Economics 101 & Public Square

Prices, Income, and Education

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These last few weeks I’ve been trying to answer a very thoughtful question Moody Radio’s Janet Parshall asked me on her radio show.

Basically, Janet wanted me to answer why teachers are not paid more if training our children is such an important job to society.

When thinking about this question, I find it helpful to first think through the larger biblical framework.

The Bible speaks to the scarcity present in our world when it speaks of the Fall in Genesis 3: 17-18:

Cursed is the ground because of you; through painful toil you will eat food from it all the days of your life. It will produce thorns and thistles for you,and you will eat the plants of the field. 

God’s admonishment to Adam in this passage describes the incredible level of scarcity mankind will now have to wrestle with as a result of the Fall. Because the world we live in after the Fall now only has scarce resources, we need to know how to allocate those resources in the most productive way.

  • Markets are imperfect tools that nonetheless help us overcome some of the scarcity we face.
  • The problem of resource allocation is a knowledge problem; not one person knows everything we need to know about functioning in a market economy, i.e. how to best allocate scarce resources in productive ways.
  • In the context of scarcity, prices and incomes operate as signal devices: they reflect relative scarcities, and help bring together the most willing suppliers with the most willing demanders.

So how can all this help us to understand the large wage differences between professions?

Principles of Price & Income

Here a few points that can help us get a grasp on the situation:

1. Markets portray value based on how consumers assess it.

2. Markets force suppliers to give people what they demand. That is why you see the goods and services you do on store shelves – consumers, by purchasing those products, told producers to put them there.

3. What is the alternative to markets? A planned or managed economy. But, if you accept the knowledge problem – that no one person has the all the knowledge necessary to allocate scarce resources to their most productive use – this becomes a problematic alternative:

  • Planning cannot get us a moral price or salary, because no one has the knowledge to know what that price or salary should be, or what are the various gifts, talents, and comparative advantages of all citizens in a society.
  • In planned economies, managers are forced to guess at prices, or prices are set by the whims of leaders. This is usually accomplished by force, and even then, it is an inefficient means of allocating scarce resources.

4. The more you serve people, the more markets will reward you. Let me clarify what I mean by “serve” and “reward.”

  • Consider Microsoft: Bill Gates “serves” hundreds of millions of clients with his product, and gets “rewarded” for everyone he serves because a transaction is made each time. You have a technological need. Microsoft serves your need by offering a product or service, and you reward them by purchasing that product or service.
  • In the same way, every time you watch a sporting event on T.V. or purchase a ticket to a game, you are rewarding an athlete for his or her service they provide to you on the field.

This last point gets at what makes the issue of teachers’ salaries so complex. The transaction aspect has been taken out of education.

Prices, Income, and Education

Making education compulsory and free distorts the ability of markets to place a higher value on the work of teachers because we have eliminated markets in the arena of education. We cannot bring together the most willing suppliers and the most willing demanders. Thus, the knowledge problem persists.

Since education is provided by the state without a price, we cannot regulate the quality and quantity like a market would. We cannot reward teachers the way we think they ought to be rewarded for their services. There is no mechanism to do so.

Markets give us what we tell them we want. We want children’s movies with great animation – and the market gives it to us. Look at all the movies produced by Pixar and DreamWorks.

Just one of these animated movies serves a wide audience who value that product enough to pay to see it. That is why those involved in the movie’s production command such a high salary. They are being rewarded for their work by everyone who paid to see their film.

The market cannot discriminate. It does what consumers indicate they want it to do, via their purchasing behavior. Until we stop wanting Sunday football games, the market will continue to serve us by providing them.

In the future I’ll dive into alternatives to market solutions regarding the knowledge problem, scarcity, and low salaries – and assess how well these alternatives work.

What do you think? How should prices and salaries be set in our economy? Leave your comments here

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  • Prices are set every day by the people who own goods and services and want to set them for the best economic outcome. We need to guard against prices being set by those who do NOT produce the service or good because they don’t bear the result of their price setting, thus inviting market averse consequences. In so many cities and towns the public school systems are profoundly broken. In Memphis, TN, for example, the state has taken over a serious number of schools (maybe 50?) because no progress is made by children attending them. Not sure if this is great or terrible — we’ll have to see what happens! Maybe heads will roll and things will get better. But, from a market standpoint this is an entrepreneurial opportunity for outsourcing educational LLCs created by serious, principled, highly motivated teachers and dedicated administrators ready to produce real educational results for children. Let them lease the best of the school buildings, set up their LLCs; ignore the unions which force retention of poor teachers; and teach children the basic things people need to know to be successful – not ideologically appropriate. Public education is a truly costly monopoly in most towns — inescapable mediocrity or worse.

  • John E. Bishop

    Anne, very interesting article and perspective. The question I would have is how does all of this fit with the incredibly large gap between the income of college football coaches and college professors? Isn’t there a deeper issue at play here (pun intended) than simply “markets’?
    John Bishop

    • Anne Bradley

      This is a great question, John and one that is slightly complicated.
      Universities like other academic institutions tend to suffer from perverse
      internal incentives as well because the markets for higher education while not
      totally stifled,are truncated by donor concerns and political concerns. It seems
      like many universities are trying to attract both alumni dollars and current
      students through sports programs. This tends to create incentives for
      universities to focus on sports over academics and to lure coaches with
      extremely high salaries. They view this as the way to engage in expensive
      capital campaigns to build new stadiums Et cetera, when perhaps their
      comparative advantage would tell them to focus on a new chemistry lab. I still
      think the way to solve some of these issues is to inject markets where we can.
      Some schools perhaps should just be about training athletes and others should
      focus on liberal arts or sciences. It always has struck me odd that we encourage
      athletes to attend schools they never otherwise would have been accepted to for
      the purpose of playing football or basketball. This surely helps line the
      pockets the University but doesn’t necessarily help the athletes the students or
      the alumni. Your point is a good one in that many university professors have to
      seek outside grants to do important and relevant research.

  • Paul

    Unfortunately, some good points and helpful insights are clouded by an “incredible level of” creativity reading an ” incredible level of scarcity ” into Gen 3.17-18.

    • Anne Bradley

      Hi Paul – thanks for your comments. I’m glad you found some good points and helpful insights in this post. I’m open to hearing other interpretations of Genesis 3:17-18. What are your thoughts? How would you read these verses?

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