Training Young Economists

This article was originally delivered as a lecture at Educating for Liberty: Mises Circle in Tampa on February 22. Transcript edited for clarity.

I want to talk about how we can train young children as soon as they’re able to grasp a story, as soon as they’re able to follow along while you’re reading a book to them.

How can we get them to start to embrace important principles of liberty, and important economic concepts as well? It turns out that it’s possible, and I’ll talk about a few examples that I’ve tried to do in my own work with children’s books.

My number one recommendation for training young students is to employ the power of stories. Humans have used stories, both real and fictional, to convey and preserve important principles for millennia. Stories are very important and very useful when we’re trying to preserve important ideas. All stories have a basic structure in which the characters start in some initial state, they confront a conflict that disturbs the state, then they act to resolve the conflict.

The ending state is either some return to normalcy, a new and better state, or in the case of tragedies, a sad state that the characters failed to prevent. In all cases, the characters change and make sacrifices in their attempt to achieve a better state of affairs. That’s the arc of any story. If it’s a good story, if it has those sorts of elements, it means that it’s a part of this grand history that we have of using stories to preserve some information.

Here are three little stories that I consider classic.

One is from the Old Testament. God determines that the world is full of evil, except for one man named Noah. God instructs Noah to build an ark to save himself, his family, and all the animals from the flood that God will send to wipe out all of the evil in the world. Trusting God, Noah builds the ark and survives the flood.

Another one: A poor orphan named Aladdin is employed by an evil sorcerer to retrieve a magic lamp from a booby-trapped cave. Aladdin is trapped in the cave after the sorcerer tries to double-cross him, but he escapes with the help of a magical genie from the lamp. The genie grants Aladdin fortune and power, but the sorcerer tries to undo Aladdin’s new state and take power himself. Aladdin slays the sorcerer eventually and becomes sultan.

One more: A teenager is charged with murder and a jury of twelve men deliberate on the case. All but one juror is convinced of the teenager’s guilt. The one juror slowly exposes flaws in the prosecution’s arguments, the evidence, and the witness’s testimonies, eventually convincing the rest of the jury to deliver a unanimous verdict of not guilty.

In all of these cases, you see characters developing, you see them confronting conflict, you see them acting to make a difference. And, at least in some of these cases, you see the role of the villain being played.

The case I want to make is that economics is especially suited for storytelling.

Since the starting point of economic theory is the fact of human action, all of economics has something to do with an initial state, an actor making a sacrifice and overcoming obstacles, and an end state in which the actor succeeded or failed. Every action is a story. Every choice we make is a story. Moreover, economists often employ stories to explain some important conclusions.

One of my favorites is Bastiat’s Parable of the Broken Window, which was retold and popularized by Henry Hazlitt in Economics in One Lesson. It’s such a favorite, it was the basis for my first children’s book, The Broken Window. I thought it was such a nice little story, and that it would pair nicely with some illustrations because there’s a kid throwing a brick through a window and then an economist comes on the scene and corrects the crowd.

If you’re not familiar with the story, this young boy throws a brick through a baker’s window, and a crowd gathers to reflect on this, trying to analyze the situation. They come to the conclusion that the broken window is good for the economy. It stimulates spending and employment because now the baker has to spend money and employ a glazier to repair the broken pane of glass. So they think, “vandalism is good, breaking things is good, destruction is good.”

You see this same sort of claim being made whenever there’s a hurricane that comes through, right? Some journalist somewhere will say, “it’s not all bad, this is actually good for the economy.”

But the economist comes on the scene and says, “Now wait a minute, you’re forgetting something very important. You’re forgetting the counterfactual. You’re forgetting the opportunity costs.”

What would the baker have done if he didn’t have to repair his broken pane of glass? And, of course, once you consider that line of events, what would the baker have done, then you realize, well, actually the vandalism, the destruction just destroyed a valuable resource. Because if the baker had used the money to purchase a new suit or buy a new pair of shoes, then you’re still providing for the same amount of spending and employment. It’s just in one timeline you have a broken window and then in the other one you have an unbroken window and a new pair of shoes or a new suit.

The broken window did not stimulate spending and employment. All it did was redirect spending and employment, and it destroyed something valuable in the process.

This is a story that’s worth telling because it conveys an important principle; and actually, the story is three in one. There are actually three stories going on during this broken window parable.

First, there’s the one that traces the state of the window, including the hoodlum’s vandalism and the baker’s response. There’s also a story about the crowd’s ignorance, and then they come to enlightenment. And then there’s the story that’s told by the economist about the counterfactual course of events.

Another category of stories that we see in the economics literature involves Robinson Crusoe, which is one of my favorites. We have a running joke whenever we do Mises University each summer. How long does it take for Crusoe to be mentioned? Usually it’s a very short amount of time—sometimes in the first lecture.

The reason why we rely on Crusoe is because he helps us simplify economic concepts.

Crusoe is stranded on an island, which means that there’s no division of labor, there’s no money, there’s no credit, there’s no global trade, none of these complicating factors. And so if you’re trying to explain something or get at the very fundamentals of something like capital theory, starting with Crusoe can be very helpful. Here’s one story that might be told:

Alone on his island, Crusoe picks and eats only berries and coconuts. He’d like more variety in his diet, and he notices some fish swimming near the shore. He can’t catch them with his bare hands, but he thinks that maybe a fishing net would allow him to catch some fish. He sees on the island a few materials he could use to build a fishing net, but it might take a whole day to build it.

Over the course of a week then, he sets aside the coconuts and berries he needs for the day that he will spend collecting the materials and building the fishing net. Crusoe estimates that this sacrificed consumption and the time and effort that it will take to build the net will be worth the fish he’ll be able to catch. Once the net-building day arrives, Crusoe has saved up enough food and he spends all day making the net.

The next day, he catches three fish with his new net. Crusoe had success and it’s a nice story. This seems like a very simple story, coconuts, berries, fish, a fishing net, etc. But let’s try to build a list of all of the economic principles that are conveyed through this very simple story.

1. One very important one is that production takes time. Crusoe had to take a day out of his life to build the fishing net. However, if you go to many mainstream universities and look at their textbooks, a lot of times they have timeless production, so even this very important principle that production takes time is ignored in the mainstream.
2. Capital accumulation enables economic growth.
3. Production requires the use of land and labor. Of course, this principle is ignored by the Fed because they think that we can stimulate economic growth just by printing up new green pieces of paper.
4. Some lines of production require specialized tools.
5. Saving must precede production. Of course, ignorance of this principle is why we have business cycles.
6. The value of a factor of production is determined by the value of the consumer good it helps produce. This is something that no Marxist is able to understand for some reason.
7. Action and entrepreneurship are speculative. However, many view profits as self-replicating or just a given. But of course, every entrepreneurial venture—even Crusoe building the fishing net—there’s some speculation involved. There’s a possibility of failure.
8. Finally, every action has an opportunity cost.

Just in one tiny little story about Crusoe, coconuts, and berries, you can convey many very important economic principles that translate into very important issues when we’re talking about business cycles and monetary policy, even though Crusoe didn’t have any money.

Another great story invented by none other than Ludwig von Mises is the story of the master-builder. Mises realized that conveying the essence of his business cycle theory required the use of narrative. The story is very short, but short stories are sometimes all that’s required to convey important truths. He said,

The whole entrepreneurial class is, as it were, in the position of a master-builder whose task it is to erect a building out of a limited supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan for the execution of which the means at his disposal are not sufficient. He oversizes the groundwork and the foundations and only discovers later in the progress of the construction that he lacks the material needed for the completion of the structure. It is obvious that our master-builder’s fault was not overinvestment, but an inappropriate employment of the means at his disposal.

Here Mises was trying to counter and expose the fallacies in attributing the business cycle to “overinvestment.” He’s saying no. What actually happens is there’s a misalignment of the plans that entrepreneurs have and the availability of resources. That was Mises’s point. He tells this little story of a builder who runs out of materials while he’s building.

I liked the story so much, it became the basis for my next children’s book called Ludwig the Builder. I took some liberties here. I didn’t stick to the story as it was told like I did with The Broken Window, but I had a builder named Ludwig who tried to build a house.

Unfortunately, he was misinformed about the availability of resources. There was a man in a warehouse who was supposed to keep track of all of his resources, and he gave him the wrong information. He said, “Yes, you do have plenty of resources to build this house,” but in fact the resources weren’t actually there. Of course, the name of the man who was in charge of this was “Fred,” and on the sign I had the R sort of dripping down, so “F-E-D.”

This is a great way to introduce the concept of business cycles to even young students. Even children can figure out when they’re playing with their Legos, if they start building something that’s supposed to be really big but then they run out of the materials to finish it, then they’re not going to be able to finish it. And you can make a very easy connection to that with what happens to the entire structure of production in the economy.

If all entrepreneurs are pursuing these very long lines of production, more capital-intensive lines of production, the riskier lines of production, and it was all because they were misinformed about the availability of real savings and that misinformation came through artificially low interest rates, then you have a big boom, lots of consumption, lots of investment, but eventually, it turns into a bust. Eventually those projects have to be liquidated.

The kid has to take apart their Legos and start something else in which they do have enough Legos to finish the structure that they’re building, so that was the basis for this. And, of course, this is a tragedy, right? We had Crusoe—who successfully built the net—and then we had this tragedy. In Ludwig the Builder, I figured out a way to have a happy ending. I like happy endings.

Since we have some bad information entering the system and misleading the master-builder or—in the case of the real business cycle theory—you have falsified interest rates, it means that there’s room to introduce villains into our stories. Of course, I’m going to make the case that the great villain that we can use in our economic stories or stories that we’re trying to convey the principles of liberty is the state. The state is very much a villain.

A free market economy works. You have individuals interacting with each other, engaged in voluntary exchange. I give you something that you want, you give me something that I want, and we’re both better off as a result. Of course, this is just one tiny little bit of the entire market economy where everybody is trading with one another. We’re specializing in things where we have the comparative advantage, we’re the efficient producer of something, and we get an increase in total production, prices, economic calculation, and a flourishing division of labor. It’s wonderful—we get all these great things.

But, of course, then the state comes in and tries to disrupt these plans, tries to disrupt what’s going on between individuals who are interacting voluntarily with one another and trading goods voluntarily. They might try product regulations, they might try price controls, preventing people from trading at certain prices. Of course, they tax us, right? They just take away some of the income that we earn by selling goods that other people want.

All of these are great examples of a villain entering our economic stories that we’re crafting. I was able to introduce this villain—not totally personified—in my most recent story, my children’s book that I’ve been working on called The Magic Coin.

This is a children’s book version of Rothbard’s What Has Government Done to Our Money?

What happens in the story is a little girl tries to buy a piece of candy for a penny because that had been the price, but she realizes that price inflation has caught up to her candy store, and so now the price of a candy is 25 cents. This is an allusion to another very popular children’s book, Whatever Happened to Penny Candy?, if you’re familiar with that.

She walks away from the candy store, realizes she can’t purchase it, and as she’s walking away, she finds this silver coin on the ground and she picks it up and—sort of like the genie—the coin comes to life. It gets bigger and there’s this guy on the front. His name is Newton. By the way, Newton is Murray Rothbard’s middle name.

Newton says, “I’m sad that you’re not able to purchase this candy, but let’s go on an adventure together.” And so they go on an adventure and Newton takes Lily through all of these different episodes in the evolution of money.

Where did money come from? What happened to it? What goes on with banking, all of these sorts of things.

Their first stop is Robinson Crusoe. Newton takes Lily to Robinson Crusoe’s island because the point that he wants to make is that money is a product of exchange. Crusoe doesn’t have anyone to exchange with. When Crusoe walks along the beach and he sees Newton lying on the ground, the coin, he just sort of picks it up, looks at it, and then tosses it back on the ground.

The point being that you need exchange, you need markets, in order for money to exist and for money to emerge. And so Lily says, “Okay, that’s fine. So Crusoe doesn’t need money. So where did money come from?”

Then the coin takes Lily to a primitive village where they’re engaged in barter transactions.

They’re trading goods for goods—eggs for shoes, shoes for cloth, and those sorts of things. Newton shows that there are problems with this situation. They can’t accomplish everything that they want to do in the market. Somebody might bring something to market and can’t find a buyer. It’s very chaotic.

In economists’ language, there’s this very severe constraint called the double coincidence of wants. In a barter economy, things are going to stay primitive. However, while they’re there watching the trading going on, they see this one person come up with the bright idea to accept something in exchange—not for their own direct use—but so that they can then trade it in another transaction to get what they actually want.

Thus, we have the birth of indirect exchange. The person in this village used that item—not for their own direct use—but to use it as a medium of exchange. And so, you see how money develops. You see people start to use the same sort of strategy. The market converges on one particular medium of exchange and thus we have money.

They fast forward many, many thousands of years to 17th-century London, where Lily and Newton see everybody using precious metals. It turns out that the sort of money that people wound up using,was in the form of gold and silver coins, and for obvious reasons. You can stamp them and say this is the weight and this is the purity of the metal. You can make different sizes of the coins, so it’s very divisible. It’s very recognizable. It’s easy to tell if something is gold or silver. For all of these reasons, people in markets around the world historically chose those two things as money.

However, while they’re in London, the coin shows where people are bringing in their gold coins and other gold items and in exchange they get this piece of paper, they get a bank note that they are able to bring back to the bank and get the same amount of gold back. So Lily is introduced to banking.

After some time passes—there’s a time travel element in this story that’s a lot of fun—they notice that the bank starts to engage in fractional reserve banking. They realized that the bank has issued more of these paper notes than they can redeem. Then Newton triggers a bank run where everybody is running to the bank to try to get their gold out because he was pointing out what would happen if people realized it.

We finally get some true villains when Newton takes Lily to a dark meeting in a dark room where the bankers and the politicians of the country are trying to figure out how they’re going to deal with this bank run problem. People don’t like the bank runs, people don’t like the financial instability involved with fractional reserve banking, so what can we do? Of course, Lily’s idea is, “Well, why don’t we go back to 100 percent reserve banking? Why don’t we stop? Why don’t we keep a one-to-one ratio of gold and printed banknotes?”

Unfortunately, that’s not the way history went, and so that’s not the way that this book goes. Instead, they cartelize the entire banking system, they monopolize it and institute a central bank. And the central bank has a nice relationship with the banks, but also with the government. Now the government can finance much of its spending by issuing these new pieces of paper.

The government is happy to do it because taxation is unpopular. Nobody likes taxes. Now the government is able to do all the spending that they want and they can print up new bills in order to finance their spending. This results in a chaotic situation at the end of the book, where there are people pushing wheelbarrows loaded with green pieces of paper; there’s chaos, everybody’s trying to buy anything they can.

At the end of the book, Lily’s doing some philosophical reflection, which is good for stories like this, so that you make sure that the reader understands the main point: what am I supposed to get out of this? She realizes that good money—sound money—is just money.

I have two different meanings for the word just. Things were going well in 17th-century London when people were using the gold coins to exchange things and when the bank was keeping 100 percent reserves. All of the bad things started happening when we started issuing more paper than we have gold, or put that on steroids when the central bank was in charge of that same sort of thing. We should just go back to just money, so sound money is just money.

But another thing she realizes is that when we have sound money, it’s just. It doesn’t involve tricking people into thinking that all of their money is safe in the bank. It doesn’t involve tricking people into thinking that the government has this nice technocratic elite that can manage our money supply without any sort of secondary problems and unintended consequences. Just money is the one that is associated with justice, where people are treated fairly and we have honest money as well.

In conclusion, while reading, writing, and attending lectures are essential for training young economists, good stories take students further than these standard educational elements. Every good economist needs to be able to draw a supply and demand graph, but inspiring anyone—not just children—to take part in the intellectual battle of our day will require stories.

We already have a mighty villain, and I see in this room many great heroes. So let’s make sure that our children are not only equipped with what they learn in the classroom and in textbooks, but inspired to become the hero.