the consumer price index, GDP deflator, and chained price index for consumption.
  • Aggregate production function models.
  • Graphical models of the global loanable funds market.
  • Detailed formulas for the money multiplier and for alternative (Taylor, McCallum) monetary policy targeting rules.
  • Graphical derivation of the aggregate demand curve from the aggregate expenditure model.
  • Algebraic derivations of expenditure, tax, and transfer multipliers.

It is far more valuable, I believe, for most students to understand and apply the core economic concepts well — using the circular flow diagram to understand the “Yes, so government hands-off ” and “No, so government hands-on” answers — than to be exposed to a wide range of concepts they will not master and therefore will likely soon forget.

Thinking like an Economist

Economics for Life uses no abstract graphs (many data graphs and charts of data are used for visual clarity) and almost no math. Many of my colleagues exclaim, “How can you teach economics without graphs? No math! Where is the rigour of the discipline?”

Economics for Life has the same rigour as The Economist, the Wall Street Journal, The New York Times, and The Globe and Mail. None of these publications use abstract graphs or equations, yet they present sophisticated economic analysis. The rigour comes from learning to think about and analyze situations like an economist.

If Stephen Hawking can explain theoretical physics in his book A Brief History of Time with only one equation, I believe the same can be done for economics.

What I find exciting about this book is the possibility of helping far more students “get” the benefit of thinking like an economist. If these books succeed in doing what they set out to do—and you and your students will be the judges of that—then your students will be more actively engaged with the material. Students will learn economics in a way that will stay with them—even five years after leaving your classroom.

This brings us back to the question of your “economic footprint.” You will cover fewer topics using Economics for Life (leaving more room for discussion of current events), but your students will retain more. After five years, they will actually be ahead of students who were exposed to the full range of topics. Your economic footprint will be larger. You will have produced more students who have better learned the fundamentals of thinking like an economist, and who are making smarter choices in their lives as consumers, businesspeople, investors, and as citizens evaluating policies proposed by politicians.

You will have succeeded in helping your students learn economics.