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Wednesday, July 30, 2008

Economics vs. personal finance

Thanks to the Problogger Social Media Love-in, I have a number of new friends on Twitter and other socialnetworking sites (hello new friends!). As I've been exploring the blogs of all these new friends, I'm surprised by how many money-oriented and personal-finance-related blogs there are out there (yes, I realize that this is a sample selection issue since I'm sure that these folks are more likely than others to have been interested in connecting with an economist, but still...). Seeing all these blogs strikes me as particularly great given a recent Freakonomics post in which Dubner asks whether we are a nation of financial illiterates and the answer is a pretty scary yes.

But I also have to say that the Freakonomics post raised an old issue for me about whether we should be teaching 'personal finance' in schools. In many places, high school economics courses already ARE courses more in personal finance than real economics. That is probably not so much a conscious decision by anyone about appropriate curriculum but is simply a result of the fact that many high school economics teachers are not actually trained to teach real economics. Regular readers of this blog can probably guess what I think of that. Annamaria Lusardi, an economist who has done a lot of work showing how financially illiterate Americans are, says it quite well:
I do not think that literature and mathematics are less useful in the lives of people than financial literacy. In my view, financial literacy should not replace these courses (in fact, some financial literacy can be integrated into mathematics), but should be added into the curriculum with the same high standing... we need to stay away from things like how to balance a checkbook and teach about the workings of the economy.
I am not saying that it is not incredibly important for students to understand how to manage their money. But what many people don't really grasp is that in the long run, a firm grounding in economic principles would do much more to improve financial literacy than teaching students the difference between a CD and a money market account.

Economics is to personal finance as...
Since my intro classes are always full of wanna-be business majors, I always start the semester with the analogy that econ is to business as English is to journalism - in both cases, classes in the applied fields involve learning specific pieces of information that one certainly needs in order to be successful, but classes in the more general fields provide the foundational skills so you know what to do with all those specific pieces of information. The problem is that because this distinction is not well understood, teaching 'financial literacy' often means crowding out teaching basic economic principles, particularly if policymakers get involved. This is not an idle concern; in California, there is legislation pending that would require that in the next round of revisions to subject area frameworks, the economics frameworks be revised to include "instruction related to the understanding of personal finances, including, but not limited to, budgeting, savings, credit, and identity theft."

Again, I am not saying that it wouldn't be wonderful for students to get this instruction. I just worry about what it will replace. Moreover, I wonder whether we would need to require this instruction specifically if students were already getting a solid grounding in basic economic principles.

Related posts:
Do high school econ courses prepare students for college econ courses?
Where is the demand for better K-12 teachers?
Why doesn't anyone know what economics is?


  1. I teach at a (largely) part-time, commuter institution; we offer two personal finance courses--Personal Finance, which addresses issues like debt, borrowing, bankruptcy, and retirement planning, and Personal Investing, which is largely about how to use one's savings wisely (and involves the concepts of compound interest, discounting, risk and diversification). So no "how to balance your checkbook." They're taught (largely) by the accounting and finance faculty.

    Enrollments in these two courses have grown quite rapidly, and not just among business majors. A fair (and growing) number of arts & sciences majors are showing up, I suspect (in part) because so many of them have large student loans and are struggling to figure out how to deal with them. Whether it's the best use of our resources or their time, I'd be somewhat harder pressed to say.

  2. Thanks Doc. My concern is mostly about personal finance crowding out economics in high school courses, where students don't really have a choice about which classes to take - at least in California, they are required to take a one-semester econ class, and much of the push to teach more personal finance involves 'adding' it to those courses. Of course, since they aren't talking about making the school year longer, that means taking away something that is being currently taught. Maybe not a big deal in a lot of places where econ classes are already more personal finance than econ, but I just wish people were as concerned about 'economic literacy'...


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