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Economic Fallacies

Jake-migkillertwo
Posts: 67
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9/4/2012 2:03:53 PM
Posted: 4 years ago
My favorite might be the pauper-laborer fallacy that one often hears from anti-globalists.

But my second favorite might be the misuse of the "broken window fallacy" by austrian economists.
johnnyboy54
Posts: 6,362
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9/5/2012 7:32:05 PM
Posted: 4 years ago
At 9/4/2012 2:03:53 PM, Jake-migkillertwo wrote:
My favorite might be the pauper-laborer fallacy that one often hears from anti-globalists.

But my second favorite might be the misuse of the "broken window fallacy" by austrian economists.

Can you explain how it is a misuse?
I didn't order assholes with my whiskey.
Contra
Posts: 3,941
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9/5/2012 7:37:36 PM
Posted: 4 years ago
At 9/4/2012 2:03:53 PM, Jake-migkillertwo wrote:
My favorite might be the pauper-laborer fallacy that one often hears from anti-globalists.

Isn't this the fallacy that basically makes American protestors protest against sweatshops in South-East Asia? That's a good one. They are horrible jobs, not doubt, but they pay roughly double the average wage of someone in those countries are are vital to their economic development. Do they think that the people just chose to work at these jobs for no reason? Pff.

But my second favorite might be the misuse of the "broken window fallacy" by austrian economists.
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Jake-migkillertwo
Posts: 67
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9/6/2012 2:48:33 PM
Posted: 4 years ago
At 9/5/2012 7:32:05 PM, johnnyboy54 wrote:
At 9/4/2012 2:03:53 PM, Jake-migkillertwo wrote:
My favorite might be the pauper-laborer fallacy that one often hears from anti-globalists.

But my second favorite might be the misuse of the "broken window fallacy" by austrian economists.

Can you explain how it is a misuse?

The BWF uses the example of a broken window to demonstrate why government spending doesn't grow an economy. If someone were to break the window of a shop-keeper, the story goes, someone points out that the shop keeper must hire a glass-maker to make a window, and the glass maker has to hire someone else or buy materials to make the glass. So while we would think of this as a bad thing, the breaking of the window has generated income for the glass maker, whose spending created income for someone else, and so on and so on. The problem is that income hasn't grown, it has only been shifted from one use to another arbitrarily. The shop-keeper could have used the money to invest in inventories, expand his business, etc. So the breaking of the window is really an economic loss.

Many austrians, even austrians no less prominent than Robert Higgs, have used this sort of reasoning to (supposedly) refute Keynesian economics. In the basic neoclassical model, an economy produces the most amount of value that it can. So Fiscal and Monetary stimulus simply divert resources from productive uses to less productive uses, but they do not expand real output or (by extension) income.

This, however, is a giant strawman and completely ignores the one fundamental, inarguable insight of Keynesian economics, which is price stickiness. When the price level cannot fully adjust to make use of an economy's resources, decreases in aggregate demand will necessarily decrease national income. A reduction in national income without a decrease in the stock of labor or capital causes (or rather is identical to) unemployment. Fiscal and Monetary stimulus work to put unemployed capital and labor back to work.

In other words, the "Broken Window Fallacy" argument against Keynes completely ignores the very problem that Keynesian solutions are supposed to solve, namely unemployment and idle capital!
DanT
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9/8/2012 2:48:28 AM
Posted: 4 years ago
At 9/4/2012 1:15:50 PM, Wallstreetatheist wrote:
What's your favorite economic fallacy?

That increasing government spending creates consumption. It does nothing of the short; it simply redirects consumption. If the government borrows domestically for deficit spending, or taxes to fund government spending, they are simply redirecting domestic consumption. If they borrow from abroad, they are redirecting international consumption, with the promise of paying back the foreign entity through future taxation.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
Jake-migkillertwo
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9/8/2012 12:01:27 PM
Posted: 4 years ago
At 9/8/2012 2:48:28 AM, DanT wrote:
At 9/4/2012 1:15:50 PM, Wallstreetatheist wrote:
What's your favorite economic fallacy?

That increasing government spending creates consumption. It does nothing of the short; it simply redirects consumption. If the government borrows domestically for deficit spending, or taxes to fund government spending, they are simply redirecting domestic consumption. If they borrow from abroad, they are redirecting international consumption, with the promise of paying back the foreign entity through future taxation.

Interesting that such a belief reflects a strong consensus of macroeconomists. I wonder why that is.

Oh right, it's because you've never heard the term "price stickiness"
DanT
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9/8/2012 12:18:27 PM
Posted: 4 years ago
At 9/8/2012 12:01:27 PM, Jake-migkillertwo wrote:
At 9/8/2012 2:48:28 AM, DanT wrote:
At 9/4/2012 1:15:50 PM, Wallstreetatheist wrote:
What's your favorite economic fallacy?

That increasing government spending creates consumption. It does nothing of the short; it simply redirects consumption. If the government borrows domestically for deficit spending, or taxes to fund government spending, they are simply redirecting domestic consumption. If they borrow from abroad, they are redirecting international consumption, with the promise of paying back the foreign entity through future taxation.

Interesting that such a belief reflects a strong consensus of macroeconomists. I wonder why that is.

Oh right, it's because you've never heard the term "price stickiness"

I have, I've also heard of the term "Market-Bubbles".
"Chemical weapons are no different than any other types of weapons."~Lordknukle
Lordknukle
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9/8/2012 12:27:03 PM
Posted: 4 years ago
At 9/8/2012 2:48:28 AM, DanT wrote:
At 9/4/2012 1:15:50 PM, Wallstreetatheist wrote:
What's your favorite economic fallacy?

That increasing government spending creates consumption. It does nothing of the short; it simply redirects consumption. If the government borrows domestically for deficit spending, or taxes to fund government spending, they are simply redirecting domestic consumption. If they borrow from abroad, they are redirecting international consumption, with the promise of paying back the foreign entity through future taxation.

Government spending during recessions redirects spending from the private sector, which is NOT spending, into the public sector, which IS spending. Although no new money is being spent, the money being spent is money that would otherwise have not been spent, hence jumpstarting demand. This is simple Keynesian economics.
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DanT
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9/8/2012 1:09:00 PM
Posted: 4 years ago
At 9/8/2012 12:27:03 PM, Lordknukle wrote:
At 9/8/2012 2:48:28 AM, DanT wrote:
At 9/4/2012 1:15:50 PM, Wallstreetatheist wrote:
What's your favorite economic fallacy?

That increasing government spending creates consumption. It does nothing of the short; it simply redirects consumption. If the government borrows domestically for deficit spending, or taxes to fund government spending, they are simply redirecting domestic consumption. If they borrow from abroad, they are redirecting international consumption, with the promise of paying back the foreign entity through future taxation.

Government spending during recessions redirects spending from the private sector, which is NOT spending, into the public sector, which IS spending. Although no new money is being spent, the money being spent is money that would otherwise have not been spent, hence jumpstarting demand. This is simple Keynesian economics.

So during a recession there is 0 spending?

Keynesian economics is contradictory, because the circular flow disproves the very policies it proposes.

The circular flow;
http://www.debate.org...

The government has two means of revenue to spend money;
A. borrowing from financial institutions,
or
B. taxes.

Deficit spending means they are borrowing from financial institutions. Financial institutions draw their money from household savings, and by borrowing from abroad. When money from abroad of household savings is gong towards government spending, it cannot go towards firms; the government's deficit spending is intended for the firms. Therefore the government is simply redirecting consumption from one firm to another. If the private sector "is not spending" (they are spending on some level), they are saving. If they are saving, their money is used by financial institutions. Financial institutions can either invest in firms, or lend to the government; the more it lends to the government the less it has to invest in firms. If there is no investments in, or consumption of a firm, it is because demand in the firm's product has gone down. Government spending in a failing firm gives the illusion of success, which leads some financial institutions to invest in the bubble. When the government stops spending on the firm, it is supported by investors, creating a sticky price, that leads to a market bubble. The money invested in the failing firm took away from the money that could be invested in more practical firms, with a real demand for their products.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
Ragnar_Rahl
Posts: 19,297
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9/8/2012 7:57:55 PM
Posted: 4 years ago
This, however, is a giant strawman and completely ignores the one fundamental, inarguable insight of Keynesian economics, which is price stickiness.
Price stickiness is an assertion, not an "inarguable insight." It's not even a hypothesis since, being a matter to do with human action, it states nothing that can be tested scientifically.

national income
Nations don't even have incomes.
It came to be at its height. It was commanded to command. It was a capital before its first stone was laid. It was a monument to the spirit of man.
Jake-migkillertwo
Posts: 67
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9/8/2012 10:47:25 PM
Posted: 4 years ago
At 9/8/2012 7:57:55 PM, Ragnar_Rahl wrote:

Price stickiness is an assertion, not an "inarguable insight." It's not even a hypothesis since, being a matter to do with human action, it states nothing that can be tested scientifically.

No actually price stickiness was proven by Alan Blinder nearly 20 years ago. Want to find out whether and why prices are actually sticky? how about asking the business owners themselves
Jake-migkillertwo
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9/8/2012 10:54:07 PM
Posted: 4 years ago
At 9/8/2012 1:09:00 PM, DanT wrote:Deficit spending means they are borrowing from financial institutions.

Strictly speaking, the treasury issues bonds in the open bond markets in auctions, not directly to financial institutions like banks, pension funds, etc.

Financial institutions draw their money from household savings, and by borrowing from abroad. When money from abroad of household savings is gong towards government spending, it cannot go towards firms; the government's deficit spending is intended for the firms. Therefore the government is simply redirecting consumption from one firm to another.

This is assuming that the amount of liquid assets (and by extension the amount of bonds they hold) that people choose is static, or is simply a function of income, money supply, etc. But if people choose to hold fewer liquid assets (currency) as the interest rate rises, then there is an increase in the quantity of bonds supplied. This is because the opportunity cost of holding cash increases as the interest rate increases.

If the private sector "is not spending" (they are spending on some level), they are saving. If they are saving, their money is used by financial institutions. Financial institutions can either invest in firms, or lend to the government; the more it lends to the government the less it has to invest in firms.

See above statement. http://en.wikipedia.org... A quantity theory interpretation of the IS/LM model (that the amount of liquid assets people hold does not depend on the interest rate) will allow this story of yours to hold, but allowing velocity to adjust lets us undercut this argument of yours.
Greyparrot
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9/8/2012 11:13:01 PM
Posted: 4 years ago
At 9/8/2012 12:18:27 PM, DanT wrote:

Oh right, it's because you've never heard the term "price stickiness"

I have, I've also heard of the term "Market-Bubbles".

^^
Ragnar_Rahl
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9/9/2012 7:07:37 PM
Posted: 4 years ago
At 9/8/2012 10:47:25 PM, Jake-migkillertwo wrote:
At 9/8/2012 7:57:55 PM, Ragnar_Rahl wrote:

Price stickiness is an assertion, not an "inarguable insight." It's not even a hypothesis since, being a matter to do with human action, it states nothing that can be tested scientifically.

No actually price stickiness was proven by Alan Blinder nearly 20 years ago. Want to find out whether and why prices are actually sticky? how about asking the business owners themselves

Dropping names isn't an argument.
It came to be at its height. It was commanded to command. It was a capital before its first stone was laid. It was a monument to the spirit of man.
TombLikeBomb
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9/9/2012 9:16:41 PM
Posted: 4 years ago
The coolest fallacy is one that price stickiness doesn't address and that Keynesians are slowly beginning to acknowledge after decades of being even more regressive than Keynes himself. That fallacy is rational self-interest.
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Wallstreetatheist
Posts: 7,132
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9/9/2012 11:36:00 PM
Posted: 4 years ago
My favorite fallacy is the sweatshop labor fallacy, which is the belief that trade must be bad for workers in low-wage countries since the wages in the latter countries are so much less than the wages paid to workers in high-wage countries.

This fallacy is particularly detrimental to people in developing countries because without the factory as their best option for employment, many resort to prostitution, gang life, or die of starvation in response to high tariffs on certain industries that use child labor or low-paid labor.
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johnnyboy54
Posts: 6,362
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9/10/2012 12:05:23 AM
Posted: 4 years ago
At 9/9/2012 11:36:00 PM, Wallstreetatheist wrote:
My favorite fallacy is the sweatshop labor fallacy, which is the belief that trade must be bad for workers in low-wage countries since the wages in the latter countries are so much less than the wages paid to workers in high-wage countries.

This fallacy is particularly detrimental to people in developing countries because without the factory as their best option for employment, many resort to prostitution, gang life, or die of starvation in response to high tariffs on certain industries that use child labor or low-paid labor.

Yep.
I didn't order assholes with my whiskey.
Frederick53
Posts: 1,037
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9/10/2012 7:19:53 PM
Posted: 4 years ago
At 9/8/2012 12:27:03 PM, Lordknukle wrote:
At 9/8/2012 2:48:28 AM, DanT wrote:
At 9/4/2012 1:15:50 PM, Wallstreetatheist wrote:
What's your favorite economic fallacy?

That increasing government spending creates consumption. It does nothing of the short; it simply redirects consumption. If the government borrows domestically for deficit spending, or taxes to fund government spending, they are simply redirecting domestic consumption. If they borrow from abroad, they are redirecting international consumption, with the promise of paying back the foreign entity through future taxation.

Government spending during recessions redirects spending from the private sector, which is NOT spending, into the public sector, which IS spending. Although no new money is being spent, the money being spent is money that would otherwise have not been spent, hence jumpstarting demand. This is simple Keynesian economics.

Are you and Contra eventually going to switch places completely?
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Wallstreetatheist
Posts: 7,132
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9/11/2012 12:43:43 AM
Posted: 4 years ago
At 9/10/2012 7:19:53 PM, Frederick53 wrote:
At 9/8/2012 12:27:03 PM, Lordknukle wrote:
Government spending during recessions redirects spending from the private sector, which is NOT spending, into the public sector, which IS spending. Although no new money is being spent, the money being spent is money that would otherwise have not been spent, hence jumpstarting demand. This is simple Keynesian economics.

Are you and Contra eventually going to switch places completely?

hahaha He should bill himself as "The world's only Libertarian Keynesian!" Also, I suppose he didn't study the 1920/21 Depression and Great Depression...
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slo1
Posts: 4,344
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9/11/2012 9:06:45 AM
Posted: 4 years ago
At 9/9/2012 11:36:00 PM, Wallstreetatheist wrote:
My favorite fallacy is the sweatshop labor fallacy, which is the belief that trade must be bad for workers in low-wage countries since the wages in the latter countries are so much less than the wages paid to workers in high-wage countries.

This fallacy is particularly detrimental to people in developing countries because without the factory as their best option for employment, many resort to prostitution, gang life, or die of starvation in response to high tariffs on certain industries that use child labor or low-paid labor.

I don't know. Work for foxcon or be a prostitute. I might choose the latter. At least I could get a break to commit suicide if I wanted to.

Throwing someone some crumbs and then saying it is better than getting a sandwich because at least you have crumbs seems rather weak.

Apple did not need to go in and fix foxconn, but they knew they needed to because it would affect demand for their products.

Let the market figure it out and if I hear of a company that is requiring workers to put in mega overtime and then screwing them on pay, there there should be no problem for me to put my money elsewhere. I'll be happy to commit the sweatshop fallacy.

The true fallacy is that if I demand companies have a standard of treatment towards supplier's employee and a "sweat shop" is shut down that it means all money are lost. That demand needs to be supplied from somewhere and it will get supplied somewhere only difference is in a more ethical manner.
MouthWash
Posts: 2,607
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9/13/2012 12:33:18 PM
Posted: 4 years ago
At 9/6/2012 2:48:33 PM, Jake-migkillertwo wrote:
At 9/5/2012 7:32:05 PM, johnnyboy54 wrote:
At 9/4/2012 2:03:53 PM, Jake-migkillertwo wrote:
My favorite might be the pauper-laborer fallacy that one often hears from anti-globalists.

But my second favorite might be the misuse of the "broken window fallacy" by austrian economists.

Can you explain how it is a misuse?

The BWF uses the example of a broken window to demonstrate why government spending doesn't grow an economy. If someone were to break the window of a shop-keeper, the story goes, someone points out that the shop keeper must hire a glass-maker to make a window, and the glass maker has to hire someone else or buy materials to make the glass. So while we would think of this as a bad thing, the breaking of the window has generated income for the glass maker, whose spending created income for someone else, and so on and so on. The problem is that income hasn't grown, it has only been shifted from one use to another arbitrarily. The shop-keeper could have used the money to invest in inventories, expand his business, etc. So the breaking of the window is really an economic loss.

Many austrians, even austrians no less prominent than Robert Higgs, have used this sort of reasoning to (supposedly) refute Keynesian economics. In the basic neoclassical model, an economy produces the most amount of value that it can. So Fiscal and Monetary stimulus simply divert resources from productive uses to less productive uses, but they do not expand real output or (by extension) income.

This, however, is a giant strawman and completely ignores the one fundamental, inarguable insight of Keynesian economics, which is price stickiness. When the price level cannot fully adjust to make use of an economy's resources, decreases in aggregate demand will necessarily decrease national income. A reduction in national income without a decrease in the stock of labor or capital causes (or rather is identical to) unemployment. Fiscal and Monetary stimulus work to put unemployed capital and labor back to work.

In other words, the "Broken Window Fallacy" argument against Keynes completely ignores the very problem that Keynesian solutions are supposed to solve, namely unemployment and idle capital!

Unemployment is not the end in itself, it is the means. The goal is to increase production and efficiency, which increase standards of living.
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