Economic Facts and Fallacies

by Thomas Sowell

Some things are believed because they are demonstrably true. But many other things are believed simply because they have been asserted repeatedly—and repetition has been accepted as a substitute for evidence.

Economic policies based on fallacies can be—and have been—devastating in their impacts.

Never underestimate the difficulty of changing false beliefs by facts. Henry Rosovsky

Only after that political support is strong enough to cause fallacious ideas to become government policies and programs are the missing or ignored factors likely to lead to “unintended consequences,” a phrase often heard in the wake of economic or social policy disasters.

Sometimes what is missing in a fallacy is simply a definition. Undefined words have a special power in politics, particularly when they invoke some principle that engages people’s emotions.

“Fair” is one of those undefined words which have attracted political support for policies ranging from Fair Trade laws to the Fair Labor Standards Act. While the fact that the word is undefined is an intellectual handicap, it is a huge political advantage.

Who, after all, is in favor of unfairness? Similarly with “social justice,” “equality,” and other undefined terms that can mean wholly different things to different individuals and groups—all of whom can be mobilized in support of policies that use such appealing words.

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.

A student who misunderstands mathematics has little choice but to correct that misunderstanding before the next examination, and someone in business cannot continue losing money indefinitely by persisting in mistaken beliefs about the market or about the way to run a business.

The difference between sound and fallacious economic policies by a government can affect the standard of living of millions.

voluntary economic transactions—whether between employer and employee, tenant and landlord, or international trade—would not continue to take place unless both parties were better off making these transactions than not making them.

Each side may of course prefer terms that are especially favorable to themselves but they will accept other terms rather than lose the benefits of making the transaction altogether. There may be many terms acceptable to one side or the other but the only way transactions can take place is if these sets of terms acceptable to each side overlap.

Suppose that a government policy is imposed, in the interest of helping one side—say, employees or tenants. Such a policy means that there are now three different parties involved in these transactions and only those particular terms which are simultaneously acceptable to all three parties are legally permitted.

With fewer terms now available for making transactions, fewer transactions are likely to be made. Since these transactions are mutually beneficial, this usually means that both parties are now worse off in some respect.

The end result was that people stopped investing in apartment buildings, and a huge shortage in rentals and housing forced many Egyptians to live in horrible conditions with several families sharing one small apartment. The effects of the harsh rent control is still felt today in Egypt. Mistakes like that can last for generations.2

Results of rent control from the 60s in Egypt (2006)

The immediate effect of rents set below where they would be set by supply and demand is that more people seek to rent apartments for themselves, now that apartments are cheaper. But, without any more apartments being built, this means that many other people cannot find vacant apartments. Moreover, long before existing buildings wear out, auxiliary services like maintenance and repair decline, since a housing shortage means that landlords are no longer under the same competitive pressures to spend money on such things in order to attract tenants, when there are more applicants than apartments during a housing shortage. Such neglect of maintenance and repair makes buildings wear out faster. Meanwhile, the lower rate of return on investments in new apartment buildings, because of rent control, causes fewer of them to be built.

Some tenants undoubtedly benefit from rent control laws—those who already have an apartment when such laws are passed and who find the lower levels of repair, maintenance and other auxiliary services, such as heat and hot water, acceptable as a trade-off, in view of the money saved on the rent.

In short, reducing the set of mutually acceptable terms tends to reduce the set of mutually acceptable results, with both tenants and landlords ending up worse off on the whole, though in different ways.

Improvements in all these areas make the worker better off and cost the employer money. Here again, this tends to lead to fewer transactions. Over the years, unemployment rates have tended to be chronically higher, and the periods of unemployment chronically longer, in European Union countries,

where minimum wage laws and government policies requiring employers to provide various benefits to their employees have been more generous than in the United States—and the rate at which these countries create new jobs has tended to be far lower than the rate at which new jobs have been created in the American economy.

Those workers who keep their jobs are made better off by the various benefits that employers are required to provide by law but the higher unemployment rates and longer periods of unemployment deprive others of jobs that they could have had in the absence of laws which have the net effect of discouraging hiring and encouraging the substitution of capital for labor, as well as the outsourcing of jobs to other countries.

Perhaps the most detrimental consequences of the implicit assumption of zero-sum transactions have been in poor countries that have kept out foreign trade and foreign investments, in order to avoid being “exploited.”

Large disparities between the prosperity of the countries from which trade and investment come and the poverty in Third World countries receiving this trade and investment have led some to conclude that the rich have gotten rich by taking from the poor.

Eventually, however, the fact that many once-poor places like Hong Kong, South Korea, and Singapore achieved prosperity through freer international trade and investment became so blatant and so widely known that, by the end of the twentieth century, the governments of many other countries began abandoning their zero-sum view of economic transactions.

How soon we forget...

China and India have been striking examples of poor countries whose abandonment of severe international trade and investment restrictions led to dramatic increases in their economic growth rates, which in turn led to tens of millions of their citizens rising out of poverty.

What logicians call “the fallacy of composition” is the belief that what is true of a part is true of the whole.

Many economic policies involve the fallacy of composition, as politicians come to the aid of some particular group, industry, state or other special interest, representing the benefits to them as if they were net benefits to society, rather than essentially robbing Peter to pay Paul.

Many local governments, for example, follow policies designed to attract either new businesses or higher-income people, both of which are expected to provide more local tax revenues.

Whole neighborhoods have been demolished and “redeveloped” with upscale housing and shopping malls as a means of “revitalizing” the community. Often the federal government subsidizes this operation, with no consideration that the businesses and higher-income people attracted there will simply be transferred from some other place, while the usually lower-income people d...

Government spending is often said to be beneficial to the economy, as the money disbursed is spent and re-spent, creating jobs, raising incomes, and generating tax revenues in the process. But usually if that same government money had remained in the hands of the taxpayers from whom it came, they too would have spent it, and it would still have been re-spent, creating jobs, raising incomes, and generating tax revenues in the process.

One of the most common fallacies is so old that it has a Latin name from centuries ago: Post Hoc, Ergo Propter Hoc—in other words, “After this, therefore because of this.”

one of the damning claims against the insecticide DDT, during the successful campaign to get it banned in many parts of the world, was that it caused cancer. In places where DDT had been widely used, cancer rates had in fact gone up. Many of these were countries subject to devastating ravages of malaria, which killed off vast numbers of people. In the wake of using DDT, which killed mosquitoes that transmitted malaria, that disease was drastically reduced, almost to the vanishing point in some places. Now millions of people, who would otherwise have died young, lived long enough to get cancer in their later years. But the DDT did not cause cancer, and its banning led to a resurgence of malaria that took millions of lives around the world.

When two things are both very striking, and one occurs right after the other, then the first is especially likely to be c...

As for the 1929 stock market crash, unemployment never reached double digits in any of the 12 months following that event. Unemployment peaked at 9 percent, two months after the stock market crashed, and began drifting generally downward until it reached 6.3 percent in June 1930. That was when the federal government made its first major intervention in the economy, with the Smoot-Hawley tariff. After that intervention, the downward movement in unemployment rates reversed and shot up far beyond the level it had reached in the wake of the stock market crash. Within six months of the first major federal intervention, unemployment reached double digits at 11.6 percent in November 1930. After a series of additional large federal interventions in the economy, unemployment stayed in double digits for the remainder of the decade. An economic analysis published in 2004 concluded that government interventions had prolonged the Great Depression by several years.3

In politics, the desire to take credit for beneficial changes and to blame others for detrimental changes has led to many post hoc fallacies. Presidents of the United States almost routinely claim credit for budget surpluses and are blamed by their critics for budget deficits. Yet all federal government spending bills originate in the House of Representatives, and only Congress can change tax rates. When the President and the Congress are of opposite parties, neither a deficit nor a surplus is likely to be due to decisions made in the White House.

Moreover, whatever the merits of particular social experiments, experimentation as such can have huge economic and social costs. Although some social experimenters may believe that, if one program or policy does not work, they can simply try another and another after that, until they find one that does work, the uncertainties generated by incessant experimentation can cause people to change their behavior in ways that adversely affect the economy.

Because people are not inanimate objects like chess pieces,

Many desirable things are advocated without regard to the most fundamental fact of economics, that resources are inherently limited and have alternative uses. Who could be against health, safety, or open space? But each of these things is open-ended, while resources are not only limited but have alternative uses which are also valuable.

No matter how much is done to promote health, more could be done. No matter how safe things have been made, they could be made safer. And no matter how much open space there is, there could be still more. Obvious as this may seem, there are advocates, movements, laws, and policies promoting an open-ended commitment to more of each of these things, without any indication of a limit, or any principle by which a limit might be set, much less any consideration of alternative uses of the resources that some people want devoted to whatever desirable thing they are promoting.

Health is certainly something desirable and most people are happy to see billions of dollars devoted to cancer research. But would anyone want to devote half the national income to wiping out skin rashes? Crime control is certainly desirable but would anyone want to devote...

While no one would advocate these particular trade-offs, what open-ended demands for open space, crime control, better health or cleaner air and water do advocate leaves out the very concept of trade-offs. That is what makes such demands open-ended, both as regards the amounts of money required and often also the amounts of restrictions on people’s freedom required to enforce these demands. Open-ended ...

As to the paving over of greenery, it takes quite an extrapolation to see that as a national problem in a country where more than nine-tenths of the land remains undeveloped.

Courts’ decisions in anti-trust cases have invoked a fear that a particular growing business is an “incipient” monopoly. In one landmark case before the U.S. Supreme Court, a merger between the Brown Shoe Company and Kinney shoe stores was broken up because Brown’s acquisition of the Kinney chain—which sold one percent of the shoes in America—would “foreclose” that market to other shoe manufacturers, beginning the process of creating a monopoly which had to be stopped in its “incipiency.” By such reasoning, the fact that the temperature has risen ten degrees since dawn means that we are all going to be burned to a crisp before the end of the month, if unlimited extrapolations are believed.

especially when skilled advocates are able to perpetuate those beliefs by forestalling scrutiny through appeals to emotions or interests.

Even today, it is often cheaper to ship goods thousands of miles by water than to ship them hundreds of miles by land.

A city must continuously transport in vast amounts of food alone to feed its concentrated population, and it must also transport out the goods it produces to markets elsewhere in the country or around the world. Given these imperatives, it is hardly surprising that most cities throughout history have been built on navigable waterways—whether rivers, lakes, or the sea.

When most people traveled within a city on foot, ancient cities had to be much more compact and crowded than modern cities, which have buses, subways, and automobiles. Ancient Rome had a population similar in size to that of Dallas today—but living in an area only two percent of the size of Dallas.

In a sense, crowding is what cities are all about. That is, the concentration of many and varied activities—economic, social, cultural—within reach of large numbers of people is what attracts people, economic activities, and various institutions to cities. How reachable these attractions are depends on transportation costs in both money and time.

The spreading out of urban communities in general has been made possible by reductions in transportation costs.

The widespread availability and affordability of automobiles in the second half of the twentieth century has led to rapid suburbanization in affluent industrial societies, whether in the United States, Western Europe or elsewhere, with numerous economic and social consequences that remain controversial.