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ARTICLE 7 Fal lacies ofEconomics APRIL 01, 1981 by LAWRENCE W. REED Mr. Reed isAssistantProfessor
ARTICLE 7 Fal lacies ofEconomics APRIL 01, 1981 by LAWRENCE W. REED Mr. Reed isAssistantProfessor
ARTICLE 7 Fal lacies ofEconomics APRIL 01, 1981 by LAWRENCE W. REED Mr. Reed isAssistantProfessor
ARTICLE
7
Fal
lacies
ofEconomics
APRIL
01,
1981 by
LAWRENCE
W.
REED
Mr.
Reed
isAssistantProfessor
ofEconomicsatNorthwood
Institute
in
Midland,
Michigan
and
Director
of
the
college ssummer

Freedom

Seminars.

A

news

commentator once observed
commentator
once
observed
ssummer Freedom Seminars. A news commentator once observed that any f-dozen hal economists willnormal ly come
ssummer Freedom Seminars. A news commentator once observed that any f-dozen hal economists willnormal ly come

that any

Seminars. A news commentator once observed that any f-dozen hal economists willnormal ly come up wi

f-dozen

hal

economists

willnormal

ly

come

up

wi

th

aboutsix differentpol

icy

descriptions.

Itcertainly does seem thatway!Ifeconomics is a science, then why doesitdefy the precision, the certainty,
Itcertainly does
seem
thatway!Ifeconomics
is
a science,
then
why
doesitdefy
the
precision,
the
certainty,
and
the
relative
unanimi
ty
ofopinion
which characterize
so
many
other sciences physics,
chemistry, and
mathematics,
for
instance?
If laws ofeconomics and human action existand are immutable, why do wefind economists all over
If laws
ofeconomics
and
human action
existand
are
immutable,
why
do
wefind
economists
all
over
the board
on
matters
ofcritical
importance?EconomistA
champions
a tax
cu
whi
le EconomistB
favors
a tax
increase.
EconomistC
argues
for
tariffprotection
butEconomistD
cal
ls
for
free
trade.
Another
economistproposes social
ization
and is
opposed
by
yetanother who
advances
the
marketeconomy.
Indeed,if
there
is
anything
which
all
economists
can
agree
on,it
is
that,well,
they
disagree.

the

cynic

willglance

at

this

economic

Tower

ofBabel

and

condemn

the

study

ofanything

economic.

But

thatwould

be

unfair

to

the

many

eternal

truths

which

do

exist

in

thefield

ofhuman

interaction

in

the

marketplace.

Such

a

view,

moreover,

is

whatsome

would

call

a

cop-

out. Itoffers

no

plausible

explanation

for

the

confusion

and

no

guides

for

sorting

outwhat

is

correct

from

what

is

incorrect.

Yes,

Yes, there are methods to the madness ofeconomists.

there

are

methods

to

the

Yes, there are methods to the madness ofeconomists.
Yes, there are methods to the madness ofeconomists.

madness

Yes, there are methods to the madness ofeconomists.

ofeconomists.

The

fact

that

they

do

notall

think

al

ike

is

capable

capable ofexplanation. Where
capable ofexplanation. Where

ofexplanation.

Where

mightwe start?

mightwe

mightwe start?

start?

is

simply

notphysics,

chemistry,

or

mathematics.It

is

the

study

ofhuman

action,

and

humans

are

notprogrammed

robots.

Yes,

certain

immutable

laws

ofnature

 

do

indeed

exist,butone

of

them

is

thathumans

are each

and

every

one

of

them

inner-motivated,

creative,

sel

f-interested

organisms.

They

range

from

docile

to

irascible,

meek

to

daring,

complacent

to

ambitious,

smart

to

not-so-smart.As

Adam

Smi

th

pointed

outmore

than

two

hundred

years

ago,

In

the

greatchessboard

ofhuman

society,

every

piece

has

a

principle

ofmotion

ofits

own,

al

together

different

from

thatwhich

the

legislature

mightchoose

to

impose

uponit.

 

onit.

This

handle

dissentamong

confound

enough

to

place

a

onit. This handle dissentamong confound enough to place a mathematical

mathematical

 
 

individuals

themselves,

economists

willdiffer

in

their

value

and

ethical

judgments.

One

who

is

a

social

istwilldiffer

on

a

pol

icy

matter

wi

th

one

who

is

al

ibertarian.

They

may

even

agree

on

the

outcome

of

thatpol

icy

whi

le

disagreeing

on

whether

thatoutcome

is

good

or

bad.

People

who

are

wel

l-intentioned

and

truth-seeking

yet

operating

from

divergentethical

premises

frequently

arrive

atdivergentconclusions.

 
In addition,
In
addition,

economists

In addition, economists may dis-agree because

may

dis-agree

because

they

have

differentdata

or

insufficientdata

or

no

rel

iable

data

atall

.

 
 

are

some,

andIam

sure

notall,of

the

reasons

why

good

economists

may

clash.

The

purpose

of

this

essay,

however,

is

to

look

for

reasons

for

economic

confusion

in

anothe

direction.

In

brief,economists

clash

because,

as

Henry

Hazlitthas

so

succinctly

putit, Economics

is

haunted

by

more

fal

lacies

than

any

other

study

known

to

man

(emphasis

mine).

 

Is

there

such

a

thing

as

bad

economics?

You

bet

there

is,

justas

surely

as

there

is

good

plumbing

and

bad

plumbing.Ifone

means

by

bad

economics

 

the

promotion

of

false

reasoning,

mistaken

assumptions,

and

shoddy

intel

lectual

merchandise,

then

Hazlitt s

commentought

to

be

enshrined

as

a

law!

 

Itmay

be

an

oversimplification,

butIbel

ieve

that

the

essence

essence of bad economics

of bad

economics

can

be

distilled

into

the

fol

lowing

seven

fal

lacies.

Each

of

them

is

a

pitfall

which

the

good

economistwill

fai

thful

ly

bypass.

 

The

fal

lacy

ofcol

lective

terms.

Examples

ofcol

lective

terms

are

society,

communi

ty,

nation,

class,

and

us.

The

important

thing

to

remember

is

thatthey

are

abstractions,figments

of

the

imagination,

notliving,

breathing,

thinking,

and

acting

entities.

The

fal

lacy

involved

here

is

presuming

thata

col

lective

is,

in

fact,a

living,

breathing,

thinking, and

acting entity.

good economistrecognizes that the onlyl iving, breathing, thinking, and acting entity is the individual.The
good
economistrecognizes
that
the
onlyl
iving,
breathing,
thinking, and
acting
entity is
the
individual.The
source
ofall
human
action
is
the
individual.Others
may
in one s
action
or
even
participate,
buteverything
which
occurs
as
a consequence
can
be
traced
to
particular,
identifiable
individuals.

acquiesce

disappeared?Obviously

existence

in reali ty
in
reali
ty
 

It

is

absolutely

essential

to

determine

origins

and

responsibility

and

even

cause

and

effect

thateconomists

avoid

the

fal

lacy

ofcol

lective

terms.

One

who

does

notwil

l

bog

down

in

horrendous

general

izations.

He

willassign

creditor

blame

to

non-existententities.

He

will

ignore

the

very

real

actions

(individual

actions)

going

on

in

the

dynamic

world

around

him.

He

may

even

speak

of the

economy

almostasifitwere

a

big

man

who

 

plays

tennis

and

eats

cornflakes

for

breakfast.

 

2.

The

fal

The fal lacy ofcomposition.

lacy

The fal lacy ofcomposition.

ofcomposition.

This

error

also

involves

individuals.Itholds

thatwhat

is

true

for

one

individual

willbe

true

for

all

others.

 

example

has

often

been

given

ofone

who

stands

up

during

a

football

 

game.

True,

he

willbe

able

to

see

better,

butifeveryone

else

stands

up

too,

the

view

ofmany

 

individual

spectators

willprobably

worsen.

   

A

counterfei

ter

who

prints

a

million

dol

lars

willcertainly

 

benefithimself(ifhe

doesn tgetcaught) butifwe all become
doesn tgetcaught) butifwe all become

doesn tgetcaught)

butifwe all
butifwe
all

become

counterfei

ters

and

each

printa

million

dollars,

 

a

qui

te

differenteffect

is

rather

obvious.

 

suggests

a

widespread

The

good

economistnei

ther

sees

the

trees

and

ignores

the

forestnor

sees

the

forestand

ignores

the

trees;

he

is

conscious

of

the

entire

picture.

 

The

fal

lacy

of money

is

weal

th.

The

mercantilists

of

the

1600s

raised

this

error

to

the

pinnacle

ofnational

pol

icy.

Always

bentupon

heaping

up

hoards

ofgold

and

si

lver,

they

made

war

on

their

neighbors

and

looted

their

treasures.IfEngland

was

richer

than

France,itwas,

according

to

the

mercantilists,

because

England

had

more

precious

metals

inits

possession,

which

usual

ly

meant

in

the

king s

coffers.

 
Itwas All the
Itwas
All
the

Adam

money

Smi

th,

in

The

Weal

th

ofNations,

who

exploded

this

sil

ly

notion.

A

people

are

prosperous

to

the

extent

they

possess

goods

and

services,

notmoney,

notmoney,

Smith

declared.

in

the

world paper

or

metall

ic willstill

leave

one

starvingifgoods

and

services

are

notavai

lable.

 
money is weal th error is the affliction of the currency crank. From John Law
money
is
weal
th
error
is
the
affliction
of
the
currency
crank.
From
John
Law
to
John
Maynard
Keynes,
greatpopulations
have
hyperinflated
themselves
to
ruin
in
pursuitof
thisillusion.
Even
today
we
hear
cries
of we
need
more
money
as
the
government s
monetary
authorities
crankitoutatdouble
digitrates.
The
good
economistwillrecognize
thatmoney
creation
is
no
short-cut
to
weal
th.
Only
the
production
ofvalued
goods
and
services
in
a
marketwhich
reflects
the
consumer s
wishes
can
rel
ieve
poverty
and
promote
prosperi
ty.
The
fal
lacy
ofproduction
fori
ts
own
sake.
Al
though
production
is
essential
to
consumption,
let s
notput
the
proverbial
cartbefore
the
horse.
We
produce
in
order
thatwe
may
consume,
not
the
other
way
around.
I
enjoy
writing
and
teaching
butIenjoy
sunning
in
Acapulco
even
more.Ihave
labored
to
produce
this
piece
and
to
teachi
ts
principles
in
my
classes
instead
of
going
to
Acapulco
firstbecauseIknow
that s
the
only
wayI llever
getoutofMichigan.
Writing
and
teaching
are
the
means;
sunning
in
Acapulco
is
the
end.
A
free
economy
is
a
dynamic
economy.It
is
the
si
te
ofwhat
the
economistJoseph
Schumpeter
cal
led
creative
destruction.
New
ideas
supplantold
ideas,
new
products
and
methods
replace
old
products
and
methods,
and
whole
new
industries
render
obsolete
old
industries.
occurs
because
production
mustconstantly
change
shape
to
conform
wi
th
the
changing
shape
ofconsumer
demand.
As
Henry
Hazlitthas
written,
it
is
justas
necessary
to
the
heal
th
ofa
dynamic
economy
thatdying
industries
be
al
lowed
to
die
as
thatgrowing
industries
be
al
lowed
to
grow.
bad
economistwho
fal
ls
prey
to
this
ancient
fal
lacy
isl
ike
the
fabled
pharaoh
who
thoughtpyramid-bui
lding
was
heal
thy
in
and
ofitself;or
the
politician
who
promotes
leaf-
raking
where
there
are
no
leaves
to
be
raked,
just
to
keep
people
busy.
Itseems
thatwhenever
an
industry
gets
in
trouble,
some
people
cry
thatitmustbe
preserved
atall
costs.
They
would
pour
millions
or
billions
ofdol
lars
in
subsidies
on
the
industry
to
prevent
the
market s
verdict
from
being
heard.
The
bad
economistwill
join
the
chorus
and
ignore
the
deleterious
impact
thatwould
befall
the
consumer.
The
good
economist,on
the
other
hand,
does
notconfuse
ends
wi
th
means.
He
understands
thatproduction
because
consumption
is
even
more
so.
Wantan
example
of
this
fal
lacy
atwork?How
about
the
many
proposals
to
preventconsumers
from
order
to
protect
the
American
auto
industry
from
competition?
The fal lacy of the free lunch. The Garden ofEden is a thing of the
The
fal
lacy
of
the
free
lunch.
The
Garden
ofEden
is
a
thing
of
the
distantpastyetsome
people
(yes,
even
some
economists)
occasional
ly
think
and
actasif
economic
goods
can
come
wi
th
no
costattached.
Mil
ton
Friedman
is
one
economistwho
has
warned
repeatedly,
however,
that there
is
no
such
thing
as
a
free
lunch!
something
for
nothing
scheme
and
most getrich
quick
plans
have
some
elementof
this
fal
lacy
in
them.
Let
there
be
no
mistake
about
this:ifeconomics
is
involved,
someone
pays!
An
importantnote
here
regards
governmentexpendi
tures.
The
good
economistunderstands
thatgovernment,byi
ts
very
nature,
cannotgive
exceptwhatit
first
takes.
A
free
park
for
Midland,
Michigan
is
a
park
which
millions
of
taxpaying
Americans
(including
Midlanders)
actual
ly
do
pay
for.
friend
ofmine
once
told
me
thatall
one
needs
to
know
abouteconomics
is
What
isitgoing
to
costand
who
is
going
to
pay
fori
t?
Thatlittle
nutshell
carries
a
kernel
of
advice
for
the
economist:don tbe
superficial
in
your
thinking!
The
fal
lacy
of
the
shortrun.
In
a
sense,
this
fal
lacy
is
a
summary
of
the
previousfive.
actions
seem
beneficial
in
the
shortrun
butproduce
disaster
in
the
long
run:
drinking
excessively,
driving
fast,spending
bl
indly,
and
printing
money,
to
name
a
few.
To
quote
the
venerable
Henry
Hazlittagain,
The
bad
economistsees
only
what
immediately
strikes
the
eye;
the
good
economistalso
looks
beyond.
The
bad
economist
sees
only
th
directconsequences
ofa
proposed
course;
the
good
economist
looks
also
at
the
longer
and
indirectconsequences.
seeking
to
win
the
nextelection
frequently
supportpol
icies
which
generate
short-
run
benefits
at
the
expense
of
future
costs.It
is
a
shame
that
they
sometimes
carry
the
endorsementofeconomists
who
should
know
better.
The
good
economistdoes
notsuffer
from
tunnel
vision
or
shortsightedness.
Thetime
span
he
considers
is
long
and
elastic,
notshortandfixed.

The

fal

lacy

ofeconomics

by

of increasing

coercion.

output

economists speak

Two

hundred

years after Adam
years
after
Adam

Smi

th,

some

economists

stillhave not

learned

to

apply

basic

principles

ofhuman

nature.

These

butprescribe

done.

 

Humans

are

social

beings

who

progressif

they

cooperate

 

wi

th

one

another.

Cooperation

impl

ies

a

cl

imate

of

freedom

for

each

individual

human

being

to

peaceful

ly pursue his
ly
pursue
his

own

sel

f-

interestwi

thout

fear

ofreprisal.Puta

human

 

in

a

zoo

or

in

a

strait

jacketand

his

creative

ener

gies

dissipate.

   
his creative ener gies dissipate.     Why did Thomas Edison invent thel ightbulb?Itwas

Why

did

Thomas

Edison

invent

thel

ightbulb?Itwas

notbecause

some

Edison invent thel ightbulb?Itwas notbecause some planner ordered him to! Why don tslaves produce

planner

ordered

him

to!

Why

don tslaves

produce

greatworks

ofart,Swiss

watches,

orjetairplanes?It s

rather

obvious,

isn tit?

a look

around

the

world

today and

you

see

the

pointIam

driving

Take

WestGermany.

at.Compare

see the pointIam driving Take WestGermany. at.Compare North Korea wi th South Korea, Red China wi

North

Korea

wi

th

South

Korea,

Red

China

wi

th

Taiwan

or
or

Hong

Kong, or EastGermany
Kong,
or
EastGermany

wi

th

 

would

think,

wi

th

such

overwhelming

evidence

against

the

record

ofcoercion,

thatcoercion

would

have

few

adherents.

Yet

there

are

many

economists

here

and

abroad

who

cry

for

national

ization

of

industry,

wage

and

price

controls,

confiscatory

taxation,

and

even

outrightabolition

ofprivate

property.

One

prominent

former

U.S.

senator

declared

that what

this

country

needs

is

an

army,

navy,

and

air

force

in

the

economy.

 

There s

an

old

adage

which

is

enjoying

new

publ

ici

ty

of

late.Itreads,

Ifyou

encourage

something,

you

getmore

ofit;ifyou

discourage

 

something,

you

get

less

ofit.

The

good

economistreal

izes

thatifyou

want

the

baker

to

bake

a

bigger

pie,

you

don tbeathim

up

and

steal

hisflour.

   

Well,

there

you

havei

t not

thefinal

answer

to

confusion

in

economics,

butat

leasta

start.I

for

one

am

convinced

thatgood

economics

 

is

more

than

possible.It

is

imperative,

 

and

achievingitbegins

wi

th

the

knowledge

ofwhatbad

economics

is

all

about.

 

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l Apri 1981 ABOUT LAWRENCE W. REED from Larry )Reed becamepresidentofFEEin2008,afterservingas chairmanofit
l
l

Apri

1981

ABOUT

LAWRENCE

W.

W.

REED

l Apri 1981 ABOUT LAWRENCE W. REED from Larry )Reed becamepresidentofFEEin2008,afterservingas chairmanofit
l Apri 1981 ABOUT LAWRENCE W. REED from Larry )Reed becamepresidentofFEEin2008,afterservingas chairmanofit

from

Larry )Reed becamepresidentofFEEin2008,afterservingas chairmanofit sboard oftrustees in the1990s and bot
Larry )Reed
becamepresidentofFEEin2008,afterservingas
chairmanofit
sboard
oftrustees
in
the1990s
and
bot
hwriting
and
speakin
gfor
FEEsincethelate
1970s.Priorto
becomingFEE s
pr
esi
dent,he
servedfor
twenty
yearsaspresidentof
theMackinacCenterforPublic
Policy
in
Mi
dland,M
ich
igan.
Healso
taughtEconomics
full-timefrom
1977to1984at
NorthwoodUniversity
inMichi
ganandchairedi
ts
Department
1982t
o1984.

ofEconomics

Copyright

ion.

2014 Foundat

Ri ghts

All

Reserved.

ionforEconomic

Educat

ts Department 1982t o1984. ofEconomics Copyright ion. 2014 Foundat Ri ghts All Reserved. ionforEconomic Educat