The Economics of Risk

For this activity, I told the children that they had to jump down the stairs from the very highest step they were willing to jump from. Whoever jumped from the highest step would win. I must admit this made me cringe as they went up higher and higher, but luckily they had SOME self-awareness and eventually they all refused to go any higher. 

Then, I covered the floor at the bottom of the stairs with pillows and asked the children which step they were willing to jump from NOW. In every case, of course, they were willing to jump from a higher stair. And this led nicely into our discussion of how sometimes reducing the COST of risk, leads people to take GREATER risks.

Here's Thomas Sowell on that subject, from page 135 of Applied Economics:

To some extent…reducing risk through insurance may cause people to take more risks. Just as lower prices for other things usually cause more to be demanded, so lowering the costs of given risks enables people to take on additional risks… 

If you were driving a car without brakes, or with brakes that you knew to be less effective, it might be foolhardy to drive faster than 10 or 15 miles per hour. …But, when you have well-functioning brakes as a risk-reducing device, you may well drive 60 miles an hour on a crowded highway. Thus brakes reduce the dangers in a given situation but also encourage people to drive in more dangerous situations than they would otherwise. This does not mean that safety devices are futile. It means that the benefits of such devices include benefits over and beyond any benefits from net reductions of risks. For example, because cars are able to travel at higher speeds, more extensive travel for business or pleasure becomes feasible.

(He discusses elsewhere how the same is often true with healthcare. When people don't pay the costs of their own healthcare, they tend to use more healthcare, and to use it less efficiently. This in turn leads to other costs, such as shortages, wait times, decline in quality of care, and so forth.)

We also talked about how safety and risk-reduction, like most things in life, requires analysis of costs and benefits:

(pg 161) Safety might seem to be something that you cannot get too much of. Yet everything we do in our everyday lives belies that conclusion. Often what we do makes more sense than what we say. 

Reducing risks has costs, some of which we are willing to pay and some of which we are not willing to pay. Moreover, not all costs are money costs. For many people, the costs of reducing risks would be giving up the enjoyment they get from skiing, boating, rock climbing, skateboarding, and other risky activities. In fact, ultimately there are only risky activities, since nothing is 100 percent safe. Yet no one suggests that we retire into passive inactivity—which has its own risks.…On the other hand, most of us are not prepared to take a short cut by walking across a freeway during the rush hour. In other words, there are risks we are willing to take and risks we are not willing to take, varying somewhat from person to person, but involving a weighing of benefits and costs in any event. 

In short, even those who talk about safety in categorical terms—"if it saves just one life, it is worth whatever it costs"—actually behave in their own lives as if safety is an incremental decision, based on weighing costs against benefits, not a categorical decision.

and 

(pg 143) Our natural inclination may be to want to make every place as safe as possible, but in reality, no one does that when they must pay the costs themselves. We are willing to pay for brakes in our cars, but having a second set of brakes in case the first set fails would make us safer still, and a third set would result in still more reduction of risk… However, faced with rising costs and declining reductions of risk as more backup brakes are added to automobiles, most people will at some point refuse to pay any more for additional but insignificant reductions in risk. However, if someone else is paying for reductions in risk, the point at which risk reduction stops may be very different. Lawsuits can impose costs that shut down a playground that is safer than any alternative place the children are likely to be, including their homes.

The implicit assumption that zero risk can be taken as a benchmark for assessing blame for particular risks can easily lead to higher risks than if it was understood from the outset that one risk must be weighed against another, not compared to zero risk or even to some arbitrary standard of "acceptable" versus "unacceptable" risk.

Thomas Sowell talks about how this calculus is changed when government, "non-profit" or private organizations get involved in imposing safety requirements.

(pg 144) Since these organizations do not charge directly for their services like…insurance companies, they must collect the money needed to support themselves from lawsuits, donations, or taxes. Put differently, their only money-making product or service is fear—and their incentives are to induce as much fear as possible in jurors, legislators, and the general public. 

Whereas individuals weighing risks for themselves are restrained in how much risk reduction they will seek by the costs of reducing those risks, there are no such restraints on the amount of risk reduction sought by those whose risk reduction is paid for with other people's money… 

The central question of how much risk is to be reduced at what costs is usually not raised at all by third-party safety organizations or movements. Not are alternative risks weighed against one another. Instead, the theme is that something is "unsafe" and therefore needs to be made safe. 

This kind of argument can be applied to almost anything, since nothing is literally 100 percent safe. It has been used against medications, pesticides, nuclear power, automobiles, and many other targets… 

In the case of nuclear power, the question of safety, in addition to cost, is: Compared to what?…Once the discussion changes to a discussion of incremental trade-offs, then nuclear power becomes one of the safest options. But neither it nor anything else is categorically safe.

This is why it drives me so crazy when third parties get involved in things like whether or not parents "should" let their children walk to school, play at the park alone, eliminate all allergens from their environment, allow them to consume certain foods, and so forth. Someone with absolutely no investment in paying the costs of these choices should not and CANNOT make as good of a decision as the parent who must actually pay them. I was just talking to a friend about how so many people are willing to give well-meaning advice about how much effort should be put into treating allergies or "child-proofing" a house—but in reality, each family must weigh the costs and benefits and make those choices for themselves. And this should be able to take place without third parties jumping in with accusations of "bad parenting"! See also the free-range kids movement, which makes many of these same points.

All this made for very lively discussions with the children. I talked about some of the risks they can choose for themselves, and others that we as their parents will make for them until they are older—but they loved talking about what THEY think they will do with their OWN children, when the time comes. We also had some interesting conversations about things like the regulation of organ donation, prescription drugs, hospitals, etc. What kinds of costs and benefits might these regulations have? Which things did the children think ought to be under government oversight? And why? I love discussing this type of thing and it was fun to see them begin to think about it as well.

Inflation Auction

We got the idea for this inflation activity here. This one was SO FUN. And it did a good job showing how a minimum wage leads to higher prices. Here's a video talking about that, too. Also related: It seems like everyone asks the question at some point or other, "why can't we just print more money?" And it's surprisingly hard (for me) to explain! This video does it pretty well.

We had been using our family currency for awhile by the time we had this auction, so most of the children had earned some money. I was glad to have that because I think the activity was more effective when the money wasn't simply handed out at the beginning—it had been earned through doing actual work, and thus had more value to the children themselves. (We could also have used real money, but none of them really have very much.) There was some definite disparity, though: Abe had earned a TON of family money, because he's a hard worker and that's just the way he is—he loves to earn things and keep track of things and go the extra mile. The others had made proportionally less, and Goldie and Junie almost nothing.

I bought some special candy, things we hardly ever have and certainly the children never have all to themselves! And then I proceeded to auction them off. The first "year," two packages of Lindt truffles went for $3 and $2 respectively. The two children who won those items were very, very pleased with themselves.

Then I pointed out how sad it was that Goldie and Junie didn't even have enough money to buy ANYTHING. (They had $2 and $1 each, I think.) I instituted a $2 minimum wage for "Year 2" so that everyone would at least have enough to bid with! But in Year 2, the same kind of package of truffles was sold for $7! And a pack of Skittles went for a whopping $22.

Now our poorest citizens didn't have NEARLY enough to buy something! I raised the minimum wage to $4 for Year 3. The next package of Lindt truffles sold for $15! The Starbursts fetched $45 from Abe, for whom money was really no object. I auctioned off one more thing, a Ritter Sport bar, and Seb paid $49 for it! And the poor little girls still didn't get anything. All that had happened was that the prices had gotten even more out of their reach!

I must admit that I was very pleased that everything proceeded like such a textbook case. I didn't have to manipulate or encourage or anything—that's just what our prices did naturally as the amount of money in the system increased (and the value of it, necessarily, decreased). It was also interesting—I had given the children a big lecture on being good sports and not getting mad if they didn't get something, and so forth. And they were really good about it (and I did give Junie and Goldie some little candies of their own later, so they got something too) :), but there was some regret—especially for people that didn't bid aggressively during the first year, and later paid so much more for the same items. And Sebastian regretted it SO much that later he arranged a little side trade with Malachi, unauthorized by me and unregulated by the usual market forces. There, in the Black Market, where there was little competition, he paid $71 for one bag of Lindt Truffles! And that was a wonderfully apt object lesson as well.

Economic Systems, the Free Market, and Trade

I don't expect anyone to follow my garbled lecture notes here! There is quite a lot left out. But I was pleased with the way this discussion went. It is interesting to consider the idea of a Utopia or a Zion society. It's been the goal of so many, and yet most of those people have been lacking the ONLY thing that makes such a society possible: a change in human nature. And that, of course, only comes through Jesus Christ, and through our own agency. It is literally impossible to compel this change in others! And it's impossible to purely self-will it. Only the combination of our own desire and Christ's mercy allows the mighty change of heart that makes Zion possible. Which is why any secular Utopia must ultimately fail.

Anyway, on to more political things. Economic Systems and Trade!

My first introduction to Karl Marx came through Monte Python, I'm pleased to say. And I've never forgotten it. All through AP European History and other classes, I would repeat to myself, "The struggle of class against class is a what struggle? A what struggle?" "A…political struggle." It helped me through many an exam. Here's the video.

This talk, about the difference between the United Order (a sort of communal society attempted in early Latter-day Saint history) and Socialism, is interesting. Anyone who says these two systems are basically the same is missing some vital information!

Here's an old, but good, video about how the stock market works. I love this old style of movies.

When you talk about investment, it's also a good time to read the Parable of the Talents from the Bible and discuss how we can invest and enlarge ourselves spiritually! This is a good discussion of the parable, as is this. And this. And this. I like pondering all the different applications one parable can have.

Milton Friedman's "Free to Choose" series was really influential a couple decades ago, I think (and is still very applicable). I love the guy. This video, about how the free market helps people around the world, is great.

Here's Thomas Sowell on income inequality, and here's another one on the same topic.

I, Pencil. This video is a classic about trade and how it enriches all of our lives.

And here's another take on the same subject: How to make a $1500 sandwich in only 6 months

The Morality of Capitalism. And another (the children really liked this one). Ooh! And this one too. (Nice shout-out to our man Adam Smith, too.)

I posted this on another page, but it fits here too: This article is fascinating. It relates to the free market, but also gives a good perspective on how grateful we should be for what we have. We are so abundantly rich compared to any other people on earth before!

And it's always great to hear Milton Friedman in his own words. Here he talks about a glaring problem with socialism: where are "the angels" who will carry it out?

Another look at some of the problems with socialism.

What is the best Minimum wage?

Another of these sort of old-fashioned movies that seems a bit funny now, but the principles in it are sound. Why socialism doesn't work.

What's all this talk about the "trade deficit"?

And yes, I do get into all these subjects with my children, and they love it! I don't know how normal that is; perhaps it's strange, but maybe because they're subjects I find fascinating, the children love to talk about economics and politics. "Tell us something else about whiny college students," they will say, hopefully, at the breakfast table. :)

Rock Stand

The children, who are quite mercenary little creatures at the best of times, were driven to many new heights of enterprise during this Economics and Money Unit. I always try to discourage them from doing Lemonade Stands and so forth, mostly because it makes ME uncomfortable (I'm always afraid they'll annoy people, or that people will stop and buy something just to be nice but be sort of annoyed at the same time. Ha.) and because I never think they'll be very successful and I want to quash their little dreams early so as to prevent future disappointment. And I think, the thousands of children's books using Lemonade Stands as symbols of "Entrepreneurship" to the contrary, that children's lemonade stands don't actually add that much value to society. It's funny, because when I see OTHER children at lemonade stands I think it's darling and I even make a point of stopping at them when possible, but it's still something I sort of groan at whenever my children want to do it.

What value does this kitchen scale add to the world?

(Speaking of adding value, Sam actually taught a whole lesson about it during this unit. It's something he always tells his college classes about. He talked about adding value to the world, and how to do it [and how even if YOU think you ARE doing it just by existing or "creating," it's really determined by whether or not others WANT your goods or services. And he talked about different types of value, of course—our intrinsic value as children of God doesn't change].)

Well, in spite of this wet-blanket-ness on my  part, the children have sold things at "stands" before and probably will again. And this latest effort was a rock stand selling various rocks we have found or bought and polished. And I suppose the polished rocks actually are something the children added value to by polishing, so that's good. Though I didn't know if there would be much of a market for them. This Rock Stand was a multi-day effort and the children actually made a little bit of money! So they were thrilled.

The kids were very conscientious about marketing. They made many signs, and walked up and down the street yelling and ringing a bell. It probably drove our sainted neighbors crazy. I tried not to let it go on too long or too frequently.

I loved Malachi's sign. Good thing we have so many "raer" rocks for sale.

Sweet Daisy made the cutest little Activity Books with dot-to-dots and coloring pages and other fun things. They were so darling and she said, "My target audience is something like two- or three-year-olds." I said, "That's good, but your target audience doesn't have any money!" She said, "Well, their big brothers and sisters could buy them for them." Unfortunately, there were no big brothers or sisters of adequate generosity around, so she didn't sell any books. It was a little sad (and that's another reason I don't like it when my kids sell things). But, Daisy wasn't too disturbed by it. She had fun making them anyway!

Brands, Profits, and Marketing

I found this "Snowman Soup" activity online and it seemed like a good way to talk about profits, brands, and marketing. The activity as written is great for older kids (it has some worksheets for figuring out gross and net profit, etc.); I modified it a bit for the younger ones and put more emphasis on the packaging too. Sam is always talking to his college students about the importance of having an audience in mind when you create anything, and this is no different. We tried to think about WHO we were trying to appeal to, and what kinds of messages we could convey with our logos, fonts, packaging, etc.

Along with this activity, we discussed the economics of company branding. It's an interesting thing to think about! As someone who grew up in a household that always emphasized what a waste of money it was to buy "brand-name" products, I was interested to read this several years ago in Basic Economics:

(page 504) Brand names are often thought to be just ways of being able to charge a higher price for the same product by persuading people through advertising that there is a quality difference, when in fact there is no such difference. In other words, some people consider brand names to be useless from the standpoint of the consumer's interests. 

In reality, brand names serve a number of purposes from the standpoint of the consumer. Brands are a way of economizing on scarce knowledge, and of forcing producers to compete in both quality and price… 

Brand names are not guarantees. But they do reduce the range of uncertainty. If a hotel sign says Hyatt Regency, chances are you will not have to worry about whether the bed sheets in your room were changed since the last person slept there. If the camera you buy is a Nikon, it is unlikely to jam up the first time you wind the film… 

Like everything else in the economy, brand names have both benefits and costs. A hotel with a Hyatt Regency sign out front is likely to charge you more for the same size and quality of room, and accompanying service, than you would pay in some comparable, locally-run, independent hotel if you knew where to look. Someone who regularly stops in this town on business trips might well find a locally-run hotel that is a better deal. But it is just as reasonable for you to look for a brand name when passing through for the first time as it is for the regular traveller to go where he knows he can get the same things for less. 

Since brand names are a substitute for specific knowledge, how valuable they are depends on how much knowledge you already have about the particular product or service…

Well, there's more, of course, and all of it good. But I can't reprint the whole book here! One more section, though, that provided a jumping-off place for our discussion about profits:

(pg 514) The performances of non-profit organizations shed light on the role of profit when it comes to efficiency. If those who conceive of profit as simply an unnecessary charge added on to the cost of production of good and services are correct, then non-profit organizations should be able to produce those goods and services at a lower cost and sell them at a lower price, [thus] taking away the customers of profit-seeking enterprises and increasingly replacing them in the economy. 

[However,] increasingly the opposite has happened: non-profit organizations have seen more and more of their own economic activities taken over by profit-seeking businesses… that can do the job cheaper or better or both.

And

(pg 523) Markets are often criticized for permitting or promoting greed. High prices are often blamed on greedy sellers. But "greed" is seldom defined. Virtually everyone would prefer to get a higher price for what he sells and pay a lower price for what he buys. Would you pay a dollar for a newspaper that was available for fifty cents? Or offer to work for half of what an employer was willing to pay you? 

Would adding a string of zeros to prices or salaries change the principle or the definition of greed? It is hard to see why it should… If it refers to people who desire far more money than most others would aspire to, then the history of most great American fortunes—Ford, Rockefeller, Carnegie, etc.—suggests that the way to amass vast amounts of wealth is to figure out some way to provide goods and services at lower prices, not higher prices. 

Back in the nineteenth century, Richard Sears was ferociously determined to overtake Montgomery Ward, the world's largest retailer at that time, and worked tirelessly for incredible hours toward that end, sometimes taking business risks that bordered on the reckless. Sears sought out every way of cutting costs, so that he could undercut Ward's prices, and every way of attracting customers away from his rivals. He did all this, not because he did not have enough money to live on, because he wanted more—and he wanted his company to be number one. If that is our definition of "greed," then he was greedy. More important, in this case as in many others, it was precisely such greed that led to lower prices. 

See here for more (and read the book for even more!). 

Credit Unions and Banks

Our local Credit Union was happy to let us come have a tour, and the manager was so nice! I am always amazed at how nice people are when you are interested in what they do. He showed us all around the building, talked about different services credit unions offer, and even let us go into the vault! We loved it. Watching the canisters travel up the vacuum tubes from the drive-through was another big hit with the children. :)

Along with our field trip, we enjoyed this check-writing activity (it also talks about balancing and using a check register—the older boys did that part).

Here's a useful compound interest calculator if you are talking about mortgages or other loans.

There are tons of great resources on teaching kids good saving and spending habits, debt management, etc., and they are easy to find—most banks have a "kids section" of their website and are happy to talk about money management, and many junior high schools also teach related courses. I'm not going to include those links because there are so many of them and I didn't find that there was that much variation among them—they were all of similar quality. :)

Currency and Counterfeiting

Before we learned about currency, I went to the bank and got out one of everything—gold dollars, half dollars, and all the other coins and bills. I don't know if I've ever even seen one of the new $100 bills before! Certainly I've never examined one. They look very different and cool. The children were FASCINATED by all the security features on the newer banknotes.

Things like the watermarks and security strips, and the microprinting. 

 This site talks about what all those security features do.

Speaking of security features, we learned that Photoshop won't allow you to open a picture of any U.S. Currency in it. A message pops up saying it's forbidden. And I wasn't even planning to counterfeit anything! Hmmph. I was offended. You have to deal with the pictures above being unedited. (I am curious about how Photoshop recognizes banknotes when you TRY to open pictures of them. How does it know?!?)

I checked out a book about a famous counterfeiter from the library, called The Art of Making Money. I intended to tell the children about it after I finished it. It was really an interesting book and I learned lots of things about money as I read it, but it was also a very depressing book, and I felt so sad after reading it—just sad for the way crime (even so-called "victimless crime" like this—he sold much of his counterfeit money to drug dealers and others for 30 cents on the dollar, and then they used it to pad out their payoffs to other drug dealers, etc.) brings unhappiness to the people who engage in it. And sad for the way that cycles of crime and wickedness repeat themselves. So I didn't really end up telling the children about counterfeiting so much as more philosophical matters, but I guess that's okay. :) 

Other activities:

Coin rubbings

Looking at foreign currencies

This was fun: we tested a whole bunch of different materials to see which we thought would make the best money. We needed something not too bulky, that could be folded tightly but that also wouldn't weaken too much along the fold line; something reasonably waterproof; something that would take ink well enough to allow crisp text printing; something that wouldn't tear easily; something pocket-sized. I let the children test all the materials in water, write on them, try to rip them, etc. and then decide which materials were best for making currency out of. It was easy to see why metal for coins is so popular, and why the thin cotton fabric/paper used by the U.S. works well. Have you seen the new Canadian bills, though? We saw some when we were in Montreal last summer and they are made of actual plastic! So interesting.

Abe got out all his money (he does have a bank account, but he'd been saving up at home for quite a while since his last trip to the bank!) and lined it up so we could all ooh and aah over it. :)

More resources on currency:

This site shows exchange rates and facts about different currencies

I had heard of Bitcoin before and never really understood what it was or how it worked. But I wanted to. So I read a couple whole books about it, and I'm still not sure I understand it completely! But we also found some videos and graphics that helped explain the concept. It's pretty complicated, but with me explaining what I could, and watching videos, the children got the basic idea. They (especially the older boys) were really fascinated with the whole idea of creating a currency from scratch!

We found quite a few videos about how currency is actually…manufactured? Printed, I guess. This one is good. So is this one. This one was longer, but interesting. This one shows Euro coins being made.

We also watched an older movie I'd never heard of, Who's Minding the Mint. The children thought it was HI-LARIOUS. And I laughed out loud myself a couple times. It's one of those weird sixties movies like It's a Mad, Mad, Mad, Mad World. And it shows money being printed! :)

Bartering Activity

As multiple books on money pointed out, bartering is what all children do automatically with their Halloween candy! Everyone has probably had some experience with trade and barter. But this activity made it a little more regimented. Each child got a small bag of a different kind of candy. I had them make charts to show how much value each kind of candy had to them personally, and then I just let them have at it! It was interesting to see which kinds of candy became more valuable as the activity went on (because of scarcity…some people were more reluctant to trade than others) and which things the children thought they valued, but found themselves settling for less with as the trading frenzy took over. :) Some of the kids were more methodical about it, trying to amass a variety of candy across genres. Others seemed to like the act of trading more than the commodities they actually traded for.

And the children, of course, were just super excited to have all these good things to eat!

Economics and Money Homeschool Unit

(Click any section to enlarge)

I've been wanting to do a unit on Economics for a long time, but every time I started trying to prepare for it, I had such a hard time finding the kind of information I wanted! There are plenty of ideas out there for teaching about money management, and many of those are good. And there are, of course, advanced Economics courses for high school and college students that talk about Keynesian Economics vs. Supply-side Economics and so forth. But after searching through a million lesson plans and websites and books, I realized that what I REALLY wanted was a curriculum featuring the plain-English fundamentals of Thomas Sowell's Basic Economics…but for kids. Which meant I would just have to make it up myself!

If you know me very well, you've probably heard me praise Basic Economics. As I said in this post, at the risk of sounding somewhat fanatical, it was a life-changing book for me. The entire time I was reading it (and its sequel, Applied Economics) I kept thinking, "EVERYONE needs to read this book. Everyone!" And I do recommend it to everyone I can (including the hairdresser…), but I have little hope of actually getting anyone else to read it. It does sound so very boring!

However—my children are the perfect captive audience, and before I ever even knew I was going to homeschool them, I had already vowed that they, at least, would be exposed to the fundamental principles set forth in these books. I see these ideas as some of the most important ones for living a happy and grateful life! Things like understanding scarcity and trade-offs. Realizing that cost and price are not the same thing. Accepting and balancing risks. All the children's books about opening lemonade stands and using a bank account and credit cards and "save, spend, give" are fine—but they seem incomplete without the underlying principles and context. 

I don't mean to denigrate any other methods out there—I know Dave Ramsey has a course people speak highly of, and I'm sure there are many others—but especially in the current political climate, I really wanted to weave in some of the great truths I've learned from Thomas Sowell and Milton Friedman. And to discuss some of the ways economic truths support and point to religious truths as well. If only all high school and college students could learn this stuff, maybe this country wouldn't be where it is now…*sigh*…but I digress.

Although I don't have a ton of posts and pictures about activities we did, (much of our time was spent having conversations based on notes I have from the books, and unfortunately I only had brief outlines; nothing very useful to anyone else) this was quite a lengthy unit, and a really fun one. I think it was one of our very favorites, which is saying something!

Here is my Pinterest page for the Economics and Money Unit.

To conclude: Thomas Sowell says that most of the world's economic and political problems could be solved if people would simply ask these three questions:

Compared to what?
At what cost?
And then what will happen?

Hopefully this unit helped us all become more practiced at asking and answering these things!

Oh, and one more pressing question…is it EEE-conomics, or Eh-conomics?? The answer is…both. I guess. Or either. I think I switch off between them. :)