Seven Fallacies of Economics

In 1980, I became interested in economics.  Because I had done miserably in the subject as a collegiate undergraduate, I really knew nothing about economic thought except for the various folk tales that circulated in newspapers.  However, during the 1980 presidential election, the last one in which real-live economic issues such as the meaning of “Say’s Law,” were discussed, my interest was piqued.

(We don’t have to worry anymore about being intellectually challenged by politicians.  They have decided to give us what Robert Higgs calls “vulgar Keynesianism” as economic policy in the name of “stimulating” the economy.)

In 1981, I subscribed to The Freeman, having been introduced to it by the economist William H. Peterson.  That April, the featured article was “7 Fallacies of Economics,” by a young professor named Lawrence Reed, who now is president of FEE.

The article itself was simple.  Unlike what one might read in the latest edition of American Economic Review, this piece actually made sense.  Furthermore, part of its being profound was in its simplicity; here was a commentary that laid out the principles of economic thought in a way that not only was coherent, but also exploded the vast majority of modern economic literature that seems to glory in one fallacy after another.

While it appeared nearly three decades ago, nonetheless “7 Fallacies of Economics” is more relevant than ever, and I am going to spend the next seven weeks examining each of these fallacies.  I’ll link each of them to current government policies to point out that not only are the fallacies still with us; they are being forced upon us, to the detriment of each person who reads these words.

This week, I will deal with the introduction and opening points.  Reed lays it out with the following:

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 and every 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.”

This inherent variability can easily give rise to dissent among those observing it and it can just as easily confound the predictions of those bold enough to place a mathematical handle on it.

In these two paragraphs, he manages to deal with a couple of truisms about economic thought – truisms that seem to escape most professional economists (unfortunately).  The first is that there really are “immutable” laws of human action, which means that there are immutable laws of economics.  Thus, good economics is going to be a priori in the way we analyze economic phenomena.  That is, when governments attempt to apply policies, such as price controls, that violate laws of economics, we already know what the outcomes will be.

Second, the attempt by academic economists to put all economic phenomena into mathematical equations is inappropriate at best and harmful at worst.  Not only does the use of mathematics in this way make it more difficult to understand the points the economist is trying to make, but it also means that the conclusions to be drawn are likely to be wrong, given that human action generally does not proceed with mathematical precision.  (As Henry Hazlitt once wrote, if a mathematical equation is not precise, then it is a “fraud.”)

So, as I reprise “7 Fallacies of Economics,” we also can see just how current policymakers are violating the very tenets of economic logic.  It should be interesting.