A news commentator once observed that “any half-dozen economists will normally come up with about six different policy descriptions.”
It certainly does seem that way! If economics is a “science,” then why does it defy the precision, the certainty, and the relative unanimity of opinion which characterize so many other sciences—physics, chemistry, and mathematics, for instance?
First, economics is simply not physics, chemistry, or mathematics. It is the study of human action, and humans are not programmed robots. Yes, certain immutable laws of nature do indeed exist, but one of them is that humans are—each one of them inner-motivated, creative, self-interested organisms. They range from docile to irascible, meek to daring, complacent to ambitious, smart to not-so-smart. As Adam Smith pointed out more than two hundred years ago, “In the great chessboard of human society, every piece has a principle of motion of its own, altogether different from that which the legislature might choose to impose upon it.”
Being individuals themselves, economists will differ in their value and ethical judgments. One who is a socialist will differ on a policy matter with one who is a libertarian. They may even agree on the outcome of that policy while disagreeing on whether that outcome is “good” or “bad.” People who are well-intentioned and truth-seeking yet operating from divergent ethical premises frequently arrive at divergent conclusions.
In addition, economists may disagree because they have different data or insufficient data or no reliable data at all.
Economists also clash because, as Henry Hazlitt (author of the classic Economics in One Lesson) succinctly put it, “Economics is haunted by more fallacies than any other study known to man.”
Is there such a thing as “bad economics?” You bet there is, just as surely as there is good plumbing and bad plumbing. If one means by “bad economics” the promotion of false reasoning, mistaken assumptions, and shoddy intellectual merchandise, then Hazlitt’s comment ought to be enshrined as a law!
It may be an oversimplification, but I believe that the essence of”bad economics” can be distilled into the following seven fallacies. Each of them is a pitfall which the good economist will faithfully bypass.
The fallacy of collective terms.
Examples of collective terms are “society,” “community,” “nation,” “class,” and “us.” The important thing to remember is that they are abstractions, figments of the imagination, not living, breathing, thinking, and acting entities. The fallacy involved here is presuming that a collective is, in fact, a living, breathing, thinking, and acting entity.
The good economist recognizes that the only living, breathing, thinking, and acting entity is the individual—the source of all human action.
Consider this: could there even be an abstraction called “society” if all individuals disappeared? Obviously not. A collective term, in other words, has no existence independent of the specific persons which comprise it.
It is essential to determine origins and responsibility and even cause and effect that economists avoid the fallacy of collective terms. One who does not will bog down in horrendous generalizations. He will assign credit or blame to non-existent entities. He will ignore the very real actions (individual actions) going on in the dynamic world around him. He may even speak of “the economy” almost as if it were a big man who plays tennis and eats corn flakes for breakfast.
The fallacy of composition.
This error holds that what is true for one individual will be true for all others.
The example has often been given of one who stands up during a football game. True, he will be able to see better, but if everyone else stands up too, the view of many individual spectators will probably worsen.
A counterfeiter who prints a million dollars will certainly benefit himself (if he doesn’t get caught) but if we all become counterfeiters and each print a million dollars, a quite different effect is rather obvious.
Many an economics textbook speaks of the farmer who is better off because he has a bumper crop but may not be better off if every farmer has one. This suggests a widespread recognition of the fallacy of composition, yet it is a fact that the error still abounds in many places.
The good economist neither sees the trees and ignores the forest nor sees the forest and ignores the trees; he is conscious of the entire “picture.”
The fallacy of “money is wealth.”
The mercantilists of the 1600s raised this error to the pinnacle of national policy. Always bent upon heaping up gold and silver, they made war on their neighbors and looted their treasures. If England was richer than France, it was, according to the mercantilists, because England had more precious metals in its possession, which usually meant in the king’s coffers.
It was Adam Smith, in The Wealth of Nations, who exploded this silly notion. A people are prosperous to the extent they possess goods and services, not money, Smith declared. All the money in the world—paper or metallic—will still leave one starving if goods and services are not available.
The good economist will recognize that money creation is no short-cut to wealth. Only the production of valued goods and services in a market which reflects the consumer’s wishes can relieve poverty and promote prosperity.
The fallacy of production for its own sake.
Although production is essential to consumption, let’s not put the proverbial cart before the horse. We produce in order that we may consume, not the other way around.
I enjoy writing and teaching but I enjoy fishing in the mountains even more. I have labored to produce this piece and to teach its principles instead of fishing first because I know that’s the only way I’ll ever get on a plane for Montana. Writing and teaching are the means; fishing in the mountains is the end.
A free economy is a dynamic economy. It is the site of what the economist Joseph Schumpeter called “creative destruction.” New ideas supplant old ideas, new products and methods replace old products and methods, and whole new industries render obsolete old industries.
A bad economist who falls prey to this ancient fallacy is like the fabled pharaoh who thought pyramid-building was healthy in and of itself; or the politician who promotes leaf-raking where there are no leaves to be raked, just to keep people “busy.”
The fallacy of the “free lunch.”
The Garden of Eden is a thing of the distant past, yet some people (yes, even some economists) occasionally think and act as if economic goods come with no cost attached. Milton Friedman was one economist who has warned repeatedly, however, that “there is no such thing as a free lunch!”
Every “something for nothing” scheme and most “get rich quick” plans have some element of this fallacy in them. Let there be no mistake about this: if economics is involved, someone pays!
A friend of mine once told me that all one needs to know about economics is “What is it going to cost and who is going to pay for it?” That little nutshell carries a kernel of advice for the economist: don’t be superficial in your thinking!
The fallacy of the short run.
Some actions seem beneficial in the short run but produce disaster in the long run: drinking excessively, driving fast, spending blindly, and printing money, to name a few. To quote the venerable Henry Hazlitt again, “The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences.”
Politicians seeking to win the next election frequently support policies which generate short- run benefits at the expense of future costs. It is a shame that they sometimes carry the endorsement of economists who should know better.
The fallacy of economics by coercion.
Two hundred years after Adam Smith, some economists still have not learned to apply basic principles of human nature. These economists speak of “increasing output” but prescribe the stick rather than the carrot to get the job done.
Humans are social beings who progress if they cooperate with one another. Cooperation implies a climate of freedom for each individual human being to peacefully pursue his own self- interest without fear of reprisal. Put a human in a zoo or in a strait jacket and his creative energies dissipate.
Why did Thomas Edison invent the light bulb? It was not because some planner ordered him to!
There’s an old adage that says, “If you encourage something, you get more of it; if you discourage something, you get less of it.” The good economist realizes that if you want the baker to bake a bigger pie, you don’t beat him up and steal his flour.
Good economics is more than possible. It is imperative, and achieving it begins with the knowledge of what bad economics is all about.
Lawrence writes a weekly op-ed for El American. He is President Emeritus of the Foundation for Economic Education (FEE) in Atlanta, Georgia; and is the author of “Real heroes: inspiring true stories of courage, character, and conviction“ and the best-seller “Was Jesus a Socialist?“ //
Lawrence escribe un artículo de opinión semanal para El American. Es presidente emérito de la Foundation for Economic Education (FEE) en Atlanta, Georgia; y es el autor de “Héroes reales: inspirando historias reales de coraje, carácter y convicción” y el best-seller “¿Fue Jesús un socialista?”