Key Messages
How To Avoid Common Fallacies And Think More Clearly About Global Problems
Learning to avoid common economic fallacies is key if we are to try and solve the huge crises that face us today.
In his book “Economic Facts and Fallacies,” author Thomas Sowell dives into the most frequent errors in economic thinking.
He explains how not understanding these issues can have harmful consequences, both nationally and globally.
Through this book, you’ll gain a better understanding of how to spot fallacious thinking when it comes to a variety of different subjects such as housing policy or wealth inequality.
By learning why rent control policies are counter-productive, why the 1929 stock market crash wasn’t so bad, and how urban ‘improvement’ projects can get it wrong, you’ll be able to think clearly about the economic problems we all face.
The Zero-Sum Fallacy: How The Idea Of Losers And Winners Can Actually Do More Harm Than Good
The idea that in each economic transaction, there must be a winner and a loser – it’s an outdated disservice to think like this.
Economic transactions should not just be viewed as a zero-sum exchange between two parties.
It is much more complex than that.
For example, when rent control policies are implemented in an attempt to protect tenants, the outcome isn’t always successful.
Landlords and builders find the terms of rent control unreasonable, which leads them to stop renting or building altogether.
Ultimately, this causes a shortage of accommodation which only hurts those renters who need it the most.
Likewise, the idea that international trade gives rise to ‘losers’ is inaccurate too.
On the contrary, since opening itself up to investment from rich countries, many poorer states have only seen economic growth and prosperity as a result.
In other words, both parties seem to have benefitted from the exchange – disproving the notion of zero-sum outcomes yet again!
The Post Hoc Fallacy Has Led To Many Costly Mistakes In Politics And Economics
Post hoc ergo propter hoc, or “after this, therefore because of this” is a common problem in politics and economics.
When flawed assumptions about cause-and-effect are made, terrible decisions tend to be the outcome.
Unfortunately, this is a recurring problem that can often have huge consequences.
Take for example DDT; it was used to control insects and reduce the risk of malaria in certain parts of the world.
Unfortunately, it became controversial and was eventually banned after people noticed an increase in cancer rates where DDT had been sprayed.
In reality though, people were living longer due to fewer cases of malaria – meaning they were living long enough to develop cancer later in life – something that had nothing to do with using DDT!
This wasn’t realized right away due to false causation; ultimately making the decision to ban an effective and cost-efficient controlling method a costly mistake.
The other example is the 1929 US stock market crash; believed by some at the time to be the direct cause of economic downturns and rising unemployment across America.
A closer look revealed though that unemployment actually began to decrease shortly after; only getting worse later on when government intervened based on faulty information about causation being post hoc fallacy.
This shows just how misleading incorrect causality can be – facts only emerged decades later when there was another stock market crash but no corresponding economic meltdown!
The Open-Ended Fallacy Is A Problem For Progressives
The Economic Facts and Fallacies book clearly states that the open-ended fallacy is a major issue for those with progressive political demands.
This refers to when a demand is made without specifying what needs to be done or the exact limits set on it.
For an example, saying “we should improve healthcare” does not explain exactly how much money needs to be spent and in which area of healthcare – whether it’s cancer research or fighting skin rashes.
This kind of open-ended demand can mean that too much money is spent on only one or two areas, and others go neglected.
It can also put strain on governments, who have more responsibility than they can handle due to these policies requiring unlimited resources.
There may also be situations where unlimited extrapolation is used – this means that politicians believe that more projects will always bring in even more people, but this does not take into account the limited number of people who are actually available for such projects.
Overall, the open-ended fallacy can create unwanted consequences; ultimately, progressives need to consider their demands before making them in order to avoid any potential pitfalls or setbacks.
It Is Easy To Fall Into The Fallacy Of Composition When Formulating Economic Policy
The fallacy of composition blights economic policy and affects how governments treat particular groups, cities or industries.
Governments will often set up ‘improvement’ projects that are meant to benefit the economy as a whole, but these rarely pan out in reality.
For example, redevelopment projects in certain neighborhoods are assumed to help the economy overall, yet this is rarely the case.
All that really happens here is that more successful businesses and higher-income people come in while less profitable ones and poorer residents go elsewhere.
In turn, this offers no benefit to the economy on a net level.
Furthermore, governments largely end up wasting billions of dollars on these projects without achieving much else than demolishing existing neighborhoods and relocating people who may not even want to move in the first place.
Therefore, it’s argued that rather than governments picking how citizens spend their money through large ‘improvement’ projects, they should allow taxpayers to determine what they consider important – this is known as the best way to avoid the fallacy of composition from occurring.
The Lack Of Accountability In Academic Institutions Allows For Substandard Research That Has Little Use To Society
When businesses operate, they’re subject to market forces, like the demand for their product, and shareholders who expect financial returns.
This is not always the case with academic institutions, especially those that are non-profit organizations which receive money from sources such as taxation and donations.
These funds are of relatively little benefit to the donors and have little effect on how well these institutions perform or how their research affects our understanding of the world.
Unfortunately, this lack of accountability can result in substandard qualifications being passed out that offer no real use to society at large.
In some cases all this research merely gathers dust in university libraries, while much of it is also funded by government subsidies.
This issue isn’t isolated either; many other countries around the world struggle with this very same issue as well.
So until oversight bodies are made responsible for seeing these issues addressed, Academic institutions will remain unaccountable and without stringent expectations from businesses – something sorely needed to ensure resources aren’t wasted on futile endeavours when it comes to higher education.
Beware Of Deceptive Statistics: The Context Behind The Numbers Matters When Considering Wealth Inequality
Mark Twain famously said “Lies, damned lies, and statistics.” He was warning us that statistics should not be taken at face value.
This is especially true when it comes to understanding the wealth inequality in a country.
Statistics often omit taxes which mean they overestimate the net worth of wealthier people.
On the other hand, they also leave out welfare payments or any other kind of government help, leading them to underestimate the actual economic resources of poorer people.
All these distortions can lead one to conclude that there is a huge gap between the rich and the poor – but in reality this isn’t always so.
This zero-sum fallacy where wealthy people are viewed as ‘stealing’ from poor people needs to be dispelled.
After all, if those stats were accurate then countries like America – which has a large number of billionaires – would have some of the most poverty-stricken citizens in the world.
Thankfully this isn’t true!
The takeaway here: don’t let your opinion about wealth inequality hinge solely on what dull numbers say without considering context.
The Idea That Western Nations Are Responsible For The Poverty Of Other Nations Is A Fallacy: Geography And History Play An Important Role In Explaining Global Inequality
The notion of Western nations being the cause of poverty in poorer countries is something that has been repeated throughout history.
However, Walter Rodney’s influential book How Europe Undeveloped Africa takes a different view on this idea and argues that this interpretation is far too simplistic.
Instead, Rodney posits that geography is actually playing a more influential role in causing poverty.
He explains how places like the Eurasian landmass enjoyed breakthroughs due to its easy exchange and transfer of ideas.
On the other hand, there are some parts of the world which are not able to access such flows of ideas – for instance because they are cut off by the Sahara desert or dotted around by oceans such as those around Australia.
Further still, nations and empires rise and fall for all kinds of reasons, demonstrating how nothing remains static; prosperity today could very easily become poverty tomorrow.
It is crucial to look at factors beyond just Western imperialism and instead take into account multiple perspectives when it comes to understanding why certain countries experience inequality and deprivation, debunking the fallacy that blames any one factor alone.
Wrap Up
At the end of the day, Economic Facts and Fallacies makes it clear that we can’t just take what we hear at face value.
There are plenty of economic fallacies out there – from the zero-sum fallacy to the fallacy of composition – and they need to be dispelled in order for us to solve the world’s problems.
The book serves as an important reminder that we should always consider all sides of an issue before forming our own opinion and that we should be careful not to let our emotions cloud our judgment.
So next time you hear something on the news, make sure to look at it from all angles, do your research and come up with your own conclusion!
