I teach one hour-forty minute classes on Tuesdays and Thursdays. And I allot only sixty minutes for exams. While student enjoy having the unexpected spare time after an exam, that’s a lot of learning time to miss. Therefore, after my midterms, we do an in-class activity that is a low-stakes, competitive game (and, entirely voluntary).
I call this game “The Extent of the Market” and it has three lessons. Here’s how the game works:
I have a paper handout, a big bag of variety candy, and a URL. The handout is pictured below-left and lists the types of candy. Each student rates their preference with zero being the least preferred candy. Whether they keep their preferences a secret is up to them. Next, I distribute two pieces of candy to each of them. Importantly, their candy endowment is random and they don’t get to choose or trade (yet). Finally, the URL takes them to a Google sheet pictured below-right where they can choose an id and enter there ‘value score’ under Round 0 by summing the candy ratings of their endowment.
Round 1 is where they get to make choices. I tell students that their goal is to maximize their score and that there is a prize at the end. They are now permitted to trade with anyone at their table or in their row. It doesn’t take long since their candy preferences compose of only the short list, their endowments are small, and the group of potential trade partners is small. When trading is finished, they enter there new scores under round 1.
Lesson #1: Voluntary trade makes people better off.
For each transaction that occurred, someone’s score increased. And in most cases two people’s scores increased. Not everyone will have traded and not everyone will have a higher score. But no one will have a lower score, given the rules and objective of the game. Importantly, the total amount and variety of candy in the little classroom economy hasn’t changed. But the sum of the values in Round 1 increased from Round 0. Trade helps allocate resources where they provide the most value, even if the total amount of physical stuff remains fixed. If it’s a microeconomics class, then this is where you mention Pareto improvements.
Round 2 follows the same process, but this time they may trade with anyone in their quadrant or section of the room. After trading concludes, they enter their scores at the URL under round 2.
Lesson #2: More potential trade partners increases the potential gains from trade.
Again, the variety and total amount of candy in the room remains constant. The only thing that increased was the size of the group of people with whom students could trade. And, they again earn higher scores or, at least, scores that are no lower. People have diverse resources and diverse preferences, and the more of them that you can trade with, the more opportunities to find complementary gains. Clearly, this means that increasing the size of the pool of trading partners is beneficial. One among the many reasons that the USA has had great economic success is that we are a large country geographically with diverse resources and a population of diverse preferences. This means that we have a large common market with many opportunities for mutually beneficial trade. The bigger that we make that common market, the better. Clearly, the implications run afoul of buy-local and protectionist inclinations.
Round 3 proceeds identically with students able to trade with anyone in the room and they enter their scores. At this time the game is finished. It’s important to identify the cumulative class scores across time and to reemphasize lessons #1 & #2. Often, the cumulative value-score will have doubled from Round 0, despite the fixed recourses, making no one worse off. If trading with a row, and then a section, and then the whole class results in gains, then there is an analogy to be drawn to a state, country, and the globe.
Lesson #3: Trade changes the distribution of resources.
Despite an initial distribution of resources, voluntary trade changed that distribution. While no one is worse off and plenty of students are better off, measured inequality may have been affected. Regardless, once a voluntary trade occurs, the distribution of candy and of scores changes. This has implications for redistributive policies. If income or wealth is redistributed in order to achieve some ideal distribution, then the ability to freely trade alters that distribution. The only way to achieve it again would be for another intervention to change the candy distribution by force or threat thereof. Consider that sports superstar Lebron James became rich by playing basketball for people who like to watch him. If we redistribute his income, and then permit him the freedom to voluntarily play basketball again, then the income distribution will change as he again trades and increases his income. Similarly, giving money to a low marginal product worker can provide some short-term relief. But, if the worker resumes their prior behavior and productivity, then the same determinants and resulting income persist.
It’s a fund game and students enjoy it. There are some important limitations. #1: There is no production in this game nor incentives for production. This is a feature for the fixed resources aspect of the game. But this is a bug insofar as students think about US jobs vs international jobs. I can assert that the supply side works similarly to the demand side, but students see it less clearly (it helps to draw these parallels throughout the semester). #2: While there is a maximum possible score in the game, the value created in reality is unbounded. There is no highest possible score IRL. #3: There are no feedback dynamics. Taxes associated with income redistribution cause workers to require higher pay, worsening pre-tax inequality. People respond to incentives, and the tax/subsidy component that determined the initial distribution of candy is absent.
It’s a fun game. If you try it, then please let me know how it goes or leave suggestions in the comments.
*By default, Google Sheets anonymizes users. You could have them sign in or use an institutional cloud drive to remove problems that might be associated anonymity.
**If your student can’t handle choosing their own id, then you can just list your students.
***Ideally, each increased trade-group is a superset of the prior round’s potential trading partners.
****You can do more than 3 rounds, but the principle doesn’t change
*****More trade will occur with more students, a greater variety of possible candies, and with more candies endowed per person. You can alter these as needed depending on the classroom limitations.
Economist Writing Every Day 