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your turn by Robert A. Schwartz Sparking Excitement About Economics ECONOMICS COURSES should be among the most fascinating classes in the business school, but students are frequently bored by them. Yet markets lie at the heart of economic activity, and their operations are exciting to study, so why the boredom? In typical classes, markets are presented as perfectly liquid envi- ronments with no problems, no frictions—and no con- nection to reality. They are nothing more than abstract, magical lands where demand meets supply so that prices and quantities can be established. In the real world, markets are rife with impediments, bound by government regulations, and constantly impacted by new technology. Actual markets are replete with transaction costs, blockages, and fuzzy informa- tion. Both corporate leaders and heads of households are often forced to make choices based on information that is incomplete, imprecise, and sometimes irrelevant. These marketplace realities are called frictions. When the financial crisis erupted with full force in 2008, a widespread evaporation of liquidity had dire consequences for markets around the world. Credit lines froze, an increasing number of nonfinancial firms headed toward bankruptcy, and ordinary people were left startled, mystified, out of jobs, and out of savings. It became crystal clear that the financial sector is not a simple, frictionless conduit for transmitting funds from those who save to those who invest. On the contrary, the finance function is complex, it pervades the markets, and when it fails, it can almost bring down the broader economy. If the realities of the marketplace had been taught in the classroom, events such as those of 2008 might not have caught so many people so woefully unprepared. But to teach economics properly, we must do more than reel off the eye-popping names of market impediments like asym- metric information, short-run myopia, principal-agent problems, under-production of public goods, techno- logical inertia, and systemic risk. We have to examine how these impediments keep a market from delivering the results the public wants. And we must do this in an engaging fashion. In the real world, markets are rife with impediments, bound by government regulations, and constantly impacted by new technology. 64 July/August 2011 BizEd In traditional economics courses, we carefully explain to our students that prices are set where demand and supply curves intersect in those perfectly competitive markets that we love to teach. We further explain that price and quantity distortions occur when a free market encounters interferences from govern- ment-imposed price ceilings or floors, or sales taxes or subsidies. But we can take a more exciting approach. For instance, we can introduce students to the com- plex and fascinating market for already issued equity shares—i.e., the stock mar- ket. Professors should dive into the rules, regulations, and technology that deter- mine how orders are written and turned into trades. In today's electronic envi- ronment, trades are made and prices set within milliseconds. Some schools intro- duce students to these realities through trading rooms and student-managed funds. But a trading room's huge poten- tial for demonstrating microeconomic concepts remains largely untapped. And there are other ways to bring the tension, time pressure, and excitement of a marketplace into the classroom. In my classes, I have students study what happens when they're dealing with the equity shares of an exchange-listed com- pany. Here's how to do it. First have them operate in the make-believe world of a perfectly competitive market, where there are no large, institutional investors, only a sizable number of small, retail custom- ers. Next tell them that price discovery will take place on the exchange, and that