A Book to Help Young Americans Understand Economics: Economics in Action by Brian Balfour

Very few young Americans learn anything about economics. Some high schools offer it, but the courses are usually taught by teachers who have scant knowledge of the field, using books that are heavily laden with anti-market sentiments. Such books reinforce socialistic ideas about worker exploitation, the supposed instability of capitalist economies, the need for governmental welfare systems, and many other interventions. The seeds of hostility towards economic freedom are planted in those classes, as well as in many others high school students take.

Then, in college, the economic myths and misconceptions learned in high school are apt to be reinforced, even if the student takes an economics course. The typical college Econ 101 course is rooted in Keynesian analysis and is rife with discussions about market failures that only government action can supposedly solve. This steady exposure to, as Ludwig von Mises called it, the anti-capitalist mentality, helps to explain why so many young Americans say they would prefer to live under socialism.

Clearly, we need better teachers and better textbooks.

Here is some good news in that regard. Thales Academy, a network of private schools that began in Raleigh, NC and has spread into South Carolina, Virginia, and Tennessee, has developed and published a textbook for use in its high school economics course entitled Economics in Action. The book was written by Brian Balfour, Senior Vice President of Research at the John Locke Foundation, and it is written from the Austrian standpoint. That is to say, it is rooted in the thinking of Karl Menger, Eugen von Bohm-Bawerk, Ludwig von Mises, and other economists (whether actually from Austria or not) who emphasize that the understanding of economics must begin with the logic of individual action.

Balfour patiently explains to students that the laws of economics derive from the fundamental point that human beings only act when they believe that doing so will make them better off. That is the basic axiom from which the entire discipline flows. Economics is thus a science of reason, not of statistics. It is open to everyone, not just those who are comfortable with abstruse mathematics. You won’t find any equations in the book, just clear, persuasive English.

One of the first and most important lessons that readers of Economics in Action will grasp is that only individuals act. We often hear that “the economy” is behaving in a certain way, like “sluggish” or “overheated,” but Balfour explains that such notions are misleading. When we speak of “the economy” we are talking about the great network of individuals who produce and trade, not a thing capable of action on its own.

In their decision-making, individuals are constantly faced by scarcity. There are limits on time and the resources available. Therefore, people must choose carefully, making the trade-offs that best suit their own circumstances and values. The millions of people who comprise “the economy” are guided in their choices by prices and opportunity costs (the most valuable option that must be given up to do something else). The book explains how prices come about as a natural consequence of the basic axiom — people trying to make themselves better off — and how trade will occur if and only if the trading partners think they will both gain. The picture that emerges for students is that order comes from the millions of individual actions, an order that no one planned or needs to direct.

Seeking to make themselves better off, people naturally tend to specialize in whatever they do best and trade with others to obtain goods and services that they couldn’t produce efficiently for themselves. The resulting division of labor is a crucial part of the spontaneous economic order, one that the book shows is vital to prosperity.

Also vital to prosperity is entrepreneurship. Balfour explains to his readers that when individuals see opportunities for profit that others have not, they can earn a lot for themselves by assembling the resources necessary to produce the new good or service. If their vision turns out to be accurate and consumers really do want the product, they will make profits, which are usually reinvested in the business to expand output. But if the entrepreneur is mistaken, the result will be losses, indicating that he has wasted resources. The important point here is that economic liberty encourages people to look for improvements, rewarding them if they’re right.

Some students might be thinking that this free market system sounds good, but couldn’t it be made better if the government stepped in to accomplish certain desirable goals?

Economics in Action has the answer to that question: No.

What if the government tossed out the system of private property and liberty in favor of socialism? Large numbers of Americans profess that we’d be better off because socialism is more “fair.” Balfour makes it clear that socialism necessarily means enormous waste of resources, because it lacks a price system. Not only that, but socialism leaves little or no room for entrepreneurship, so progress would grind to a halt.

Well, what if the government were to try to help poor workers by demanding that employers pay wages that are higher than the levels that prevail in the market?

In his chapter “Interventions in the Market,” Balfour explains why all varieties of government interference with the natural economic order will have undesirable effects. Minimum wage laws prevent some workers from being able to find jobs (at least, legal ones); maximum price laws inevitably cause shortages in the market and impede the increase in production that’s needed; laws against “price gouging” after natural disasters make things worse by driving away profit-seeking individuals and companies that want to sell badly needed goods and services. Furthermore, taxes interfere with the functioning of the market by diverting resources away from the uses that would be dictated by competition and into the projects desired by politicians, projects which are often wasteful or even counterproductive.

The book also devotes many pages to a discussion of money. Students learn how money comes into existence as a highly valued commodity that most people willingly accept in trade. Gold emerged as the ideal money, although other items have also served as a medium of exchange. The problem begins, Balfour shows, when governments take over the production of money, moving away from commodity money (such as gold) and replacing it with fiat money. Fiat money is not backed by any actual value and governments can (and almost inevitably will) produce more and more of it so they can pay for their expenses.

When they do that, the result is inflation. Most Americans think that “inflation” means generally rising prices, but Balfour correctly states that what is actually being inflated is the supply of money. One of the consequences of doing that is generally rising prices, as the value of each unit of money decreases. But that isn’t the only consequence. Another is the boom-and-bust business cycle, which results from the way governments artificially depress interest rates through their central bank operations.

Balfour concludes with a chapter on economic fallacies. He explains why labor-saving devices are not a “curse,” but instead are essential to an increasing standard of living; why government programs to “create jobs” are worse than useless; and why it’s a mistake to think that the rich get rich at the expense of the poor.

Who should read Economics in Action? I would say that it should be read by anyone who desires to grasp the truth about economics — students and adults. But focusing on students, I would recommend that parents who want their children to be part of the solution, rather than part of the problem, should get this book for them.

Homeschooling parents will find that the book does a superb job of covering the basics and getting their children to think sensibly about economics. Parents who have children in schools might want to get this book for them as a supplement to the materials they will receive if they have an economics class — materials that will probably be full of falsehoods and disinformation. Countering the plague of economic falsehoods and disinformation that statists constantly spread is crucial to our liberty, and this book does so brilliantly.

The post A Book to Help Young Americans Understand Economics: Economics in Action by Brian Balfour was first published by the American Institute for Economic Research (AIER), and is republished here with permission. Please support their efforts.