- Cafe Hayek - https://cafehayek.com -

A Bleg, and My Explanation of the Trading Game (With Implications for the Minimum Wage)

Tweet [1]

A new high-school economics teacher e-mailed me to ask if I know of any hands-on projects that she can assign to her students as a means of teaching them economics.  I know of few such projects, so I here bleg for the assistance of my high-school economics teacher friends (you know who you are!) to share with me any suggestions that I might pass along to this other teacher.  (You can share your suggestions with me by e-mail, by commenting here, or both.)

….

I did, however, in responding to this new high-school economics teacher relate some details of one of the few hands-on projects that I know of and have seen used effectively on many occasions.  That project is called “the trading game.”  Pasted below is the explanation that I offered to the teacher; teachers better informed and more experienced than I am in using such projects should not hesitate to offer corrections, clarifications, or expansions to what appears below.

Put five or six small, low-value items more or less randomly into several paper bags; one bag per student.  Make sure, though, that there are differences in value among the items – for example, one item might be a tube of toothpaste, while another item is a wrapped piece of Godiva chocolate or an inexpensive flash drive.  Then give a filled bag to each student.  Ask the students to open their bags and then, on some numerical scale (say, one to ten), ask each student to rate his or her satisfaction (or happiness, or ‘utility’) with his or her bag.  Take the numerical sum of the students’ answers.

Now allow the students a few minutes to trade.  Trading isn’t required of any student, just allowed for each and every one who wishes do to so.  There are no restrictions on the trading, other than that the trading should be only of things in the bags.

After the trading is completed, ask each of the students again to rate, on the same numerical scale, his or her satisfaction with his or her new bundle of items.  Then sum the total of the students’ answers.  Almost always the second sum will be greater than the first sum.

This fact is evidence that voluntary trading makes people better off.

You can drill down a bit further by asking, after the trading is completed, if any student assesses his or her bundle to be worse than before trading.  Almost surely (unless you have smart-alecky students!) no one will assess his or her bundle to be worse after trading than it was before trading.  So because the total sum is larger after trading than before trading, trading makes people as a group better off: at least some people are better off with no one being worse off.  (If, in your course, you get into explanations of Pareto-moves, you can explain that such trading moves the group closer to Pareto optimality.)

Also, you can, when you fill the bag, make sure that one or two (no more than two) of the bags are filled with an especially large number of the highest-valued items (for example, Godiva bars, flash drives, or $10 gift cards to the movie theater).  The students who get these bags will be the ‘wealthy’ ones.  And the greater is the difference in the value of the ‘wealthy’ bags from that of the majority run-of-the-mill bags, the less likely it is that the students who get these ‘wealthy’ bags will be active traders.  This fact shows that trade is not necessarily an activity that benefits the wealthy; trade is even more important for the not-wealthy.

Of course, on the other side of this phenomenon, if you fill one or two bags only with especially low-value or even worthless stuff, you’ll find that the students who get these ‘poor’ bags also do little or no trading, the reason being that these students have little of value to begin with to offer to others.  So while the trading of the other students will not make these ‘poor’ students worse off, it provides no opportunities for them to make themselves better off.*  One lesson to draw here is that having something of some value to trade to others is vitally important.  In the real-world, even the poorest person almost always has something of this nature – namely, his or her ability to work for others.

So you might point out here that a government policy that strips poor people of any valuable asset that they might have – most relevantly, government policies, such as minimum-wage legislation, that rob poor people of the ability to sell their unskilled labor services at wages that are attractive to others – excludes the poorest people from the market and keeps them poorer than they would otherwise be.
……

* A really sophisticated twist at this point would be to have all the students, both before and after trading, publicly display their bundles.  If after trading the ‘poor’ students lower their subjective evaluations of their unchanged bundles of goods, then one conclusion might be that trading that makes some, but not everyone, materially better off might make the poorest worse off ’emotionally’ by inciting in them a sense of envy of the better, or improving, fortunes of others.

Comments