What they don’t tell you
We suggest another approach to teaching economics.
Our tutoring consultant has no formal background in the discipline of Economics. However, he has a lot of informal experience, and in the language of the subject, there was a demand for Economics tutoring, but no supply. So he spent some time with textbooks and has been able to help a number of students. Over this summer he is reviewing the subject, because there’s always more to absorb and a better grasp means his explanations are clearer.
The textbooks make much of the equilibrium of supply and demand. That is, where the supply curve and demand curve cross, the price set thereby represents the most efficient allocation of resources. A disturbance in the market changes things for a while, but they settle down to a new equilibrium. Indeed, our recent descriptions of telescope economics and photographic filters fit easily into the long-term equilibrium model. It is highly simplified, of course, and there are large sections of the textbook on market failures, but it is a reasonable basis for an introductory course. Much is made of the fact that each player is seeking his or her own best profit, and everyone benefits.
Our tutor, however, is acutely aware that economics has as much instability as stability. Consider the evening bus service he uses to get home in the winter from his sessions. Suppose the bus ran every half-hour and the bus company, trying to be efficient, kept records of how full it was. Finding it mostly empty, the company decides to change to hourly service. That is, the supply of bus-rides was greater than the demand, so the supply contracts. The company now expects full hourly buses.
And does not get them. Waiting for twenty minutes for a bus is accepted philosophically by public-transport people; it comes with the territory. But waiting in the winter rain for forty-five minutes after your work is done may not be so acceptable, especially at a lonely and unprotected suburban bus stop. People find an alternative way home, or maybe a different job. The buses are again mostly empty, and the bus company contemplates a further cut in service, which results in still emptier buses. No equilibrium results; the situation is unstable.
Or consider borrowing money, whether you are a nation with a budget deficit or an individual with a credit card. The Economic textbooks have a familiar type of diagram describing the market for borrowable funds, where the demand declines but the supply increases with the interest rate charged. Where they cross is the equilibrium that most efficiently distributes the loans.
This diagram ignores the fact that the market is made up of individuals, and the interest rate you are charged depends on the lender’s evaluation of your chance of defaulting. If your credit rating goes down, the lender raises the interest rate, which makes it harder to pay your interest charges, which makes the chance of default increase. It’s a form of self-fulfilling prophecy. If you’ve watched the international news over the past couple of decades you’ve seen it more than once. Borrowed money is unstable.
One of our consultants ran into this effect a few years ago. A deposit to his account was, through no fault of his own, delayed a month, which meant that he missed a monthly payment to several companies. On most accounts, he was charged an extra fee and his interest rates increased. In his case, it was a momentary glitch, and he was not in any danger of actually defaulting; but the higher interest rates (which have persisted) are annoying.
Two companies, however, had different responses. They noticed a possible problem and offered their help to get through it: debt counseling and financial planning, at no extra cost. They didn’t raise their interest rates. These companies, we suggest, have a much lower chance of being stuck with defaulted loans and delinquent accounts.
Our tutor suggests that beginning Economics place as much emphasis on the instabilities of the subject as the equilibria. It might have beneficial effects for everyone.
