Economics for Young Citizens

Here are some concepts that I would include in my curriculum for young people:-

The Law of unintended consequences

We live in a stable but dynamic system. The world we live in operates consistently and, if we try to change it, it reacts in order to regain equilibrium. Unfortunately, we often forget this and treat new ideas from a single point of view. The result is that the consequence is the opposite of what we intended.

A good example of this is 'women's rights'. If laws are passed to simply increase the pay, privileges and maternity benefits of women employees the result will be that they find it more difficult to find employment. Their increased rights over male employees will count against them at recruitment.

If we wish to improve the employment situation of women, therefore, it is necessary to explore opportunities within the 'system' so that a new equilibrium can be reached and our intended consequence achieved.

Opportunity cost

Opportunity cost is the lost benefits of what could have been achieved if this particular action had not happened. So, for example, the cost of a training course includes the cost of the work that cannot now be done by participants on the days they attend as well as the direct cost of travel and fees.

Moral hazard

When I was young, a schoolgirl in the house opposite became pregnant. This was in the days before such things became the norm in Britain!!

The question was: Should we celebrate and look after the young mother and her baby? or: Should she be shamed as a lesson to other potentially delinquent teenagers? Clearly, we would prefer to look after mother and child. But the moral hazard is that such action could unintentionally send a message to other girls, leading to more schoolgirl pregnancies and greater total suffering.

To take a business example. If government is seen to underwrite banks, insurance companies and businesses that fail, in order to protect the lenders and investors, the moral hazard is that managers will be more willing to take risks and the likelihood of failure will increase.

The reality of risk

When I was young it was common for school classes to include someone with an arm or leg in plaster. We were allowed to take risks, and sometimes it led to a broken limb or to some other minor harm.

Today, in Britain, we have replaced an acceptance of risk with both a desire to protect citizens from all chance of harm and a desire to litigate against someone in case of personal harm. Here is a form of unintended consequence. Now that children are protected from risk they have no swings or roundabouts to play on, and may not be able to learn to swim at school or go on foreign holidays. As a result, not only do they miss many of the joys of youth, but they lose the experience of learning to manage risk and take personal responsibility in later life.

Tipping point

The Tipping Point is a book by Malcolm Gladwell - How little things can make a big difference.

I have long been fascinated by what it takes for public opinion to change. It is an important lesson for anybody to appreciate that each of us contributes to public opinion and that at a certain moment just a small contribution can have a dramatic impact - a quantum change.

Many years ago I did a study for the Welsh Consumer Council and the officer managing my project asked me why I kept so enthusiastic about projects "when they never had any real impact." I was amazed. This was at a time when I was much involved in public transport and I was able to list several major changes where I believed my contribution had made an impact.

Gladwell suggests that ideas, behaviour, messages and products sometimes behave just like outbreaks of infectious disease. They are social epidemics. It is an important message of personal empowerment. Without it, it is easy not to bother, thus proving that we have no impact!

One of the greatest sins in my book is to infect young people with "learned helplessness". As the saying goes - If you think you can or you think you can't; you are right.

Probability theory and statistics

There is a story about an old lady caught carrying a bomb onto an airplane. When accosted, she replied "I know that it is unlikely that there will be a terrorist bomb on this plane, but I have been told that probability theory says that the odds are very much greater against there being two bombs on the plane. I wanted to travel in greater safety."

Apparently the most dangerous place you are likely to be is in your own home, and you are significantly more likely to be injured crossing the road than travelling in an aircraft. And yet, in practice, people recognise fear on a different scale.

In most countries there is an unacceptable death rate on the roads, but we are inured to a large number of random small events. Rail crashes, by contrast, are dramatic - but rare. However, in Britain we are spending large amounts of money on 'super' safety systems that delay capacity improvements and cause more people to travel by (dangerous) roads. The opportunity cost of rail safety is the lost improvements in other services, including healthcare, that might have had a greater impact on death and injury.

The Law of Comparative Advantage

This law was postulated by David Ricardo two hundred years ago and is an argument in favour of global trade. It is a good basis for discussing the rights and wrongs of globalisation. According to the principle of comparative advantage, the gains from trade follow from allowing an economy to specialise. If a country is relatively better at making wine than wool, it makes sense to put more resources into wine, and to export some of the wine to pay for imports of wool. This is even true if that country is the world's best wool producer, since the country will have more of both wool and wine than it would have without trade.

A country does not have to be best at anything to gain from trade. The gains follow from specialising in those activities which, at world prices, the country is relatively better at, even though it may not have an absolute advantage in them.

Because it is relative advantage that matters, it is meaningless to say a country has a comparative advantage in nothing. Same arguments for individuals; few of us now make our own shoes - or even grow our own food.

Put simply, do what you are best at. Even though there may be others that are better at it, you will still benefit by focusing on your best attribute.

Compound interest

Einstein considered compound interest to be the ninth wonder of the world. It is indeed magic as it leads to continually increasing rates of return for no effort. If you invest a fixed amount of money, for example, and reinvest the interest, then the principal increases and therefore future interest at the same rate also increases.

Compound interest is why it is sensible to start a pension plan early in your career. The converse means that if you build up a debt on your credit card it can rapidly get out of control. Beware!

Marginal cost

In the late 1970s I was involved in public transport planning in the UK. At that time many of the bus services were run by the National Bus Company. Under pressure to reduce losses the company in our rural areas had withdrawn lots of services because they made a loss. When I came to review the situation in the villages I found that buses services could be introduced and cover the costs. I then discovered that the services that I was proposing were the loss makers that had been withdrawn.

How did this make sense? The bus company used a costing system that ensured that services contributed to the 'whole cost' of running the service. That is the depots, the management and the buses and drivers. I used marginal costing which took account of the fact that drivers were being paid to sit in the depot during off-peak periods and that the busses were lying idle. The cost of running the services, therefore, was just the cost of the diesel and some tyre wear. Not even any extra servicing, because the buses were serviced by time rather than distance.

A win all round. Drivers being more productive and villagers getting a shopping service.

But beware. Overheads have to be covered, and a business run on marginal costing is likely to get a false confidence and soon go bust.

Richard Winfield is an experienced international facilitator who uses a wide range of powerful processes to enable clients to achieve their outcomes. He is the creator of The Directors' Academy and the author of The New Directors Handbook.