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The nice thing about Mathematics and other Hard Sciences is that there is no question that 2 + 2 = 4.

The complicated thing about Sociology and other Social Sciences is that there's room for interpretation and debate[1].

The horrifying thing about Economics is that both of these are true.

This violent collision leaves a few absolutes to take refuge behind, and a wide open mine field for catastrophic assumptions and mistakes, and prime Flame Bait. There are a fair number of widely divergent economic schools of thought, each with a reasonable claim to accuracy, and each which believes the others to fail economics forever. This is probably one of the reasons Thomas Carlyle called economics "the dismal science". (And few agree on that term... Economists will claim their science isn't dismal, and many other fields will claim it's not a science. The dance goes on.)


There are two brief notes that need to be observed for the following fallacies: First: These fallacies are based on Neoclassical economics, which is a broad designation that refers to all economic schools that accept the consensus formed in the wake of the "Marginalist Revolution" caused by the work of Leon Walras, William Jevons and Carl Menger. Basically, this approach to economics emphasizes economic subjectivism; the belief that a good is valued by a subject and that market prices for a good only come about when subjects desire them. This is a great contrast to the Classical economists like Adam Smith and Karl Marx, who argued the value of commodities are related to the labor to produce them (the labor theory of value, a theory derived from the philosophy of John Locke).

Second: These fallacies are only always accepted as fallacies in a healthy economy. Schools of economic thought greatly differ on matters relating to an unhealthy economy. For instance, a Keynesian would only accept Fallacy 1 (the Broken Window Fallacy) is a fallacy in a healthy economy. In an unhealthy economy, committing this fallacy is (according to Keynesianism) a potentially beneficial thing. Thus, all the following fallacies are controversial in an unhealthy economy.

  1. The Broken Window Fallacy aka. Destruction Equals Employment aka. Digging and Filling Ditches: Named by Frederic Bastiat, this fallacy consists of ignoring opportunity costs. Specifically, an important principle in economics is when one has an opportunity to choose between multiple outcomes, the cost of picking one outcome is having to forgo the other outcome/s. In practical situations, this means resources spent on one thing cannot be spent on another thing. Some examples include:
    • Destruction Equals Employment: or when someone says "breaking windows is good for the economy because people will then buy new windows, thus increasing business done by glaziers." The ignored opportunity cost is that the money used to repair windows could've been used to buy other things and the business would've gone to other merchants. On a larger scale, the belief that "war is economically productive" ignores the opportunity cost of spending resources on building bombs instead of building something else. Of course, this is profitable for the arms industry, but for the economy as a whole it isn't. There's also the minor matter that society's poorer by what was destroyed; the resources spent replacing it are used to restore lost wealth. A Raubwirtschaft economy based on plunder often works in the short term but is unsustainable in the long run as existing territory becomes depleted of resources and conquering new territories is not possible - or would cost you more than you could rob. Cases in point: The Roman Empire and Those Wacky Nazis.
    • Digging And Filling Ditches: The government (or a corporation) gives everyone a job and pays them, without regard for the actual usefulness of said jobs. There are significant opportunity costs associated with the resources required to pay the people working on the newly-created jobs (because these resources could have been used to do something else, which may have been more beneficial).
  1. Fallacy of Intrinsic Economic Value aka. Money for Nothing aka. Superiority Equals Success aka. Wealth Is Zero Sum: This fallacy consists of forgetting that the value of a good is not necessarily related to any measurable quality of this good, but is rather granted by the fact that people desire more of the good than is avaliable immediately. Examples include:
    • Money for Nothing: The government prints more money or a gold mine gives out free gold to everyone, claiming they are creating more wealth. This does not create "more wealth" because "wealth" doesn't exist inside gold or money. All it would do (holding demand constant) is lower the market price of gold, or generate inflation (i.e. more money is required to purchase the same good/s). Regarding the printing-money example, in the short term (i.e. before the inflation kicks in) this gives the issuer some extra wealth; but as time goes on the effect becomes a wealth-transfer from the holders to the issuers of the currency; holders are left with Worthless Yellow Rocks.
    • Wealth Is Zero Sum: This fallacy alleges that someone can only get wealthy by making someone else poor. X's gain must be Y's loss. It's a dog-eat-dog world and business consists on grabbing the largest share of the pie one can. The fallacy is the belief that the "pie" is a fixed size. If economic value is objective, then it is finite; it cannot be created. However, that premise is wrong; economic value is subjective. Thus, the pie size can be increased by increasing the supply of subjectively-valued goods.
    • Superiority Equals Success: This fallacy alleges that a product's market price is determined by an objectively measurable aspect of the product. For instance, lets say I place a bucket of my phlegm on the market. And then I place two buckets of phlegm on the market. By the logic of Superiority Equals Success, I should get more money for two buckets of my phlegm than one. Thankfully, no one wants my phlegm and as such I wouldn't get any money for either bucket (clarification: I might get money for the buckets themselves; but the phlegm would have to be removed from the bucket). Objective superiority of any good along any measurable aspect (for instance, quantity) only translates into a higher market price if people want more of that measurable aspect (holding all other variables constant). And let's not even mention adding marketing into the mix...
  1. Exporting Good, Importing Bad: It's usually used something like this: Exporting something makes others dependent; this is good. Importing things makes you dependent; this is bad. Note that there was an early economic theory, mercantilism, which taught this exactly. In truth, some countries have a relative productive advantage in some areas, while other countries have different relative productive advantages. Trade allows countries to specialize in whatever production they have an advantage in, thus producing more in total, and then trade with each other. This makes both countries better off. For example, perhaps Country A can produce 4 cans of butter, or 2 cans of butter and 1 carton of eggs, or 2 cartons of eggs. Country B can produce 4 cartons of eggs, or 2 cartons of eggs and 1 can of butter, or 2 cans of butter. With trade, they can produce at their advantages of 4 cans of butter in A and 4 cartons of eggs in B and then trade so they each have 2 cartons and 2 cans. Making them both better off than if they produced everything in their own country.
    • It's worth noting that in an Empire that has expanded sufficiently the Mercantile system makes more sense (although probably still isn't optimal) from the perspective of enhancing state power (because state power is relative to other states, and by engaging in mercantilism you are potentially harming other states more than yourself). However, in terms of delivering an economically optimal outcome (i.e. maximizing utility), the Mercantile system still Fails Economics Forever.
    • In theory, Empires can benefit from mercantilism. In practice, of course, this was often not the case. The late 19th century European empires all spent far more maintaining their empires than they got back in revenue, and the colonies themselves represented a very small fraction of their overall GDP.
    • Some economists (e.g. Ha-Joon Chang) consider avoiding imports extremely important when the economy of a country is still developing. If country A currently produces 4 cans of butter and country B can't produce any butter at all, but could potentially produce at least 4 cans, country B should limit the importation of butter from country A to encourage the development of the local butter industry. In the modern world this applies most strongly to third world countries, which are dependent on imports in nearly all sectors of economy and have a very limited selection of exports. That is, real protectionism is about either having certain production at all or balancing import and export. So the export may be seen as a problem too[2]
    • Most of the arguments about promoting exports and avoiding imports for developing countries center around the idea that a country needs to industrialize to be truly prosperous, and the best way to do that is to promote local industries by limiting foreign competition. It seems to work with Export-Led Industrialization, but not so much with Import Substitution Industrialization, although obviously this is a major simplification of the internal economic processes of each country that tried these policies. In any case, it's no surprise that countries very much want to have a productive advantage in advanced technological industries and not, say... drugs, prostitution, and making sneakers for three cents an hour.
    • It's also worth noting that importing and exporting will, with few exceptions, always balance. If the US buys stuff from China, but doesn't sell anything, they'll have a bunch of dollars that are worthless to them, unless they start buying stuff from the US, or loan the money back to them, or something else to that effect. If both countries use the same currency, this won't happen as quickly, but in this example the currency would slowly get more valuable in the US and less in China until the trade balances.
  1. Ridiculous Future Inflation: The main problem with this is that it is often portrayed as being a natural and normal result without any of the many social and economic problems hyperinflation show in the real world. It is, however, normal to see drastically inflated prices as a result of a past inflation.
  2. Ridiculous Rationality: The first things that are spelled out in Econ 101 are a set of assumptions about how people decide on their actions. In brief, these assumptions are that individuals act to optimize their own utility (pleasure/satisfaction) and they have perfect information about all prices and how much utility will be provided by any good (as well as other things). Needless to say this is a simplifying assumption and by no means holds true in all cases of how humans act. Ridiculous Rationality occurs when a work of fiction appears to assume that all cases of human action must conform to the previous assumptions. Needless to say, most Economists know these assumptions need to be taken with about a teaspoon of salt, and there are many schools of economics that begin their analysis from different starting points. A good example of this can be seen in any given grocery store that stocks both name-brand and generic versions of the same product, like breakfast cereals. Generic breakfast cereals are invariably cheaper than name-brand cereals, usually identical in quality, and sometimes even contain slightly more food per box/bag (for the same or cheaper price). If the ridiculous rationality fallacy were real one would expect generic cereals to constantly sell out and name-brand cereals to be shelf-warmers. In reality, the opposite is true. Sales for name-brand cereals leave the generics in the dust, mostly because consumers come to the (irrational) conclusion that name-brand cereals are better because they come in colorful boxes and/or are promoted by entertaining cartoon characters and/or because, if the brand name cereal turns out to be of inferior quality, the consumer has a multi-billion dollar corporation to shun/sue.
  3. The resource halt: A source of conflict in many post-apocalyptic scenarios is the sudden exhaustion of a valuable natural resource such as oil and the conflicts that inevitably flow from it. Any microeconomics principles student will tell you that the real world does not work this way. If mankind is faced with such a threat, owners of the resource will withhold some of their stockpiles now in order to take advantage of the future scarcity. Furthermore this will mean that the price of the resource will rise slowly, giving humanity time to adapt. As a result, the point where we do run out will not be a trigger for a massive calamity, rather it will hardly be noticed.
    • This would presume that the progress of science, and, indeed, the circumstances of the physical world itself, are determined by economic demand; events may very well occur to which humanity is simply unable to adapt. Furthermore, if the resource is sufficiently important - for example, water - the tactic of stockpiling may backfire by way of having your throat cut by a thirsty mob.
    • A sudden, temporary decrease in availability, however, can be entirely plausible. This can occur (and has occurred) due to the obstruction of transportation routes, the destruction of the production apparatus, or monopoly/oligopoly producers artificially withholding supply in order to serve other motives. The effects of these scenarios are likely to be tied to relatively specific times and places rather than being The End of the World as We Know It (although it may feel that way to those affected).
  1. Rights-Efficiency Tradeoff: The false dichotomy that suggests that civil liberties and workers rights would automatically undermine economic efficiency. This idea, which is implicit in the idea that Hobbes Was Right, is not only an oversimplified model of political theory, it's also a severe bastardization of welfare economics. In fact, many economic models like the coase theorem suggest that markets become more efficient when certain rights are institutionalized. This trope was notably more popular before the fall of the Soviet Union effectively discredited it forever, but many writers still haven't gotten the message. Whenever this trope is invoked, expect to see a lot of rag clad vagrants mucking about in the wastes outside a clockwork efficient police state, consoling themselves "at least I have my freedom".
  2. America the bankrupt: National debts don't work like your personal debt. For example, people don't buy your debt to prop up your currency. Yet for some reason a lot of writers tend to think of the national debt in the same terms as a bank loan, with angry creditors and everything. When this trope is invoked expect to see a consortium of angry foreign dignitaries banging on a conference table that they want their money back. In reality, if countries actually acted like this, the global financial system would probably collapse pretty spectacularly and everyone would be screwed. This trope is not specific to America, but for some reason Americans are exceptionally paranoid about the National Debt, particularly when the Chinese are buying it up, and now not buying it anymore. Oddly enough, America's National Debt isn't even that bad by international standards. Also, the US national debt is in terms of dollars, and the government can create as many dollars as they need to pay off the debt. Everyone would be paid the amount owed, but the new dollars would lead to inflation. The key here is that governments usually owe substantial portions of their debt to 'themselves,' i.e. either the government owes money to different branches, or those branches hold their assets as bonds and treasury bills instead of money; by owing money to yourself, you usually don't charge yourself interest (beyond inflation) and you theoretically can't default on money you owe yourself. This is how Japan can have gross debt worth over 100% of their yearly economic output and have little economic effects: 70-80% of its debt is owned by the Japanese Central Bank. In the United States, around 35-40% of the government debt is owed to itself, mainly to the Social Security Administration. Also, debt owned to foreign entities makes up MUCH less of the debt than people seem to think: as an example, China owns only 6% of the total US debt.
  3. Free Market equals Big Monopolies: A general feeling among many people is that if the market goes without any check, eventually, a business would out-compete all its competitors, buy them off, or drive them out of business, and then it would snowball into becoming the sole provider of a good or service, crushing without mercy any feeble attempt of entering the market. In Real Life, monopolies are extremely hard to maintain without at least either blatantly criminal means or collusion/support by the government; And if a monopoly charges monopoly prices for monopoly quality within an actual free market, this could act as an incentive to bring in new competition and/or motivate the customers to look for alternatives.

    To an extent, this is complicated by the existence of natural monopolies (i.e. goods and services where economies of scale render the most efficient method of producing a good to be a method where one single producer makes the good). Additionally, certain parts of a production process may be naturally monopolistic and some may not be (i.e. you can have multiple telephone carriers, but network infrastructure is naturally monopolistic). However, rarely do works of fiction deal with complex issues surrounding regulatory economics (or even the possibility of voluntary solutions, like all the telephone networks agreeing to use the same set of infrastructure because it is cheaper for them to do so). Regardless of this, it is in general correct to say that for the most part the belief that free markets are friends of monopolies is a false one; indeed several individualist anarchists like Lysander Spooner have argued that free markets (genuine free markets, i.e. not rigged corporate statism) undermine monopoly privilege.
  4. Third World Countries: Paradise of rich nations' investments: Ah... Third World Countries, with their cheap labor supply, lax regulations, and prime materials just waiting to get exploited. With such advantages, wouldn't the average Joe invest his life savings into opening a business in say... Somalia? As you probably answered... not so, normally, the reason labor is cheap in TWCs is because the workforce is also unskilled, lax regulations also usually mean a high crime rate or even political instability. That's why it's usually the big businesses the ones that take the plunge to do the tremendous investments in TWCs, since they can absorb the cost of giving training to the workforce and providing security for their investments.
  5. Ideological Identity Idiocy: This is the intersection of You Fail Economics Forever and Strawman Political. Often, a work that wants to make a political point will (probably accidentally, but possibly deliberately) make mistakes about the definitions of specific economic systems. In short, authors often don't know (or don't care) how economists actually define economic systems. Economic systems exist to allow a society to economize, i.e. allocate their supply of means towards various different ends. The supply of means is scarce because it cannot achieve all these ends. Thus, an economic system is something that provides a method by which these ends are prioritized and means are directed to fulfilling them.
  • Post-Scarcity Economy:
    • The supply of means is no longer scarce. This means that people don't need to economize. A society in this stage cannot be meaningfully described as any of the following labels since those labels only apply to societies with scarcity economies. Of course, many systems described in fiction as post-scarcity are not post-scarcity. Scarcity exists as long as any human (or Sufficiently Advanced Alien) cannot have all its wants met. If not everyone who wants the house on the hill, Jimi Hendrix's bandana, or the front row seats at a concert can have them, then there is in fact still scarcity. If The Singularity is capable of producing any commodity (say, gold), then those goods won't need to be economized. However, if the Singularity cannot let everyone enjoy goods like the front row seats at a concert, then there is still a need to economize them.
    • This is not to say that its impossible to imagine. If we're talking about a post singularity society, it is possible that they will figure out a way to replicate all the essential qualities of even seemingly unique goods. The house on that one hill next to that waterfall could be replicated right down to the waterfall and the hill with sufficiently advanced terraforming technology. We could reshape the landmasses of a planet to maximize the beachfronts if that's what people want. Alternatively, a society which exists totally within a virtual universe could do the same thing arguably for a much cheaper price.
    • There's also the issue that some things might be post-scarcity while others still need to be economized. For example, even if there was more than enough consumer goods for every person on Earth being provided by automated robots without human intervention you would still need an economy for things that cannot be reproduced that way, such as land (barring space stations or something similar) and unique items like antiques and historical treasures, but most people wouldn't care. This doesn't even require a singularity, the Earth's resources are such that it is virtually impossible for us to ever use it all. For example, enough energy falls on the Earth from the sun to power our projected energy needs in 2050 about 5000 times over, and that is without drastic measures like sending satellites into space to collect more energy. Collecting all that solar energy is difficult however. Similarly, there is an overabundance of water on the Earth, but most of it is salt water or trapped in the atmosphere and desalination is expensive while atmospheric condensers are still in their infancy, the farmland currently in use could feed 80 billion people if converted to emerging farming methods (and that's not even counting the possibility of farming more area) but that will take time and money, and enough raw materials exist in the Earth's crust to supply a virtually unlimited amount of consumer products including advanced technology and electronics, but harvesting it is hard. The majority of what we are economizing in the 21st century is actually labor, technology, and information, and advances in these areas could very well lead to major shifts in the world economy within a few years. Or not, the future is hard to predict.
      • Also note that there are already resources that aren't scarce, such as air. As such, this would yield exactly the sort of economy we have.
  • Socialism: In terms of Political Ideologies, Socialism refers to a broad family of ideologies united by an opposition to Liberalism and a goal of improving the lot of the working classes. However, self-proclaimed Socialists have advocated various different economic models, quite a few of which would fit under the category of "mixed economy" (for instance, market socialism and social democracy). In economics, Socialism is often used to refer to State Socialism; a scarcity economy where all the means of production are property of the State (on behalf of the working classes) and all economic activity is controlled by the State. Thus, economists typically refer to nationalization of a specific industry as the "Socialization" of this industry. However, there are many variations on this theme, mainly varying in matters of degree (i.e. how much control the State exerts over economic activities).
    • Public Enterprise Centrally Planned Economy in which all means of production (stuff used to make other stuff) is owned by the State and all key economic decisions are made centrally by the State, e.g. North Korea in The Seventies (it's an interesting mix nowadays) or, partially, the former Soviet Union, where always existed at least some tacitly allowed private sector.
    • Public Enterprise State-Managed Market Economy, one form of market socialism which attempts to use the price mechanism to increase economic efficiency, while all decisive productive assets remain in the ownership of the state, e.g. China, Venezuela (although Venezuela is moving towards the above), and arguably Fascist Italy (whilst Fascism does have nominal private ownership of the means of production, all key economic decisions are made by the State, thus meaning the State has de facto control of the means of production (and what is ownership without de facto control?)).
    • Public Enterprise Employee Managed Market Economies, another form of market socialism in which publicly owned, employee-managed production units engage in free market exchange of goods and services with one another as well as with final consumers, e.g. mid twentieth century Yugoslavia. Two more theoretical models are Prabhat Ranjan Sarkar's Progressive Utilization Theory and Economic democracy.
    • Public Enterprise Participatory Planning, an economy featuring social ownership of the means of production with allocation based on an integration of decentralized democratic planning, e.g. Catalonia during the Spanish revolution. More developed theoretical models include those of Karl Polanyi, Participatory Economics and the negotiated coordination model of Pat Devine, as well as in Cornelius Castoriadis's pamphlet "Workers' Councils and the Economics of a Self-Managed Society".
    • Note: The "market socialist" models are arguably examples of mixed economies; some Socialists do not accept them as forms of Socialism.
  • Free Market Economics or Laissez-Faire: An economic system where the scarcity economy is remedied exclusively via a system of private property. All the inputs to the production process are owned by individuals or voluntarily-formed groups thereof whose property rights are derived from those of the underlying individuals that make up said group (for instance, businesses with more than one owner). All economic activities must take place between consenting parties. Hence, under pure Free Markets, all economic activity takes place within the realm of consent and contract and hence outside of the jurisdiction of the State. The State's role is restricted to the enforcement of property rights and ensuring that human interaction is free from force, fraud or interpersonal coercion (i.e. protecting the realm of individual consent and contract). A note: some advocates of Free Markets give a slightly larger but still strictly limited role to the State, and some advocates of Free Markets are Anarchists that believe the existence of the State cannot be justified. A further note: Many economists use "Capitalism" as a synonym for "Free Markets", but amongst many schools of political theory (including most forms of Anarchism and Marxism) "Capitalism" refers to something different.
  • Mixed Economy, Social Democracy or Social Market Economy: An economic system where the scarcity economy is remedied by a mixture of both state and free market means. To qualify, both the State and the market must have a significant role in the economy (i.e. an advocate of free markets that gives a very small role to the State is not advocating a Mixed Economy, and a socialist that advocates a small role for markets is not advocating a Mixed Economy either). The vast majority of the world's economies, including those of Western Europe and the United States, fit in this category.

Combined with all the above is the general zeroth rule of the Author Tract:

Regardless of quality, writing a work of fiction neither adds nor subtracts empirical evidence to or from your point of view. It may display evidence, it may make an argument using that evidence, it may convince the reader using that evidence. However, merely writing a fictional work about a free-market/socialist utopia/dystopia does not prove anything. The only thing about which fiction can prove a point is fiction.

See also: Socialism and Capitalism

Notes

  1. Are '2' and '2' satisfactory evaluations based upon sound criteria? Is there a margin for error? Are '+' and '=' the correct operations to be accounting for? Is the product of the process, 4, the problem or the solution? Are we even asking the right question in the first place (or is someone out to prove something)? And, why ask at all when the answer is so obvious? This could be an indication that someone else should be chosen to ask the questions in future - they're wasting our time - though then again, this happened back in '07 and no-one batted an eyelid. We should really look into that.
  2. Aristocratic slavers export wood and rope until the rest of economy is crippled?
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