Economic Education versus Financial Literacy

There is a disturbing trend in the field of economic education that has been growing for quite some time, especially as it relates to younger students. No, it is not the influence of one school of economic thought over another, nor is it a lack of resources, funding, or even opportunity. No, this is a case of replacing the good with the good, with the best of intentions, and dangerous consequences.

In recent years, there has been a growing push for financial literacy education. I want to stress now that this is a good thing! Financial literacy is an important skill that every single person will be able to use to their benefit. We strongly support financial literacy initiatives for every age. Financial literacy itself is not a problem.

The problem arises when institutions, organizations, bureaucrats, administrators, and educators mistakenly view financial literacy education as a sufficient alternative to traditional economic education, or worse, when they view it as a sufficient instructional channel to actually teach economics. Financial literacy is a subset of economics, an application of a limited portion of economic concepts. As such, the two get lumped together and are confused as being interchangeable. I want to address why this ought not be the case.

While I was teaching economics full-time, I would get two or three weeks into the school year before the concept of money ever entered my classroom discussions. I did this in order to explicitly show my students that economics in not confined to the realm of monetary transactions. Yes, money is an important resource that facilitates economic exchanges, and the concepts of scarcity and opportunity cost (among countless others) certainly can and should be applied to how we use money. But the same is true of our time, energy, and countless other resources. When we confine discussions of economics to only those which include monetary exchanges, students tend to believe that these concepts simply do not apply elsewhere. Surely they must be taught to see that trade-offs are made not only with our pocketbooks, but with our time as well! In extreme situations (though not uncommon), I have even experienced students who come to believe that economics itself is merely a tool for a class of wealthy elites to manipulate public policy for their own benefit. When these students watch The Lego Movie, they wrongly believe that the only message related to economics is the “overpriced” coffee. Oh, how we have failed these youth!

While financial literacy education (as a replacement for economic education) can lead people to place false restrictions on the practicality of economics, it can also leave people ignorant of the assumptions upon which financial literacy rests.

When we teach financial literacy, especially in the primary grades, we tend to assume the use of a singular currency and the universal application of that currency across every exchange. Yet our children are growing up in a world where technology make it possible for me to choose between currencies based on the present purchasing power parity. I can walk into any store and choose to spend dollars, bitcoin, fractions of a gold reserve, or even foreign currencies. Financial literacy alone falls short in helping students understand not only the options they have, but the interplay between these options as they fluctuate in value, relative to each other and relative to the goods and services of the market.

Many popular financial literacy programs teach people, especially children, to shun the use of credit cards and other debt-financing options, despite the fact that the vast majority of them will ultimately rely on debt to finance a college education. Like so many other things make taboo, rather than learning appropriate application of these tools, understanding the trade-offs associated with them and how they actually work, young people simply use them in the shadows, shamefully hiding their ignorance until they have dug themselves into a dangerous financial hole. Meanwhile, entrepreneurs and travel hackers around the world utilize credit to their advantage, having the tools to appropriately assess risk and reward, while those who have avoided personal debt will find themselves unable to comprehend the liquidity of their own government and the impact this may have on their own financial situation.

Financial literacy education is certainly an admirable and worthwhile objective. But the close relationship with economic education leaves too many believing that one is a substitute for the other. The recent emphasis on financial literacy alone at the expense of broad economic theory, especially by organizations who proclaim themselves experts in economic education, is quite troubling. As a profession, we are placing blinders on our students, dangerously oblivious to the fact that we do so.

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