Common Fallacies Of Economics

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Economics has its own styles of common fallacies. These are much loved by both pundits and highly qualified economists making partisan arguments.


Free Market Theory (10 links)
Free markets cannot exist: they are an ideal model in microeconomic theory. While almost everybody accepts free market theory, the real world diverges from its assumptions very strongly. Also known as the Standard Model.
Invisible Hand (6 links)
One analogy used by Adam Smith has been inflated into a full-blown economic mythology. If there is an "invisible hand", it drives concentration of wealth and power instead of economic equilibrium. There is also a corresponding "invisible foot" that leads to production of harmful externalities.
Refutation of Dogmas by Empirical Economics (17 links)
Much of the economics recited by libertarians is Derp, but many older economics ideas have had a long evidence-free existence that is now being clearly refuted by modern empirical economics methods.
An FAQ for Mainstream/Neoclassical Economists [More...]
Main problems with neoclassical economics: framing, assumptions and various notions of equilibrium. In particular: finance/banking, labour markets, utility and the theory of the firm.
Anthropology and Scientific Psychology (21 links)
Libertarian philosophy and ideology (and indeed almost all economics) omit basic facts of anthropology, such as the fact that humans naturally engage in gift networks and sometimes barter, but that markets are unnatural to our psychology. They also usually ignore scientific psychology findings in favor of pop psychology, if not ludicrous claims of "human nature". Capitalist exploitation relies on this fact.
Assuming Slopes of Curves (1 link)
Standard neoclassical analysis assumes demand curves are necessarily downward-sloping and supply curves upwards-sloping. The real world doesn't necessarily agree.
Assuming Theory Applies To A Real World Example (9 links)
Without knowing the specifics of the relevant institutions, you cannot assume a particular economic model will make valid predictions. The commonest example of this fallacy is assuming a free market model.
BadEconomics, search for libertarian, Austrian Economics, and Bitcoin. [More...]
The BadEconomics reddit routinely scoffs at libertarian economic claims, Austrian Economics, and Bitcoin.
Broken Window Fallacy (3 links)
This fallacy does not let us distinguish between an arsonist destroying a building and an investor who demolished the building. In either case something new would be put in its place, often much better. From That Which Is Seen, and That Which Is Not Seen.
Capitalism is the best economic system ever devised. (Not!)
A remarkable propaganda statement that relies on the vagueness of "best", doesn't say which variant of capitalism, and requires you to overlook the fact that capitalism must necessarily be only a part of real economic systems (which include family and government production and exchange.)
Capitalist success is meritocratic and thus deserved. (3 links)
The same way the scum floats to the top? Because libertarians usually define merit as success in capitalism, this begs the question. Meritocracy still has the problem of rule by a small clique. Positive feedback in markets makes success very much dependent on random initial conditions.
Deficit (3 links)
Libertarians get all hot and bothered about government deficits. They are really just a form of borrowing, just like homeowners and businesses borrow. Rants about balanced budget amendments are simply ways they want to hamstring governments and cut taxes.
Derp (3 links)
A determined belief in some doctrine that is completely unmovable by evidence.
Econometrics, open science, and cryptocurrency [More...]
Econometric and statistical research often represents a search for a model, however implausible, rather than testing of a hypothesis.
Economic Ideas You Should Forget (book)
By discussing problematic theoretical assumptions and drawing on the latest empirical research, 71 authors question specific hypotheses and reject major economic ideas from the “Coase Theorem” to “Say’s Law” and “Bayesianism.”
Economic Incentives Don’t Always Do What We Want Them To [More...]
"On their own, markets can’t deliver outcomes that are just, acceptable -- or even efficient." And "Financial incentives are nowhere near as powerful as they are usually assumed to be."
Economic Realism (Wonkish) [More...]
A discussion of how realistic economic models should be, and for what purpose. Includes a good criticism of Milton Friedman.
Economics As Religion: From Samuelson to Chicago and Beyond (book)
An examination of the religious-style rhetoric upon which economics is founded and promoted. Themes of genesis, prophets, prophesies, salvation and more are illustrated.
Economics for the Rest of Us: Debunking the Science That Makes Life Dismal (book)
Shows how today’s dominant economic theories of economic efficiency and wages evolved, how they explicitly favor the rich over the poor, and why they’re not the only -- or best -- options.
Economics in Two Lessons: Why Markets Work So Well, and Why They Can Fail So Badly (book) (1 link)
An excellent academic (but readable) rebuttal to the propaganda in Economics in One Lesson, the fallacies of Economics 101, some Chicago Economics and some Austrian Economics. Very simply, markets do not take into account ALL opportunity costs.
Economics Should Not Tell Us What To Do (3 links)
Economics is only a tool, fundamentally amoral. But there are many other inputs for our moral values. For example, there are conditions under which slavery makes economic sense, yet we should not choose slavery and instead could change the conditions.
Economists Dissing Economics [More...]
A list of 20 or so quotes, mostly from well known economists, criticising mainstream economics.
Financial Times 404notfound Application Errors Explained as Economics [More...]
The best 404 page ever, using 22 popular economics ideas to explain why you couldn't get the page you wanted.
GIGO (4 links)
"Garbage In, Garbage Out." Applying economic theory to badly mistaken "facts" (or critical omissions), usually in service of free market fundamentalism. Even Nobel Laureates do it.
Hayek Meets Information Theory. And Fails. [More...]
Modern economic theories of prices-as-information are seventy years out of date.
History of Economic Thought, 3rd Edition: A Critical Perspective (book, online)
A readable textbook that will clarify your understanding of the pitfalls of different economic ideas, starting with the "invisible foot of the market".
Homo economicus (15 links)
AKA Economic Man. The idea that humans are individualistic, rational, economic maximizers. A common, simplifying assumption in most economic models, also known as economic rationality. It is also commonly agreed that this assumption is false. Behavioral studies with the Ultimatum Game are good evidence that it is false.
How to Get It Wrong [More...]
Paul Krugman says: "Mammon knows that economics needs rethinking in the wake of a disastrous crisis, a crisis that was neither predicted nor prevented. It seems to me, however, that it’s important to realize that the enormous intellectual failure of recent years took place at several levels."
Ideology Underlies Economics (6 links)
Claims that economics is a non-ideological science are transparently false. There's far more evidence than just the right-wing funding of Chicago Economics, Austrian Economics, and the George Mason University Economics Department. The ideology goes back at least to John Locke, who provided justifications for his class' policies of expropriation and enslavement. The wealthy have always created economic ideology to justify their wealth.
Individual Choice (3 links)
Individual choice is a misleading concept: individuals do not control the choices available and are heavily influenced by advertising, propaganda, and other irrational factors. It also focuses attention away from alternatives, such as social choice.
Invisible Foot (2 links)
A term used by E. K. Hunt to describe the second half of the capitalist incentives to privatize gain and socialize costs. It increases private gain to create negative externalities (such as pollution) rather than bear their costs: thus negative externalities will be maximized "as if by an invisible foot". See also the propaganda term Invisible Hand.
Libertarianism is basically video game economics 101 [More...]
"Most people know that libertarians tend to have a very naive understanding of real world economics, but I lately I've started to wonder how much of that understanding comes from playing video games and assuming that those video game economies are real."
Market economics means more than just supply and demand [More...]
A simple and clear explanation of Jean Tirole's Nobel prize winning work on market dominance.
Market Fundamentalism (9 links)
The unholy ideological trilogy of Laissez Faire, Free Market and Invisible Hand. Beliefs that supposedly will solve all the world's problems.
Markets do it better and cheaper than government. Not. (1 link)
A common propaganda claim from Milton Friedman. Patently untrue for a number of market failures. An additional problem is that the products would be different, sometimes in undesirable ways, because markets have no incentive to create positive externalities
Math vs. Reaganomics: Why GOP's anti-tax hysteria falls flat [More...]
Mathematician Jordan Ellenberg points out some fallacies of Cato Institute propaganda, Voodoo Economics, and the Laffer Curve, based on the difference between linearity and nonlinearity.
Microfoundations (8 links)
There has been a huge push to base macroeconomics on microfoundations. But the microfoundations selected do not match what is known of real human behavior and economic measurement. And there is substantial criticism of whether microfoundations solve the problem of the Lucas critique.
New Microeconomics: How Evolution Explains Resource Distribution [More...]
"Through years of schooling, mainstream economists are trained to ignore the obvious facts about human nature. The theories that economists learn make it impossible for them to understand human sociality."
Non Sequitur on economics
A close parallel to several economic policies over the past several decades.
Optimal Solutions (3 links)
There are no optimal solutions for real-world economic problems. There are only second-best (or worse) solutions because the requirements for optimality (in markets or government) can never be met in the real world. Sometimes markets are second best and sometimes government is second best.
Pareto Optimality (6 links)
Pareto optimality is often an illusory hope. Markets can theoretically produce Pareto-optimal results, but there are plenty of reasons why they might not. Nor do markets help us choose which Pareto Optimum we'd want of many possible optima. Pareto improvements assume many things which are not true, such as that inequality doesn't matter. They also are frequently used in bait-and-switch: lump-sum transfers to make sure everybody benefits are often conveniently forgotten. And there are other solutions (including centralized solutions and naked coercion) which can also produce Pareto-optimal results
Paul Romer on Modern Macroeconomics, Or, the “All Models Are False” Dodge [More...]
"When confronted by evidence that the predictions of their models are wrong, the standard and almost comically self-confident response of the modern macroeconomists is: All models are false."
Coined by Matt Yglesias, this refers to explaining what is well known with standard economics, and explaining the remaining unknown part with hand-waving appeals to popular prejudices, usually supporting a right-wing moral argument.
Preventing Economists’ Capture [More...]
Chapter 6 of Preventing Regulatory Capture. The same standard economic incentives that drive regulatory capture should also result in capture of economists by business interests. Economists seem unwilling to admit they have the same problem.
Public Choice Theory (9 links)
A school that starts with anti-government and pro-market ideology to find that government cannot work and markets do. Surprise! Economics for the plutocracy. See also Rational Choice Theory for the usual methodology.
Rational Choice Theory (4 links)
A field of economic theory that is notorious for many pathologies. See also Public Choice Theory, which uses rational choice methodologies.
Regional Policy and Distributional Policy in a World Where People Want to Ignore the Value and Contribution of Knowledge and Network-Based Increasing Returns [More...]
In a world of mammoth increasing returns to unowned knowledge and to networks, no individual and no community is especially valuable. Those who receive good livings are lucky, and the illusion of desert is punctured by any recognition that there is a large societal dividend to be distributed. This is the dismal science at its best and most dismal.
Rescuing Economics from Neoliberalism [More...]
A refreshing antidote to neoliberal ideology, stuffed with more excellent writing and economic ideas than are easily appreciated. "The fatal flaw of neoliberalism is that it does not even get the economics right. It must be rejected on its own terms for the simple reason that it is bad economics."
Say's Law (2 links)
The doctrine that shortfalls in overall demand aren’t possible, because money has to be spent on something. Debunked strongly by Keynes, yet still strongly held by many Chicago School economists and others.
Seven principles for arguing with economists [More...]
Some of the more common fallacious economics arguments, and how to counter them.
Should We Trust Economists? [More...]
"No matter how much we might wish they were, economists are not go-to experts who know just how the world works or how to fine tune it...But they do have a lot of interesting things to say. They might help you clarify or re-evaluate your own beliefs about how the economy functions. They can also help you spot the flaws in each other's arguments."
Slavery Was Never Economically Efficient [More...]
A prime example of libertarian handwaving, not citing a single authority or even saying what kind of economic efficiency he's talking about. For example, "If slaveholders made decisions purely on economics and not corrupt emotion..." instead of their own self-interest?
Some Thoughts About Economic Exposition in Math and Words [More...]
How economists can conceal fallacies by combining mathematics and prose.
Supply-Side Economics (11 links)
A failed Reagan-era crank theory used to cut taxes and services. It promised a boom in productivity and never produced one. Instead, it created an ever-increasing concentration of wealth in the hands of the rich. Featuring the Laffer Curve. Also called voodoo economics and trickle-down economics. Considered a gross failure.
Taxes And Growth (18 links)
Low taxes do not produce more growth, though democracy does. Successful reduction of poverty by tax-funded programs does not reduce growth either.
The contradiction in economics [More...]
Thomas Sargent's 12 lessons of economics have been criticized as "as either too simplistic, partial or just wrong". But are these really lessons or just assumptions economists make?
The Dismal Science: 'Seven Bad Ideas,' by Jeff Madrick [More...]
Paul Krugman's synopsis and mild suggestions about "an important and broadly accurate story about what went wrong. Economists presented as reality an idealized vision of free markets, dressed up in fancy math that gave it a false appearance of rigor. As a result, the world was unprepared when markets went bad."
The Pissed-Off, Entitled, Virgin, Fedora-Wearing Neckbeard's Guide to Self-Righteous, Armchair Bullshit Economics [More...]
"No, No, No; you moron! Not establishment economics! Those economics have been co-opted by the bourgeois elites in the ownership class!"
The Private Sector can solve that. (3 links)
Hand-waving arguments that because the private sector is already involved, there is no need for government. If you ignore market failures, game theory, historical evidence, psychology, transaction costs and more, why, it all makes sense!
The Will of the Market (1 link)
Or what markets want. Often used to justify outcomes or demand policies. But how is this will known? And since markets are just tools for our society, we can change or deny their wills by changing the laws that underly them. If "will" is a valid idea for markets.
Two modes of pop-economics reasoning popular among libertarians. [More...]
A quick rule of thumb is that when someone seems to be acting like a jerk, an economist will defend the behavior as being the essence of morality, but when someone seems to be doing something nice, an economist will raise the bar and argue that he’s not being nice at all.
We do not owe each other anything because we are self-made. (3 links)
A favorite libertarian myopia! Conveniently forget all the contributions that went into making us successes. Also known as "I built it all by myself." Ignores the lessons of I Pencil: A product of the mixed economy and the fact of Social Capital.
What is wrong (and right) in economics? [More...]
"... anything that has turned into conventional wisdom is almost by definition wrong, or at least, overstated." Examples of dismissal of market failure, rejection of other social sciences, and benefits of globalization.
What is Wrong with Neoclassical Economics? [More...]
"The list is a long one and includes practically every major theory [...]" At least 16 important assumptions that are often false.
When econ models potentially mislead, econ profs should say so [More...]
Models are often based on assumptions that do not hold in the real world. When they are used to support real-world policies, these failings of the models should be highlighted.
Why Economists Should Look At Horses [More...]
This is an example of something common in economics – “as if” modelling. When real world evidence is not used for modelling.
Yuppie Fishtanks: YIMBYism explained without "supply and demand" [More...]
Simple supply and demand models which assume one type of good do not work on complex housing problems where there are several types of goods as well as social goals.


But -- speaking of economics -- there’s basically an infinite market for glib pseudo-academic bullshit, if it protects and enhances the political and economic power of the already wealthy and powerful. That, more than anything else, is the base on which the intellectual Potemkin village that Epstein and his ilk have built continues to rest so securely.
Paul Campos, "A Plague Of Libertarians"
Saying ‘governments can’t create wealth’ is a sweeping, largely vacuous statement based on a superficial zero sum view of taxation as being ‘extracted’ from the private sector. In fact, taxation is just one prong of a symbiotic relationship that exists between the private and public sectors. If we take the definition of wealth as the creation of valuable resources, it’s clear that, say, teaching and infrastructure ‘create wealth.’ We’ve already seen just how large a source of wealth the government can be through its funding of research and development. Furthermore, many state-backed institutions are historically a prerequisite for substantial wealth creation to take place at all.
UnlearningEcon, "An FAQ for Libertarians"
It really looks from the anthropologists that Adam Smith was wrong--that we are not animals that like to "truck, barter, and exchange" with strangers but rather gift-exchange pack animals--that we manufacture social solidarity by gift networks, and those who give the most valuable gifts acquire status hereby.
Brad DeLong, "Economic Anthropology: David Graeber Meets the Noise Machine..."
[...] lacking the experimental method, economists are not strictly enough compelled to reduce metaphysical concepts to falsifiable terms and cannot compel each other to agree as to what has been falsified. So economics limps along with one foot in untested hypotheses and the other in untestable slogans.
Joan Robinson, "Economic Philosophy" , 1962, pp. 26-28.
[A]ll these economic theories are at least debatable and often highly questionable. Contrary to what professional economists will typically tell you, economics is not a science. All economic theories have underlying political and ethical assumptions, which make it impossible to prove them right or wrong in the way we can with theories in physics or chemistry.
Ha-Joon Chang, "Economics is too important to leave to the experts"
Economics is luxuriant with fallacies, because it is not a natural science like physics or chemistry. Propositions in economics are rarely absolutely true or false. What is true in some circumstances may be false in others. Above all, the truth of many propositions depends on people’s expectations.
Robert Skidelsky, "Four Fallacies of the Second Great Depression"
There has been a good deal of confused controversy about the question of "value judgments" in the social sciences. Every human being has ideological, moral and political views. To pretend to have none and to be purely objective must necessarily be either self-deception or a device to deceive others. A candid writer will make his preconceptions clear and allow the reader to discount them if he does not accept them. This concerns the professional honour of the scientist.
Joan Robinson, "Freedom and Necessity" p.122.
The conditions under which equilibrium prices really are all a decision-maker needs to know, and really are sufficient for coordination, are so extreme as to be absurd... Even if they hold, the market only lets people "serve notice of their needs and of their relative strength" up to a limit set by how much money they have. This is why careful economists talk about balancing supply and "effective" demand, demand backed by money.
Cosma Shalizi, "In Soviet Union, Optimization Problem Solves You"
Both neo-classical and Austrian economists make a fetish (in several senses) of markets and market prices. That this is crazy is reflected in the fact that even under capitalism, immense areas of the economy are not coordinated through the market.
Cosma Shalizi, "In Soviet Union, Optimization Problem Solves You"
We don't have to go into "Monkey's Paw" territory to realize that getting what you think you want can prove thoroughly unacceptable; it's a fact of life, which doesn't disappear in economics.
Cosma Shalizi, "In Soviet Union, Optimization Problem Solves You"
Those values [expressed by markets] are not pretty. They are that the whims of the rich matter more than the needs of the poor; that it is more important to keep bond traders in strippers and cocaine than to feed hungry children. At the extreme, the market literally starves people to death, because feeding them is a less "efficient" use of food than helping rich people eat more.
Cosma Shalizi, "In Soviet Union, Optimization Problem Solves You"
The evolution of government from its medieval, Mafia-like character to that embodying modern legal institutions and instruments is a major part of the history of freedom. It is a part that tends to be obscured or ignored because of the myopic vision of many economists, who persist in modeling government as nothing more than a gigantic form of theft and income redistribution.
Douglas North, "Institutions and economic growth: An historical introduction"
… Economic doctrines always come to us as propaganda. This is bound up with the very nature of the subject and to pretend that it is not so in the name of ‘pure science’ is a very unscientific refusal to accept the facts.
Joan Robinson, in Marx, Marshall And Keynes
The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.
Joan Robinson, in Marx, Marshall And Keynes
[H]umans are, at a very deep and basic level, gift-exchange animals. We create and reinforce our social bonds by establishing patterns of “owing” other people and by “being owed”. We want to enter into reciprocal gift-exchange relationships. We create and reinforce social bonds by giving each other presents. We like to give. We like to receive. We like neither to feel like cheaters nor to feel cheated. We like, instead, to feel embedded in networks of mutual reciprocal obligation. We don’t like being too much on the downside of the gift exchange: to have received much more than we have given in return makes us feel very small. We don’t like being too much on the upside of the gift exchange either: to give and give and give and never receive makes us feel like suckers. We want to be neither cheaters nor saps.
Brad DeLong, "Regional Policy and Distributional Policy in a World Where People Want to Ignore the Value and Contribution of Knowledge and Network-Based Increasing Returns"
This wish to believe that you are not a moocher is what keeps people from seeing issues of distribution and allocation clearly -- and generates hostility to social insurance and to wage supplement policies, for they rip the veil off of the idea that you deserve to be highly paid because you are worth it. You aren’t.
Brad DeLong, "Regional Policy and Distributional Policy in a World Where People Want to Ignore the Value and Contribution of Knowledge and Network-Based Increasing Returns"
The fatal flaw of neoliberalism is that it does not even get the economics right. It must be rejected on its own terms for the simple reason that it is bad economics.
Dani Rodrik, "Rescuing Economics from Neoliberalism"
A journalist calls an economics professor for his view on whether free trade is a good idea. The professor responds enthusiastically in the affirmative. The journalist then goes undercover as a student in the professor's advanced graduate seminar on international trade. He poses the same question: Is free trade good? This time the professor is stymied. "What do you mean by 'good?'" he responds. "And good for whom?" The professor then launches into an extensive exegesis that will ultimately culminate in a heavily hedged statement: "So if the long list of conditions I have just described are satisfied, and assuming we can tax the beneficiaries to compensate the losers, freer trade has the potential to increase everyone's well being." If he is in an expansive mood, the professor might add that the effect of free trade on an economy's long-term growth rate is not clear either and would depend on an altogether different set of requirements.
Dani Rodrik, "Rescuing Economics from Neoliberalism"
There is nothing wrong with markets, private entrepreneurship, or incentives -- when deployed appropriately. Their creative use lies behind the most significant economic achievements of our time. As we heap scorn on neoliberalism, we risk throwing out some of neoliberalism's useful ideas. The real trouble is that mainstream economics shades too easily into ideology, constraining the choices that we appear to have and providing cookie-cutter solutions.
Dani Rodrik, "Rescuing Economics from Neoliberalism"
Adam Smith used the phrase “invisible hand” only once in “The Wealth of Nations,” and he probably didn’t mean to say what most people now think he said. But never mind: Today the phrase is almost always used to mean the proposition that market economies can be trusted to get everything, or almost everything, right without more than marginal government intervention. Is this belief well grounded in theory and evidence? No.
Paul Krugman, "The Dismal Science: 'Seven Bad Ideas,' by Jeff Madrick"
It is a great fault of symbolic pseudo-mathematical methods of formalizing a system of economic analysis... that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed; ... Too large a proportion of recent mathematical economics are mere concoctions, as imprecise as the initial assumptions they rest upon, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.
John Maynard Keynes, "The General Theory of Employment, Interest and Money", 1936. Pg. 297.
There are powerful forces having to do with the sociology of the profession and the socialization process that tend to push economists to think alike. Most economists start graduate school not having spent much time thinking about social problems or having studied much else besides math and economics. The incentive and hierarchy systems tend to reward those with the technical skills rather than interesting questions or research agendas. An in-group versus out-group mentality develops rather early on that pits economists against other social scientists. [...] [E]conomists tend to look down on other social scientists, as those distant, less competent cousins who may ask interesting questions sometimes but never get the answers right. Or, if their answers are right, they are so not for the methodologically correct reasons. Even economists who come from different intellectual traditions are typically treated as “not real economists” or “not serious economists.”
Dani Rodrik, "What is wrong (and right) in economics?"