On Economic Facts and Fallacies

I recently finish reading Economic Facts and Fallacies by Thomas Sowell.

Below are key excerpts from this book that I found particularly insightful:

1- “Fallacies abound in economic policies affecting everything from housing to international trade. Where the unintended consequences of these policies take years to unfold, the effects may not be traced back to their causes by many people. Even when the bad consequences follow closely after a given policy, many people may not connect the dots, and advocates of policies that backfire often attribute these bad consequences to something else. Sometimes they claim that the bad situation would have been even worse if it had not been for the wonderful policies they advocated. There are many reasons why fallacies have staving power, even in the face of hard evidence against them. Elected officials, for example, cannot readily admit that some policy or program that they advocated, perhaps with great fanfare, has turned out badly, without risking their whole careers. Similarly for leaders of various causes and movements. Even intellectuals or academics with tenure stand to lose prestige and suffer embarrassment when their notions turn out to be counterproductive. Others who think of themselves as supporters of things that will help the less fortunate would find it painful to confront evidence that they have in fact made the less fortunate worse off than before. In other words, evidence is too dangerous— politically, financially and psychologically— for some people to allow it to become a threat to their interests or to their own sense of themselves.”

2- “There are far too many fallacies to list them all. However, we can sketch four widespread kinds of economic fallacies here and investigate more specific fallacies in detail in the chapters that follow. These four widespread kinds of fallacies may be called the zero-sum fallacy, the fallacy of composition, the chess-pieces fallacy, and the open-ended fallacy.”

3- “In other words, building more roadways to keep pace with the growth of traffic only works when you do it. So do most thing-s. Following the kind of reasoning used by those who say it is futile to build more roads to cope with traffic congestion, it would be possible to say that it is “futile” to deal with hunger by eating because people just get hungry again later on. One of the reasons so many are committed to the idea of the futility of building more streets and highways to cope with traffic congestion is that they prefer to rely on mass transit as part of a more sweeping program of centrally planned development or redevelopment. City planners. consultants and “experts” all have a vested interest in the idea that people cannot be left to live their lives as they see fit but must have their transportation and their housing patterns, among other things, controlled by city planners, consultants and “experts.” One of the reasons for a failure to ease traffic congestion is that many see this congestion as a way to “get people out of their cars” and into mass transit. The fixation on mass transit, as a substitute for high levels of automobile usage, cannot be justified by the actual track record of mass transit or by its underlying economics. While mass transit played a major role in the development of New York City, that is today the exception, rather than the rule.”

4- “The biggest economic fallacy about housing is that “affordable housing” requires government intervention in the housing market, perhaps with subsidies, rent control, or other devices to allow people with moderate or low incomes to be able to have a decent place to live, without paying ruinous prices for homes or apartments. Ruinous prices for housing are certainly a fact of life in some places, leaving people of moderate or low incomes with inadequate amounts of money for other things. The question is whether government programs offer a way out of such situations for most people. The idea that government intervention improves the situation is a notion which has been repeated innumerable times in many ways, but endless repetition is not a coherent argument, much less proof. When we turn from political rhetoric to hard facts, we find that those facts tell a story directly opposite to what is being said in politics and in much of the media. It is precisely government intervention in housing markets which has made previously affordable housing unaffordable. Both the history and the economics of housing show this.”

5- “The question here is not whether open space is desirable but whether an open-ended commitment to ever more open space— or anything else— is desirable. It is especially important to weigh costs against benefits when there is crusading zeal and heady rhetoric in favor of something that virtually everyone regards as desirable, because crusaders seldom pause to do cost-benefit analysis. A related claim, made not only in the United States but in other countries, is that agricultural land must be preserved. Such claims are common even in countries where agricultural surpluses have been chronic and costly problems for generations, such as the United States and countries of the European Union.”

6- “It is very doubtful if the effort to keep them out could succeed politically if presented starkly in terms of what is actually being done, rather than enveloped in a fog of lofty and idealistic-sounding rhetoric. Few votes would be likely to be won by saying that the government should devote billions of dollars’ worth of land to providing a vast buffer zone around a community of affluent and wealthy individuals, in order to keep out ordinary people and preserve the vistas of a relative handful of upscale people at other people’s expense. Instead, political rhetoric focuses on celebrating a particular way of life in that community or “saving” greenery or animal habitat, as if both were in grave danger of disappearing in a country where more than nine-tenths of the land is undeveloped. The benefits of a particular way of living are not at issue. The only issue is who should pay for those benefits. If those enjoying such benefits are unwilling to pay for them, why should the taxpayers or people seeking an affordable place to live be forced to subsidize those who are economically better off than themselves?”

7- “But in most of these jobs, especially most engineering jobs, there are fewer women than men. The most important reason why women earn less than men is not that they are paid less for doing the very same work but that they are distributed differently among jobs and have fewer hours and less continuity in the labor force.”

8- “Many have analogized the situation of women to that of low-income, explaining income disparities in both cases by employer discrimination and attempting through anti-discrimination laws and affirmative action policies to advance both groups economically. But there are fundamental differences between the circumstances of women and those of minorities which affect both analysis and policy…Women and minorities are different in a more fundamental historical sense. Low-income minorities are usually descendants of poorer and less educated people, so that they inherit both a cultural and an economic background that is less helpful to them in trying to rise economically and socially than are the backgrounds of other members of society.”

9- “Private academic institutions have endowments, whose dividends and interest can subsidize inefficiency, and state colleges and universities have the taxpayers to do the same. In either case, those whose money provides the subsidy are seldom in any position to monitor the efficiency with which that money is used. Moreover, such organizations as the American Association of University Professors and accrediting agencies protect existing practices from competition by condemning less expensive alternatives as educational quality deterioration.”

10- “Academic institutions often make the argument that their costs for educating a student are greater than the price they charge as tuition, which some take as a sign of the altruism of a non-profit institution. But, since teaching is one of the joint products of an academic institution, along with research and other ancillary activities, the meaning of such a statement is elusive.”

11- “Income statistics are classic examples of numbers that can be arranged differently to suggest, not merely different, but totally opposite. conclusions. Among the bountiful supply of fallacies about income and wealth are the following: 1. Except for the rich, the incomes of Americans have stagnated for years. 2. The American middle class is growing smaller. 3. Over the years, the poor have been getting poorer. 4. Corporate executives are overpaid, at the expense of both stockholders and consumers.”

12- ” New York Time – “Merit has replaced the old system of inherited privilege, in which parents to the manner born handed down the manor to their children. But merit, it turns out, is at least partly class-based. Parents with money, education and connections cultivate in their children the habits that the meritocracy rewards. When their children then succeed, their success is seen as earned.””

13- “Pay is not a retrospective reward for merit but a prospective incentive for contributing to production. Given the enormous range of things produced and the complex processes by which they are produced, it is virtually inconceivable that any given individual could be capable of assessing the relative value of the contributions of different people in different industries or sectors of the economy.”

14- “Despite the popularity of the phrase “income distribution,” most income is earned— not distributed.”

15- “”Discrimination” is one of those words that is often used and seldom defined. Bias, prejudice, and discrimination are often lumped together, as if they were pretty much the same thing. But bias and prejudice are attitudes— things inside people’s heads— while discrimination is an overt act taking place outside, in the real world. That is not a small distinction when analyzing economic differences, which are things visible in the real  world. Nor can we simply assume that more bias or prejudice translates automatically into more discrimination— or that discrimination would not exist in the absence of bias or prejudice- What is overlooked in such fallacious assumptions is the price that has to be paid by someone who turns his subjective feelings into an overt act.”

16- “This is not to sav that no discrimination ever takes place. For one thing, all economic transactions need not take place in competitive industries or in profit-seeking enterprises…Similarly, government enterprises around the world have tended to be more discriminatory, because their costs of discrimination are paid by the taxpayers, rather than by those who do the discriminating.”

17- “But the very question at issue is whether victimization is the explanation. As for blame, who can be blamed for inheriting a culture that existed before they were born? But. while nothing can be done about the past, much can be done in the present to prepare for the future. Whatever we wish to achieve in the future, it must begin by knowing where we are in the present— not where we wish we were, or where we wish others to think we are, but where we are in fact.”

18- “There is no need here to go into the detailed geography of Third World countries, much less to claim that geography is the sole determinant of their poverty. What is important is to understand that geography alone is enough to preclude any inherent economic sameness or equality among peoples or nations from being used as a benchmark or general presumption that would lead us to be shocked that there are differences and to look for mysterious or sinister reasons for those differences. There are also many other factors at work besides geography which influence the poverty or prosperity of nations. Because of other factors, some geographically very fortunate nations are nevertheless poverty-stricken and some much less geographically favored nations have prospered. We need to consider these other factors as well but, again, with no general presumption that peoples and notions around the world would have had the same economic outcomes except for some given factor.”

19- “Perhaps the biggest fallacy in discussions of Third World countries is the implicit assumption that there is something intellectually baffling or morally wrong about the fact that different nations have different per capita incomes. Given large differences in geography, demography, history and culture, it is hard to imagine how it could be otherwise. Humanitarian aid to enable countries to meet natural disasters beyond their capacity to foresee or avoid need not be based on any assumptions about the reasons for their incomes being what they are. But attempts to remake other countries show no track record comparable to the dramatic improvements that countries have achieved when they have decided to remake themselves.”

20- “Statistics are no better than the methods and definitions used in lout scrutinizing those methods and definitions, we cannot assume that comparable people are being compared, whether comparing the incomes of high school dropouts with college graduates, the incomes of members of different ethnic groups who have the “same” education, or the incomes of single women with married women, when “single” women includes women who were married for years before getting divorced. Nor can statistics about the amount of air pollution in populated areas versus open space tell us anything about whether letting people move to unpopulated areas will increase the total pollution over all, since it is people— not their locations— that generate pollution. Perhaps most dangerous of all is the practice of not subjecting fashionable beliefs to the test of facts, but instead accepting or rejecting beliefs according to how well they fit some pre-existing vision of the world. The idea that government intervention is needed to create “affordable housing” is an idea that ; makes sense only in the context of a preconceived notion, while mountains of hard evidence point in the exact opposite direction.”

21- “Among the many preconceptions that cannot be subjected to an; empirical tests, because they are so subjective, is the notion that third-party observers know better what is good for people than those people know themselves. This implicit assumption pervades discussions of urban and suburban housing, mass transit versus automobiles, and the imposition of international aid agencies’ pet theories on Third World countries. The most that can be done in these cases is to (1) make that implicit assumption explicit, (2) demand proof of that superior knowledge, and (3) point out how many disasters in countries around the world have followed in the wake of programs and policies based on that assumption.”

22- “The particular fallacies discussed in this book are only a small sample of a vastly larger number on a vastly wider variety of subjects. If seeing how these often plausible-sounding fallacies can collapse under the weight more analytically, then this book will have achieved its larger purpose.”

Regards,

Omar Halabieh

Economics Facts and Fallacies

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