Economic Fallacies

1. The Lump of Labor Fallacy: This is the idea that there is only so much work to do in the world. Thus, if the Chinese are doing it then it won't be there for Americans, French, Germans, etc. to do. This fallacy was illustrated when the French government limited workers to 35 hour per week and prohibited second jobs. The thought was that be dividing up the existing jobs, unemployment would increase. Of course since less wealth is created with fewer people working just the opposite happened. France is always dealing with high unemployment rates.

2. The Broken Window Parable: http://en.wikipedia.org/wiki/Broken_window_fallacy

This is a story about a boy who breaks a store window and at first people are angry, because of the destruction he caused. But, as they talk they soon declare the boy a hero, because the glass installer now has work, and so will the people at the glass factory. Of course they will buy things and soon they have decided that this kid gave hundreds of people work by breaking the window. The fallacy is what they don't see. They don't see that the store owner has less money to buy other things. Without the broken window, they window would still exist but the store owner would have purchased a new suit, etc., etc. You see this fallacy when people say things like "war is good for the economy," or that hurricane created 1,000 new jobs. Destruction is not a positive for the economy.

3. What's Good for GM is Good for America: This is the idea that if a policy is good for some specific industry, it must be good for the country. Dependency theory of the 1980s was based on this concept. This is often used to justify protectionism. "If we stop Japanese cars from coming into the country, we will save American jobs at GM." Must be good for America, right? Wrong--Rather, other American's will lose their jobs because consumers are spending more money on expensive, low quality GM cars and not on other goods and services provided by other workers. These policies lead to inefficient businesses producing low quality products and a net loss of jobs for countries that follow these policies.

The best book that I know for explaining these fallacies is a short book written originally in the 1940 and revised in the 1970s. It has become a classic. "Economics in One Lesson."

		July 4, 2005 *Economic Fallacies that Rule the World*
	1. The Lump of Labor Fallacy: This is the idea that there is only so much work to do in the world. Thus, if the Chinese are doing it then it won't be there for Americans, French, Germans, etc. to do. This fallacy was illustrated when the French government limited workers to 35 hour per week and prohibited second jobs. The thought was that be dividing up the existing jobs, unemployment would increase. Of course since less wealth is created with fewer people working just the opposite happened. France is always dealing with high unemployment rates. 2. The Broken Window Parable: http://en.wikipedia.org/wiki/Broken_window_fallacy This is a story about a boy who breaks a store window and at first people are angry, because of the destruction he caused. But, as they talk they soon declare the boy a hero, because the glass installer now has work, and so will the people at the glass factory. Of course they will buy things and soon they have decided that this kid gave hundreds of people work by breaking the window. The fallacy is what they don't see. They don't see that the store owner has less money to buy other things. Without the broken window, they window would still exist but the store owner would have purchased a new suit, etc., etc. You see this fallacy when people say things like "war is good for the economy," or that hurricane created 1,000 new jobs. Destruction is not a positive for the economy. 3. What's Good for GM is Good for America: This is the idea that if a policy is good for some specific industry, it must be good for the country. Dependency theory of the 1980s was based on this concept. This is often used to justify protectionism. "If we stop Japanese cars from coming into the country, we will save American jobs at GM." Must be good for America, right? Wrong--Rather, other American's will lose their jobs because consumers are spending more money on expensive, low quality GM cars and not on other goods and services provided by other workers. These policies lead to inefficient businesses producing low quality products and a net loss of jobs for countries that follow these policies. The best book that I know for explaining these fallacies is a short book written originally in the 1940 and revised in the 1970s. It has become a classic. "Economics in One Lesson."