Friday, June 12, 2009

Good for the Group, Not for Society

The goals of an introductory economics course should be succinct.  They should seek to instill an understanding of a few basic economic principles.  Seeking to cover a large amount of material is like pouring water onto concrete; the water spreads over a large area but no one gets a sip.

This is one principle I feel is important: what is good for a group is not necessarily good for society.  Most of the policies of the great depression (price controls, plowing under cotton, killing baby pigs) were based on the idea that this principle is false, and that if one group is made more profitable, society is made better off.

How can one instill this principle?  One way is the traditional supply and demand diagram with consumer and producer surplus contrasted with the same diagram under a monopoly case.  Yet, students often memorize the graphs without actually understanding the concepts.  It is perhaps better simply to discuss what happens when we force farmers to plow under their cotton, which raises their prices and profits (if done right).  Yet the impact for society is obvious--less cotton. More importantly, there was some cotton that individuals wanted to voluntarily trade, but now cannnot.  Some students may then ask: perhaps farmers spend their higher profits on other goods, so there may be less cotton but more other stuff?  Fair question, which demonstrates why those diagrams are important; those diagrams show that after the reduction in cotton there is, physically, less money to spend on other stuff.  Society is made poorer.