The case for economic literacy is a strong one.
George Stigler, a Nobel Laureate in economics, probably stated it
best almost three decades ago when he wrote: "The public has chosen
to speak and vote on economic problems, so the only open question
is how intelligently it speaks and votes." In Stigler's view, economic
literacy is special because it contributes to two classes of knowledge.
First, it serves as a "means of communication among people, incorporating
a basic vocabulary or logic that is so frequently encountered that
the knowledge should be possessed by everyone." Second, it is a
"type of knowledge frequently needed and yet not susceptible to
economical purchase from experts."
Economic literacy certainly contributes to the first class of
knowledge. People like to think and talk about the economic issues
that affect them as consumers, workers, producers, investors,
citizens and in other roles they assume over a lifetime. Economic
literacy also gives people the tools for understanding their economic
world and how to interpret events that will either directly or
indirectly affect them. Nations benefit from having an economically
literate population because it improves the public's ability to
comprehend and evaluate critical issues. This understanding is
especially important in democracies that rely on the active support
and involvement of its citizens.
Economic literacy contributes to a second class of knowledge.
For some economic decisions, such as buying a home or investing
in the stock market, it is possible to hire professional or technical
help when making a choice, but in most cases it is neither economical
nor practical for an individual to hire a skilled professional
every time an economic decision needs to be made. Even when such
advice is given, the final choice must be made by the individual,
not the adviser. What this means is that each person must ultimately
serve as his or her own economist in making many economic choices,
whether those choices involve buying a product, getting a loan,
voting on candidates and economic issues, or something else. Economic
literacy improves the competence of each individual for making
personal and social decisions about the multitude of economic
issues that will be encountered over a lifetime.
Whether there is a case for economic literacy, however, is not
the most important question that needs to be answered. George
Stigler and many other distinguished economists and individuals
have already made that case. The more essential question to be
asked is: How can we improve economic literacy in our society?
Answering that question naturally turns the focus to economic
The development of economic literacy must begin in the schools.
Even young children are capable of learning basic economic concepts
that help them understand their economic world. In the secondary
years, that initial foundation can be expanded to include instruction
in a broader set of economic ideas and concepts. This additional
education gives students greater capacity to understand more complex
personal or national economic issues.
Some may think that economics is too difficult a subject to
be taught to children and youth, and that such instruction should
wait until college. Nothing could be more incorrect. No one would
even think of making such an argument for math or science education.
Waiting until students are in college to teach economics is simply
a matter of "too little and too late." The majority of students
end their formal education with secondary school, and even those
students who continue their learning at a college or university
may not take an economics course. The fact is that the best opportunity
for economic education occurs before graduation from high school.
There are three essential ingredients for effective economic
education in the schools. First, teachers must be knowledgeable
about the subject and be able to help students learn how to use
basic economic concepts to analyze personal and social issues.
Second, good curriculum guides and instructional materials are
needed that present economic content at an appropriate level for
the student to understand. Third, economics must have a central
place in the school curriculum—similar to math, science,
history and language arts—so that substantial classroom time
is devoted to economics instruction.
Over the past 40 years there has been a significant improvement
in each area.
Teachers now have more economic knowledge because they are taking
more economics courses. Instruction in economics in the classroom
is more analytical and less descriptive because of the development
of curriculum guides and national standards. There are now many
high quality textbooks and supplementary materials for instruction.
More high school graduates are completing an economics course
and more instructional time is devoted to economics throughout
the school curriculum.
Although there has been progress, much more needs to be accomplished
in the coming decades if we are to produce an economically literate
population. A major problem in this nation is that too few students
are receiving an economic education before they graduate from
high school. A study of high school transcripts shows that only
about 44 percent of high school students take a separate course
in economics. This course is usually offered in the 12th grade
as an elective and lasts for only a semester. Although more states
have made economics a required course for students, only 16 states
require high school graduates to take some sort of economics course
Given this situation—that fewer than half of high school
graduates take a course in economics—it should not be surprising
that study after study show that there is widespread economic
illiteracy among youth and the American public. In one such study,
I administered the Test of Economic Literacy, an
achievement measure covering basic economic concepts, to 11th
and 12th grade students nationwide and found that students supplied
correct answers to less than half the questions. In another study
I conducted with The Gallup Organization, I found that less than
four in 10 high school seniors or adults could answer basic questions
about economic terms and concepts that are essential for understanding
economic events and issues reported in the news media. No matter
what the economic content of questions or the test format, the
study results remain the same—youth and adults show a great
deal of ignorance when it comes to basic economics.
Youth are aware of their deficiencies because they give themselves
low self-assessments of economic understanding in survey studies.
Some 87 percent of high school seniors rated their knowledge and
understanding of economic and economic issues as only fair
or poor. (Among the general public, 83 percent gave the
same responses.) One reason for these low self-ratings is that
high school students are well aware that they are not receiving
an adequate education in economics. When asked whether they were
taught a lot, a little or nothing at all
about how the economy works, 76 percent said that they were taught
little or nothing. (Compare that percentage with
the 7 percent who said they were taught little or nothing about
mathematics.) In addition, both high school students and the general
public had a recommendation for what should be done: Over 96 percent
said the nation's schools should teach more about how our economy
The question that can be asked at this point in the discussion
is "So what?" Why does it matter whether a student has taken an
economics course or knows something about basic economic concepts?
The answer is that economic knowledge has a direct and substantive
effect on people's opinions about economic issues. This relationship
can be illustrated with two examples from national survey studies.
The microeconomic example goes to the heart of support for a
market economy. One knowledge question asked youth to respond
to the following statement: To the best of your knowledge,
the prices of most products in a competitive market, like the
United States, are determined by: (a) supply and demand for products;
(b) the consumer price index; (c) local, state, or the Federal
government; (d) the monetary policy of the Federal Reserve.
Just five in 10 youth knew that the prices of most products in
a competitive market were determined by supply and demand. Two
in 10 thought that prices were determined by the consumer price
index. Another two in 10 believed that prices were determined
by government. The remainder either thought prices were set by
the monetary policy of the Federal Reserve or did not know.
Knowing what determines prices in a market economy and accepting
the outcomes are two different things. If demand or supply conditions
change, prices in a competitive market will rise and fall. Having
a basic understanding of how markets work does not always mean
that people will like price changes, especially if prices rise,
but it should increase the probability of accepting the market
An opinion question was also asked to probe the degree of support
among youth for the operation of competitive markets: A bicycle
manufacturer raises the price of bikes because the demand increased
even though the cost of producing bikes has not increased. Do
you think the manufacturer should be allowed to raise prices?
Two-thirds of youth said they were opposed to allowing the bike
manufacturer to raise prices, which is certainly not a ringing
endorsement of competitive markets. In fact, there are many examples
of businesses raising prices based on increased demand. The prices
for seasonal clothing are higher at the beginning of the season
than at the end. Airfare rises in peak travel periods. Auto dealers
raise prices (or give fewer discounts) when particular models
When you cross-tabulate the responses to the economic knowledge
and opinion questions, a distinct pattern emerges. Among youth
who knew that supply and demand determined the prices in a competitive
market, 60 percent would allow the bike manufacturer to raise
prices. Among youth who gave an incorrect response to the knowledge
question, only 41 percent thought the bike manufacturer should
be allowed to increase prices. The differences in the percentages
show that what many youth know about how markets work directly
affects their acceptance of the market result.
For a macroeconomic example, the basic economic question was:
What is an example of monetary policy? Would it be a change
in: (a) the discount rate; (b) a change in Federal government
spending; or (c) a change in corporate profits. Only 17 percent
of high school students knew that a change in the discount rate
was an example of a change in monetary policy. About four in 10
thought it was a change in government spending (fiscal policy),
about two in 10 thought it was a change in corporate profits,
and another two in 10 did not know.
Although most high school students were ignorant of what monetary
policy was, they were quite willing to give their opinion on this
monetary policy question: Who should set monetary policy? Should
it be: (a) the President; (b) the Congress; (c) the Federal Reserve;
or (d) the United States Treasury? This issue is important
because it determines whether there will be an independent central
bank, isolated from direct political pressure, that can effectively
control the money supply and maintain price stability. Only 16
percent of youth thought the Federal Reserve should be responsible
for setting monetary policy.
When responses from the monetary policy knowledge and opinion
questions were cross-tabulated, they show that there were significant
differences in the support for the Federal Reserve having control
over monetary policy in the United States based on the respondent's
correct or incorrect responses to the knowledge question. Among
high school students who could give a correct example of a change
in monetary policy, 32 percent thought it should be set by the
Federal Reserve, but among high school students who gave incorrect
examples only 15 percent thought that monetary policy should be
set by the Federal Reserve.
Similar cross-tabulations of opinion and knowledge questions
on such topics as unemployment, the federal budget, economic growth,
profits or trade protectionism could be performed with survey
data to demonstrate the same point. Survey data have also been
collected from the general public on these topics and the cross-tabulations
show the same patterns as those for youth. The survey findings
clearly indicate that what youth and adults know about basic economics
affects what they think about an economic issue. What is especially
disturbing is that people who have no basic knowledge about an
economic issue are quite willing to state an opinion on that issue.
This knowledge deficiency affects people's ability to evaluate
economic matters and produces uninformed opinions. Among the informed,
of course, there will still be differences about what should be
done on an issue, but it provides a solid basis for a reasonable
discussion of economic alternatives.
The development of basic economic literacy is an important goal
for a democratic society that relies heavily on informed citizenry
and personal economic decision-making. To achieve that goal will
require that significant gaps in the economic education of youth
be closed by giving economics a more central place in the school
curriculum. More economics coursework at the precollege level
sets a foundation for economic literacy, but it is only the beginning.
As George Stigler reminded us long ago: "We shall have to combine
vast efforts and creative experimentations if we are to produce
the first economically literate society in history."
Stigler, George J. (1970). "The Case, if Any, for Economic Literacy,"
Journal of Economic Education, 1:2, 77-84.
Walstad, William B. (ed.). (1994). An International Perspective
on Economic Education. Boston: Kluwer Academic Publishers.
Walstad, William B. (1996). "Economic Knowledge and the Formation
of Economic Opinions and Attitudes." In P. Lunt and A. Furnham
(eds.), Economic Socialization: The Economic Beliefs and
Behaviours of Young People (pp. 162-182). Cheltenham, UK:
Walstad, William B. (1996). Youth and Entrepreneurship.
Kansas City, MO: Kauffman Center for Entrepreneurial Leadership,
Walstad, William B. (1997). "The Effects of Economic Knowledge
on Public Opinion of Economic Issues," Journal of Economic
Education, 28:3, 195-205.
Walstad, William B. and Larsen, M. (1992). A National
Survey of American Economic Literacy. Lincoln, NE: The
Walstad is director of the National Center for Research
in Economic Education and Edwin Faulkner Professor of Economics at the
University of Nebraska-Lincoln. Since 1992 he has been associate editor
of the Journal of Economic Education and is a past president
of the National Association of Economic Educators. Walstad, who is the
author of several hundred scholarly works in economic education, is also
well known for his national assessments of economic understanding and
prepared a report on American economic literacy with The Gallup Organization
Walstad received his doctorate in economics from the University of
Minnesota and served on the economics faculty at the University of Missouri-St.
Louis prior to coming to Nebraska.