Posts Tagged Fallacies

A Word on Economic ‘Fallacies’

I’ve developed an aversion to the use of the word ‘fallacy’ in economics, as it seems to be little more than a tool people beat others over the head with when they don’t want to engage in critical thinking. Often, the so called ‘fallacies’ that are trotted out in economics are used inappropriately and the stories told to justify them require exploration.

Here I present the three worst offenders – note that I don’t disagree with all of them entirely, but just wish to highlight that the story is often not a simple as it seems and cannot be captured by simply shouting down your opponent with the word ‘fallacy’.

The Broken Window

In the essay ‘What Is Seen And What Is Not Seen‘, a 19th Century economist named Frederic Bastiat  wrote a story about a boy who breaks a shopkeeper’s window. In replacing it, the shopkeeper gives money to the glassman, and the town observes that the broken window provided a boost to the local economy. However, Bastiat emphasises that this fallacy ignores the unseen fact that, had the window not been broken, the shopkeeper would have bought a new pair of shoes. Hence, there is no net gain for the economy.

Don’t get me wrong, it’s an important essay with an important point: if you look at only the benefits of government programs, you miss the hidden costs – where the tax money would otherwise have been spent, money unspent due to tariffs, and so forth.

However, Bastiat makes two hidden assumptions:

(1) All money that is spent would have been spent elsewhere – call this Say’s Law.

(2) That the replacement for the proverbial broken window is not better in any way.

The problem with (1) can be demonstrated by supposing that the shopkeeper was, in fact, not going to spend his money at all – in that case there would have been a boost to the economy. Not the best way to boost income, perhaps, but an income boost nonetheless. If the economy is not at full employment then spending more money does not require that you displace existing spending – to argue the opposite is to argue that private sector spending cannot increase employment either.

The problem with (2) can be illustrated by supposing that the shopkeeper’s window had been in a poor state to start with. In that case, replacing the window would have had a degree of benefit to the shopkeeper greater than in the more simple version of the story. After all, proponents the broken window fallacy often speak approvingly of creative destruction- replacing old capital and ideas with new, better capital and ideas. A similar logic applies – again, going around breaking things that seem worn out isn’t a suggested strategy for development, but it’s not as clear cut as it first seems. (‘Broken windows’ can also become a rationalisation for renovation – ‘it’s about time we redid the shop front anyway’, etc.)

Lump of Labour

This ‘fallacy’, as with the rest of labour economics, was born as a reaction to working class political movements in the late 19th century. It is basically an argument against shorter working hours – the claim is that you can’t simply ‘split up’ existing working hours, as the productivity of one sector of the economy has an impact elsewhere. Therefore, working people don’t understand econ101, etc.

The vacuousness of the fallacy can be seen in defenses of it, which seem to insist that higher productivity implies more income and more work. Take, for example Paul Krugman’s hot dog story:

But wait–what entitles me to assume that consumer demand will rise enough to absorb all the additional production? One good answer is: Why not?

Great. I’ve got a better answer: Why? Why not reduce working hours? What about limited natural resources? What if people don’t want twice as many hot dogs?

The blogger named ‘Sandwichman‘ appears to have made it his task to demolish this supposed ‘fallacy’, and has a website devoted solely to this cause. Sandwichman’s main point is that Lump of Labour proponents often mischaracterise their opponents as assuming there is a ‘fixed’ amount of work to be done in an economy, when of course they do no such thing. Discussions over the amount of work to be done is irrelevant to discussions of how that work should be distributed.

Correlation-Causation/Post Hoc Ergo Propter Hoc

Confusing correlation for causation, of course, is a fallacy, but this does not justify the mirror image delusion that correlation is meaningless. Often an observed correlation in the data has an implicit, intuitive causal link, such as alcoholism and recessions, corporate savings and unemployment, or, in the case of austerity, spending cuts/tax increases and a stagnating economy (I have seen some on the right shout down criticisms of austerity producing low growth as post hoc ergo propter hoc. Of course this is ridiculous – we know exactly why austerity produces low growth) .

If, as in the case of Steve Keen’s work on private debt, you have a clear theoretical link between two things, strong correlation, and the numbers changing in the right order (a decline in private debt acceleration portends lower growth), these things cannot be dismissed on grounds of correlation causation and post hoc ergo propter hoc.

Of course, there are many more – even the well established logical fallacies are prone to misuse and misconception (if you think about it, appeal to authority is historically quite a large component of scientific progress). Specifically, economic fallacies are generally an attempt to look for easy answers in a complex field, when the real story is often far more nuanced. It is important not to fall into this trap of lazy argumentation that often pervades the internet.

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