Economic Facts and Fallacies - critical summary review

First published in 2008, “Economic Facts and Fallacies,” to quote its blurb, “exposes some of the most popular fallacies about economic issues – and does so in a lively manner and without requiring any prior knowledge of economics by the reader.” But, then again, that’s what we’ve come to expect from Thomas Sowell, a senior fellow at the Hoover Institution at Stanford University, and a man as renowned for his libertarian opinions as he is for his attempts to popularize the so-called “dismal science.”

So, get ready to uncover the real causes of the gender pay gap and to bust some racial and income myths and fallacies!

The five most widespread general economic fallacies

In the simplest terms, fallacies are arguments wrongly constructed. However, they differ from similar phenomena – such as lies, alternative facts, or fake news – in that they are “usually both plausible and logical – but with something missing.” In most areas of life, fallacies are harmless. Nevertheless, “the difference between sound and fallacious economic policies by a government can affect the standard of living of millions.” And this is why their exposure should be more than an intellectual exercise. We’ll start with a quick sketch of the five most widespread general economic fallacies:

• The zero-sum fallacy is best illustrated by that old saying: “your loss is my gain.” The logic is almost intuitive: there is a limited amount of everything, so when someone is worse off, someone else must be better-off. However, that is not how the market or economic transactions work. They are, by design, win-win deals, because otherwise, they wouldn’t have been happening at all: why would anyone keep trading if they are constantly losing? If a deal is not perfect – that doesn’t mean it is not beneficial.
• The fallacy of composition is the belief that what is true of a part is true of the whole. For example, if you stand up out of your seat at a baseball match, you can see better. Therefore, you believe that if everyone stands up, everyone will be able to see better as well. However, in this second case, the composition would remain pretty much the same as in the case of everybody sitting down – so nobody would get a better view. Similarly, massive slum-clearance projects may have put an end to embarrassing photos of homeless folks against the background of the United States Capitol dome but created other slums because all those people thus displaced must have gone on living somewhere else. Again, the big picture – the composition of the United States – hasn’t changed one bit, even if the capital has.
• The post hoc fallacy is a logical fallacy of causation that can be best expressed thus: since B followed A, A must have caused B. For example, the stock market crash of 1929 preceded the Great Depression of the 1930s – so most textbooks claim that the former caused the latter. However, a similar stock market crash in 1987 was followed by two decades of economic growth, so, at best, the causality is inferred, and not inherent.
• The chess-pieces fallacy was first noticed by Adam Smith who wrote with disgust in “The Theory of Moral Sentiments” of the doctrinaire theorist who is “wise in his own conceit” and who “seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chessboard.” However, in reality, human beings have their “own individual preferences, values, plans, and wills, all of which can conflict with and even thwart the goals of social experiments.” Consequently, incessant experimentation is a formula for disaster leading to huge economic and social costs. Just look at Eastern Europe or South America.
• The open-ended fallacy can be observed in policies that advocate desirable things without paying attention to the simplest economic fact – namely, that resources are fundamentally limited and that they also have alternative uses. For example, nobody is against a better health system, but no matter how much is done to this end, there will always be more that could have been done. Health – just like safety, the environment, or open places – is an open-ended topic. However, since our resources to fund these noble objectives are limited, policies must be more specific. For example, few people would mind paying billions of dollars for cancer research – but would anyone want to spend a large part of the national income on exterminating skin rashes?

These five general economic fallacies are so widespread that they are present in almost all government decrees. But let us turn to a few more specific – and, possibly, even more dangerous – fallacies and test them against hard evidence.

People and fallacies: gender, class, and race

It is a known fact that women are paid less than men. And because this is due to discrimination rooted in our patriarchic societies, an affirmative action by the government is necessary to right this wrong. Or so they say: contrary to popular opinion, the facts demonstrate that the gender pay gap is neither because of discrimination against women nor unreasonable. Consider this, for example: according to “The Economic Report of the President'' from 1973, “single women who had worked continuously since high school were in 1971 earning slightly more than men of the same description.” 

All thanks to the market before any significant government intervention to promote gender equality, the first one of which went into effect the year after! In other words, if women and men both preferred their careers before their families, then there would be no such thing as a gender pay gap. However, most women make the opposite choice, which is why they receive lower pay on average. 

Case in point: according to a recent survey, one-third of women quit their jobs at one point while other works part-time during some portion of their reproductive years. Consequently, owing to their choices, women work fewer hours than men, which is why they receive less money in return. Adjusted for hours and other factors, the gender pay gap is not as serious as quasi-intellectuals make it be.

The same is true for class differences. Just like in the case of gender, the political jargon insofar as income inequality is concerned is riddled with fallacies. For example, you’ve heard thousands of times that household incomes are stagnating for decades. While this is true, it doesn’t tell the entire story. Because, simultaneously, the number of people per household has been falling. Consequently, even though household incomes have remained the same, the living standards have risen – contrary to what modern-day progressives would like you to believe. 

Class differences are not anymore a story of “haves” and “have nots,” but a case of “haves” and “have lots.” For example, in 2001, 98% of the “poor” owned either a cassette or a DVD player, which no one had in 1971. Just as well, 72% of these people owned a car or a truck in 2001 – a luxury in 1971! Finally, thanks to the free market and the fairness of socioeconomic mobility, “only 5% of those who were in the bottom 20 percent in income in 1975 were still there in 1991, compared to 29% of those in the bottom quintile in 1975 who had risen to the top quintile by 1991.” 

Just as gender and class, race is often a controversial topic in economic discussions, and it has led to numerous affirmative policies designed to alleviate the effects of discrimination against black people or other ethnic minorities. However, these policies fail to take into account that other factors can explain the differences in income between different populations. For example, age is one of the strongest determinants of income, and, on average, the median age of black Americans (30) is five years younger than the median age of the American population as a whole (35). 

The same holds true for Asians as well: the average age for Japanese Americans, for example, is only 23, so it should surprise nobody that, on average, they earn less than white Americans. However, Japanese Americans earn more than most Asian Americans because most of them (61%, to be precise) were born in the U.S., compared to 30% of those of Chinese, Filipino or Vietnamese ancestry. And expectedly, native citizens are “more familiar with the opportunities available in the society and better able to take advantage of those opportunities.”

Places and fallacies: cities, colleges, and countries

Even though cities are imperfect and their benefits have costs, they are more than necessary for economic, industrial, commercial, and cultural growth. Necessity causes the movement toward them and is not a bad thing – just as their growth is not a bad thing either. Most urban problems are caused by government restrictions on land, which results in more costly housing for the poor and, in turn, leads to new government regulations aiming to provide affordable housing to the lower classes. This causes even more problems – in fact, the financial crisis of 2008 might have been caused by this kind of policy.

The crisis in our education is also caused by erroneous government policies. The idea that education should be free for all has led to the creation of nonprofit colleges that earn their money “from people whose desires do not count – not only taxpayers but also deceased donors.” As a result, professors are not incentivized to act in the best interests of their students – or even their institutions. 

After all, once they get their tenures, they can’t be fired. Consequently, they tend to abuse their power, holding their classes at inconvenient times, and even recommending textbooks based on provisions received from certain publishers. As Adam Smith suggested in “The Wealth of the Nations,” nonprofit academic institutions are run in a way that would have guaranteed their demise in a competitive environment. In other words, in a way from which the majority benefits little.

Finally, just like people, countries are different. Consequently, their wealth differs as well. This isn’t unjust – but merely a fact of life: some countries are poor not because of “exploitation,” but because of numerous other unchangeable factors, such as geography, history, population, and culture. For example, China had the highest standard of living in the world until the Middle Ages, during which the Islamic world was well ahead of Europe in most areas. Japan was an underdeveloped country because of a 17th-century political decision that deliberately isolated it from the rest of the world. Africa hasn’t developed properly because of a lack of resources, navigable waterways, a very bad climate, and even worse institutions. 

Similarly, it’s difficult to establish law and order in mountainous regions such as Afghanistan or Tajikistan. Finally, as politically incorrect as this might sound, some nations have traditionally engendered cultural values – such as hard work, discipline, and frugality – that have allowed them a head start in the modern world of today.

Final Notes

Comprehensible and comprehensive, “Economic Facts and Fallacies” is an enjoyable and informative read. Especially if you’re new to the secrets of the economy – and even more if you are in favor of laissez-faire market policies.

12min Tip

Don’t trust the politicians: they usually use “weasel words” and erroneous arguments. Subject them to closer inspection. Counter fallacies with facts.