Economic Facts and Fallacies – Part One

Anne Marie Waters

Tuesday September 1st 2020

 

You may be familiar with Thomas Sowell, the American economist.  If not, I recommend his work.  He grew up in Harlem and is now a senior fellow at America’s prestigious Stanford University.  Sowell is not your average “PC” academic, he’s willing to put forward the sensible view of millions.

A Twitter user (@ThomasSowell) posts quotes from Sowell, here are the most recent:

Leading people into the blind alley of dependency and grievances may be counterproductive for them but it can produce votes, money, power, fame and a sense of exaltation to others who portray themselves as friends of the downtrodden.

Too many people today act as if no one can honestly disagree with them. If you have a difference of opinion with them, you are considered to be not merely in error but in sin. You are a racist, a homophobe or whatever the villain of the day happens to be.

Our children and grandchildren may yet curse the day we began hyping race and ethnicity. There are countries where that has led to slaughters in the streets but you cannot name a country where it has led to greater harmony.

As you can see, this man speaks sense, so I was excited to receive his book recently as a birthday gift.  Economic Facts and Fallacies has a table of contents that includes Male-Female Facts and Fallacies, Academic Facts and Fallacies, and Racial Facts and Fallacies.  Yes, you know this is going to be interesting!

As a starting point, here is how he describes fallacy:

Fallacies are not simply crazy ideas.  They are usually both plausible and logical – but with something missing.  Their plausibility gains them political support.  Only after that political support is strong enough to cause fallacious ideas to become government policies and programs are the missing or ignored factors likely to lead to ‘unintended consequences’, a phrase often heard in the wake of economic or social policy disasters.    

The first chapter introduces us to five general economic fallacies.  These are the zero-sum fallacy, the fallacy of composition, the post-hoc fallacy, the chess-pieces fallacy, and the open-ended fallacy.  Let’s look at these in turn.

The Zero-Sum Fallacy

Sowell argues that economics is not a zero-sum game, but that each participant to a transaction is better off as a result of the transaction, if not, the transactions wouldn’t continue.

Many individual fallacies in economics are founded on the larger, and usually implicit, fallacious assumption that economic transactions are a zero-sum process, in which what is gained by someone is lost by someone else.  But voluntary economic transactions – whether between employer and employee, tenant and landlord, or international trade – would not continue to take place unless both parties were better off making these transactions than not making them.  As obvious as this may seem, its implications are not always obvious to those who advocate policies to help one party to these transactions.  

He claims that government policy aimed at helping one party to a transaction (employees for example) often ends up harming both.  Government intervention has reduced the terms available to parties because there are now three different parties involved in these transactions and only those particular terms which are simultaneously acceptable to all three parties are legally permitted.  In other words, these new terms preclude some terms that would otherwise be mutually acceptable to the parties themselves.

To put it one way, if one side of a mutually beneficial agreement is harmed, it stands to reason that the other side would be harmed too.

A given example is rent control.  These are usually aimed at helping tenants, but as Sowell describes, can end up causing landlords and construction firms to supply less housing given the less favourable terms available.  The reduction in cost of housing leads to higher demand; demand not met with supply.  This leads to decline in housing maintenance and repair because landlords are no longer under the same competitive pressures to spend money on such things in order to attract tenants. 

The Fallacy of Composition

This fallacy is the belief that what is good for one is good for all.

Many economic policies involve the fallacy of composition, as politicians come to the aid of some particular group, industry, state or other special interest, representing the benefits to them as if they were net benefits to society, rather than essentially robbing Peter to pay Paul. 

The idea is that government often simply move problems around rather than solving them.  If one area of a country benefits but another falls in to decline, there is no overall benefit to the country as a whole.

Sowell argues that local government intervention in the form of redevelopment and “revitalisation” will only move people from one place to another.  Yet governments from the local to the national level have set up innumerable programs to engage in what is usually at best a zero-sum operation, and is often a negative-sum operation, as millions of lives are disrupted across the country and billions of tax dollars are spent demolishing neighborhoods, accomplishing nothing on a national level other than a voluntary relocation of taxpayers to places where they can get property without having to bid it away from its current owners, and an involuntary relocation of the people displaced.  

The Post Hoc Fallacy 

This is the flawed assumption that something is caused by what precedes it.  For example, Sowell mentions DDT, an insecticide, that was banned partly because it was believed to have caused cancer.  In fact, it had killed the mosquitoes that carried malaria, thereby saving so many lives that cancer numbers had begun to rise.

Now millions of people, who would otherwise have died young, lived long enough to get cancer in their later years.  But the DDT did not cause cancer, and its banning led to a resurgence of malaria that took millions of lives around the world.

Sowell states that the belief that the Great Depression was caused by the stock market crash of 1929, was “widely believed for decades”.  However, a similar stock market crash in 1987 was followed by 20 years of economic growth, with low unemployment and low inflation rates.

The Chess-Piece Fallacy 

This one is my favourite!  Some in politics believe they can move people around like pieces on a chess-board.  They believe they can make policies that amount to economic and social experimentation.  But people don’t like being subject to experimentation and may rebel, with ‘unintended consequences’.

Unlike chess pieces, human beings have their own individual preferences, values, plans and wills, all of which can conflict with and even thwart the goals of social experiments.  Moreover, whatever the merits of particular social experiments, experimentation as such can have huge economic and social costs. 

The Open-Ended Fallacy

The final fallacy relates to the notion that “desirable things are advocated without regard to the most fundamental fact of economics, that resources are inherently limited and have alternate uses”.

This is of course highly political.  Politicians love to promise endless supplies of housing and development, all the while failing to acknowledge a limit to this, or the price they’re willing to pay.

This is a fascinating book, and it has scarcely begun.  I’ll read a chapter per week and describe it to you here.  Next week, Urban Facts and Fallacies.  Make sure to catch up every Tuesday!

 

Anne Marie Waters

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