Social Education 58(1), 1994, pp. 10-12
1994 National Council for the Social Studies

How to Use an Economic Mystery in Your History Course

Donald R. Wentworth and Mark C. Schug
History is just one damn thing after another.
-Henry Ford

How wrong he was. Henry Ford never understood that U.S. history is a kaleidoscope of puzzling events, interesting stories, and dramas with great tragedy and triumph. Consider just a few of these important events in the 1800s:

How can teachers help students solve these puzzles, identify with historical &Mac222;gures and problems, and appreciate the lessons contained in the drama of history? Using economic reasoning can be of great assistance. It can help students use history to learn about factors that inßuence human behavior and how the choices people made in the past inßuence the choices we may make in the future.

The Role of Economic Reasoning
What can economics contribute to improving the teaching of history? In some ways, too much. This may surprise you. Economists, however, like other social scientists, often have difficulty limiting themselves to teaching that content that is most important to know. For students, the problem is similar to that faced by the little boy who asked his mother where babies come from. His mother suggested he ask his father. The boy protested, saying, "Mom, I don't want to know that much!" In a similar way, economists know more about the economy than most people wish to know. Underlying economists' daunting accumulation of knowledge, however, is a small set of insights that is especially valuable in many teaching situations. It is the basic intellectual principle of economics, the assumption that people weigh costs and bene&Mac222;ts in making decisions. Given this principle, students need not know a great deal of economic content to reason accurately about human behavior in our past. They must know only a few important assumptions. Then they must practice using these assumptions to develop their analyses and to identify false reasoning.

The Basis of Economic Reasoning
Economic reasoning today is being applied to many different areas of human behavior. In the past, it concentrated on &Mac222;nancial relationships and governmental policy toward the economy. Now it is used to investigate and explain political behavior, love, marriage, crime, health care, pollution, drug use, and a host of other behaviors. In this article, we will illustrate the basic economic principle by referring to the behavior of settlers in the United States following passage of the Homestead Act of 1862.

The following statement expresses an assumption that underlies most economic analysis: Human behavior results from the choices people make based on expected costs and expected bene&Mac222;ts. It appears to be far removed from conventional economic abstractions-e.g., supply and demand curves, measures of elasticity of demand, and descriptions of comparative advantage. Yet it is not so far removed. Each of these abstractions is derived from the basic statement about expected costs and benefits. To a novice, however, economists who use these abstractions appear to be vague and confusing-certainly not capable of explaining people's behavior by referring to anything as comprehensible as costs and benefits.

What does this have to do with history? A great deal. Economic reasoning tells us that history should not be portrayed as events driven by fate; nor should an economy be viewed as a machine driven by outside forces. Both U.S. history and the performance of the U.S. economy result from the choices people make as they attempt to live with many other people. To study these choices, to anticipate which choices they will make and what circumstances might cause people to choose differently, illuminates the study of history. History need not be studied as a collection of lifeless abstractions and boring sequences of events. Instead, learners can be surprised by unexpected outcomes, appalled by the tragedy and injustice of choices made by well-meaning people, and thrilled by triumphs of human achievement. They can begin to discern extraordinary events in what appears to be routine activity. For example, food is abundant in the United States, but food shortages are common in some other nations with great food production potential. Why are we able to feed ourselves when others starve because they cannot? We can deduce one explanation by using economic reasoning to analyze the choices being made.

The Handy Dandy Guide
The Handy Dandy Guide for Solving Economic Mysteries, a handout from Capstone: The Nation's High School Economics Course (Reinke, Schug, and Wentworth 1989), is a set of six statements that articulate important principles of economic reasoning-principles found in the original premise that behavior results from our choices about expected costs and benefits. The principles provide a practical instructional tool students can use to reason about history. The six statements elaborate the basic economic principle, spelling out its component parts:

1. People choose.

2. People's choices involve costs.

3. People respond to incentives in predictable ways.

4. People create economic systems that inßuence individual choices and incentives.

5. People gain when they trade voluntarily.

6. People's choices have consequences that lie in the future.

Each statement can serve to guide inquiry, helping students to discover useful clues and to evaluate the importance of existing information. Too often the study of history suggests that all causes of an event are created equal. For any given historical problem, some explanations are better than others; some clues are more useful than others. The guide helps students decide what is important and prevents them from being distracted by unimportant information.

People use devices like the Handy Dandy Guide in many situations. The Handy Dandy Guide for economic reasoning is like a pilot's takeoff checklist, a shopper's list to remember the correct groceries and avoid the incorrect groceries, and a compass and map used as a trail guide. The Handy Dandy Guide assists students and teachers in identifying which clues are most important to answer a mystery, which clues are distractions, how many clues must be found, and how they can compose an answer from the useful clues.

The Homestead Act of 1862
Let us now examine a historical issue and use the guide to analyze what may have caused the observed behavior. Congress passed the Homestead Act in 1862, and President Lincoln signed it into law. Thereafter, anyone more than twenty-one years of age, a U.S. citizen, or a person intending to become a U.S. citizen could obtain one hundred and sixty acres of land without buying that land. If settlers simply lived on it and cultivated a part of it, then the entire one hundred and sixty acres would be theirs at the end of &Mac222;ve years. Homesteaders paid nothing but a small registration fee.

The Homestead Act made land attractive to immigrants and city residents who wished to own property. So how did people react? Although many people moved onto homesteads during this period, a surprising number did not. In fact, from 1863 to 1872, ten times as many farm acres were sold for cash than were granted in homesteads. From 1872 to 1882 three and one-half times as many acres were sold for cash than were granted in homesteads. The railroads sold the most coveted land. People purchased and settled it at a much faster rate than the homestead land. What might explain this curious fact?

When students &Mac222;rst encounter the homestead mystery, they might begin to use undirected speculation in search of possible explanations:

If the teacher invites the students to set these speculations aside and to use the Handy Dandy Guide to focus their reasoning, new and sometimes unexpected insights might follow.

1. People choose.
Land-purchasing behavior was not accidental or random. It was not due to the irrationality of human behavior, the failure of government protection, or a lack of education. People are always faced with alternatives and must decide how to use their scarce resources, including time and energy. Most settlers who bought land knew about the homestead option and chose the land offered by the railroads.

We can understand behavior better if we understand what other alternatives existed as people made their choices. If no deliberate choice is involved, if the behavior is random or determined by some unseen outside force, it makes no sense to study the behavior. We cannot learn from it, anticipate it, or understand its origin in any systematic manner. So we can conclude that given the alternatives of homesteading or buying land, most people chose not to homestead. Now we will attempt to discover why many chose to purchase land.

2. People's choices involve costs.
Homestead land, of course, was not really free, even though people did not have to buy it. Individuals consider more than purchase prices when they make choices. Other costs might include travel time for shipping products to market, time and resources spent to enhance the productivity of the land, years spent before a settler could become the legal owner, and effort required to sell the land if a settler decided to relocate. The long waiting time to own the land, the difficulty of making it productive, the distance from transportation, and the difficulty of changing ownership all might make the free land expensive even though it had not been bought for a purchase price.

Individuals attempt to make choices in which the bene&Mac222;ts from the choice are greater than the cost of the lost alternative. Settlers therefore selected railroad land over homestead land only if they anticipated that bene&Mac222;ts deriving from the decision would outweigh the costs of paying for the land and of passing up available free land.

3. People respond to incentives in predictable ways.
Incentives are factors that encourage people to act. A change in incentives may involve an increase in expected benefits, a decrease in expected costs, or some combination of the two.

Railroad companies wanted farms and towns to develop near their rail lines. People living in the farms and towns would become rail customers, generating revenue to pay for the operation of the railroad. The competition of free land encouraged the railroad companies to set lower prices for their land than the prices they otherwise could have set. These reduced prices were attractive, compared to the costs of homestead land. Many settlers must have decided they could do better by buying railroad land than by incurring the expected costs and benefits of farming new, less accessible, less productive land in the homesteading area.

4. People create economic systems that influence individual choices and incentives.
No one can make any choice he or she wishes to make. Choices made by individuals are always influenced by choices of others and by rules of the economic and legal system. Some potential settlers were not eligible for the free land. They could not meet the time requirements for obtaining ownership. In some cases, the homestead land could not be made productive because of inadequate acreage allotments and lack of suf&Mac222;cient water. Some of the best homestead land was taken &Mac222;rst by lucky or well-informed settlers. This left other settlers with less attractive homestead land to choose from and made the railroad land more attractive even though it required payment of a purchase price.

People are influenced by the choices of other people and by the rules of the social system in which they live. As people alter their choices, they increase or decrease alternatives for others.

5. People gain when they trade voluntarily.

Voluntary trade results in mutual gain. If it were not so, people would stop trading with friends and strangers. People strive to improve their situations by trading something they value less than the item they receive in trade from someone else. Potential farmers and railroad executives both gave up something of less value to gain something of greater value to them. Farmers-to-be could not eat or wear money as clothing. Money could not grow food. It was better spent or borrowed to obtain productive land from which they could earn greater income.

Railroad executives had little use for the excess land. It didn't produce revenue or help pay salaries or dividends to stockholders. It served the railroad executives better to sell the land, gain revenue from the sale, and obtain future business by gaining a chance to transport the farmers' crops. Both groups-railroad executives and land purchasers-anticipated that future benefits would outweigh the expected costs of the exchange.

Do not confuse voluntary trade with exploitative, involuntary trade like colonialism, slavery, or theft. Exploitative relationships create greater wealth for one side at the expense of the other-a classic zero-sum game. This analysis focuses on voluntary trade behavior.

6. People's choices have consequences that lie in the future.
Did the future work out as farmers and railroad executives had planned? Not always. No one is a perfect predictor of the future. All choices involve risk because people make choices lacking full information. At times things don't work out as well as planned. Many farmers failed because of poor weather, poor management, or changes in world crop prices. Many railroad companies went bankrupt because they did not receive enough revenue from land sales and crop hauling. Does this range of outcomes make their choices irrational? No. It only means that actual events differed from the expected events.

What is most remarkable is how often people got it right. The farming and transportation industries in the United States were successful and helped the United States become a nation of highly mobile and well-fed people. Individual decisionmaking seems to work well, but it is not risk free.

The Solution
So why did many people pass up free land? Our new, working hypothesis is that the expected costs and benefits of the homestead land, compared to the railroad land, did not add up to a good deal. After considering their alternatives, people made what they thought was their best choice. Subsequent events proved them right or wrong.

The Handy Dandy Guide helps students understand why historical events may have turned out as they did. It also helps them anticipate the future, because they can understand why people change their minds. For example, to extend this exercise the teacher could ask students to read a contemporary description of free farmland in Siberia or free housing in a United States inner city. Students might be asked to decide whether they would be willing to move to these locations today for &Mac222;ve years. Then they might identify incentives that would cause them to change their minds. This type of example lets students experience a simulation of the dilemmas that the homesteaders faced in responding to choices and incentives.

Approaching historical content with an economic perspective allows students to explain puzzling behavior. It does not smother students in economic content, yet it leaves students ready to learn more about history and economics. The Handy Dandy Guide provides the teacher and the student with a practical, concise, but rich tool to use in analyzing and understanding human behavior. History, in turn, provides a deep source of rich information about human behavior that teachers and students can explore with the Handy Dandy Guide.

Reinke, Robert W., Mark C. Schug, and Donald R. Wentworth. Capstone: The Nation's High School Economics Course. New York: National Council on Economic Education, 1989.Donald R. Wentworth is Professor of Economics at Paci&Mac222;c Lutheran University in Tacoma, Washington. Mark C. Schug is Professor of Curriculum and Instruction at the University of Wisconsin-Milwaukee.