Three Widely Believed Economic Fallacies

Steve Horowitz:

The Fallacy of the Zero-Sum Game

The first of these fallacies is the belief that market activities, especially exchange, are zero-sum games. Zero-sum games are those in which the total gained from playing the game is zero. So, for example, if each of five people playing poker buys into the game for $100, there is only $500 to be won.

. . .

We see this misperception of markets in a variety of forms. At the most general level, the belief that the rich get rich by impoverishing others is a species of zero-sum thinking.



The Fallacy That Order Requires Design

The second fallacy is the belief that economies require someone or some group to design and/or control them. Often this belief is linked to an argument from complexity: only a simple economy could be left to its own devices. Complex, advanced economies like those across most of the globe require human monitoring and regulation to function properly.

. . .

The flaw at the heart of this fallacy is that it ignores the idea of spontaneous or undesigned order.


The Fallacy that Consumption is the Key to Growth

The final fallacy is the belief that consumption is the source of economic growth. This belief is widely held by everyone from the citizenry at large up through economic journalists and politicians. We hear it every time the economy enters a recession and begins to recover. Pundits declare that consumers need to start buying things to generate a recovery, and reports about the latest data on consumer spending make the headlines.

. . .

In fact, consumption expenditures vary the least as economies go through booms and busts. The component with the greatest variation is private sector investment. If anything is needed during a recovery, it is more investment by the private sector, not more consumption.

. . .

The heart of the fallacy, however, is that consumption consumes things! When we consume goods and services, we destroy their value by using them up. Consuming food does not create anything valuable, it eliminates something valuable.

Excellent work. Read it.


Immigration and Social Engineering

I was recently listening to President Trump’s proposal to change U.S. immigration laws and how they would somehow help the economy.

Well, Sheldon Richman puts into words better than I could what this amounts to:

Immigration brings out the social engineers and central planners across the political establishment. We see this clearly in the debate over Donald Trump’s support for legislation that would cut legal immigration in half while tilting it toward well-educated English-speakers and against low-skilled non-English-speakers. . . .

But what is this thing they call “the economy,” which has needs? Social engineers of all parties and persuasions talk as though an economy is some kind of mechanism to be centrally fine-tuned and overhauled occasionally according to a plan. Even those who style themselves free enterprisers display the central-planning mentality when it comes to immigration.

Contrary to this establishment view, the economy is not a mechanism. It is, rather, hundreds of millions of American producers and consumers, who also happen to be embedded in a global marketplace. Why can’t they be trusted, without the direction of politicians, to decide for themselves what they need and to engage in social cooperation — that is, among other things, to trade goods and services — to obtain it?


Venezuela descends into predictable dictatorship

A. Barton Hinkle:

Last weekend, president Nicolas Maduro used a sham election to consolidate power, and by Tuesday armed thugs were rounding up opposition leaders. This is the all but inevitable outcome of the Venezuelan government’s economic policies, which have driven the richest nation in Latin America — a country with more oil than Saudi Arabia — into shocking destitution.

And Darío Paya, former Chilean ambassador to the Organization of American States:

“Populists and socialists destroy their societies in predictable ways. It’s not like one day a populist gets up and says, ‘I’m going to ruin this country.’ Rather, he starts out wanting to spread the wealth and finds that the easiest way to hand out cash is by simply printing lots of it. Which creates a new problem: As the currency weakens, prices rise. But the populist finds there’s an answer for that too. If bread is getting expensive, he can fix its price, and he gets to vilify the baker as a greedy capitalist.


“But then the baker stops producing bread because he can’t afford to make it, what with the rising price of flour. And so what does the populist do next? He fixes the prices of flour. When that doesn’t work, the politically expedient thing to do will be to take over the bakery and the farms and hand them to the folks in the party’s local committees, who prove to be rather less apt at farming and baking. …


“And if violence does erupt, it can be denounced as the doing of enemies of the state and used as a pretext for renewed crackdowns: ‘We’re going to tell the imperialism and the international right that the people are present, with their farm instruments in one hand and a gun in the other,’ Maduro told a Caracas crowd. And soon, Mr. Populist finds himself with a good reason to suspend the country’s constitution. Thus does a tyrannical attitude toward the shop-owner selling bread lead to a tyranny over a whole nation.”




USDA: “We Know What’s Best”

I recently heard the radio advertisement from the United States Department of Agriculture (USDA). The tagline is “we know what’s best”.

How creepy. Worse, the supposed experts — NOT — suffer from the fatal conceit as explained by Friedrich A. Hayek. Here’s an appropriate quote from the book:

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

Brooks: Top-down or Bottom-up Approaches to Medicare

The average 56-year-old couple pays about $140,000 into the Medicare system over a lifetime and receives about $430,000 in benefits back. The program is also completely unaffordable. Medicare has unfinanced liabilities of more than $30 trillion. The Medicare trustees say the program is about a decade from insolvency.


David Brooks, thinks Republicans are channelling Friedrich August Hayek. If only. For an illuminating discussion of decentralized decision-making see this video. Click on the cc on the menu bar to the right of the volume icon.

SEC Probes Trading in Facebook, Twitter

Why?  Are the busybodies there afraid someone, somewhere is making money?  As long as the parties consent to the transactions, it’s not the SEC’s business.

Are they afraid of fraud?  Valuing the shares of the firms being traded is a judgment call.  It is implicit that either the buyer or the seller knows more than the other.  At the least, one side views the information differently that was used to make the decision.  That is always present for any transaction.