Economic Fallacies Research Articles

A Pervasive Economic Fallacy in Assessing the Cost of Public Funds

In the assessment of the cost of public funds, there is a pervasive economic fallacy that is frequently repeated in public policy circles: because the cost of borrowing is higher for a private-sector firm than it is for a public-sector firm, the cost of carrying out an activity (investment, production, distribution, provision of goods and services, and borrowing) will necessarily be lower ceteris paribus in the public sector than in the private sector. The statement is erroneous because part of the government’s cost of borrowing, namely the risk borne by citizens, customers, and taxpayers, is hidden from the casual observer of market interest rates or yields. The all-inclusive borrowing cost, more generally the all-inclusive cost of capital, is the same for both the public and the private sectors. I discuss four specific real cases in which the error is present: the Quebec Generations Fund, the Québec CDPQ Infra Réseau express métropolitain project, the Infrastructure Ontario methodology to assess the riskiness of costs, and the BC Hydro Site C hydroelectric megaproject. I also discuss a general fifth case, namely government support programs for businesses (grants, loans, guarantees, subsidies, etc.), which are generally justified on the fallacious claim that the cost of financing is lower for the government than for the private sector. I propose an auction process by which the true cost of business support programs could be made transparent. I conclude with an appeal for a more rigorous use and management of public funds because miscalculation, misinformation, mismanagement, and fallacious analysis will eventually backfire.

A Pervasive Economic Fallacy in Assessing the Cost of Public Funds

In the assessment of the cost of public funds, there is a pervasive economic fallacy, which is frequently repeated by officials in both the private and public sectorsas well as in academia: since the cost of borrowing is higher for a private sector firm than it is for a public sectorfirm, the cost of carrying out an activity (investment, production, distribution, provision of goods and services) will necessarily be lower ceteris paribusin the public sector than in the private sector.The statement is erroneous because part of the government’s cost of borrowing is hidden from the casual observer of interest rates or yields.The all-inclusive borrowing cost, more generally the all-inclusive cost of capital, is the same for both the public and private sector. I discuss fourspecific real cases where the error is present, the first three more succinctly and the last more more extensively: the QuebecGenerations Fund;the Quebec CDPQInfra REM project;the Infrastructure Ontariomethodology to assess the riskiness of costs; the BC Hydro’s Site C hydroelectric megaproject.I discuss also a general fifth case, namely governement support programs for business (grants, loans, guarantees, subsidies, etc.). Those are often justified on the fallacious claim that the cost of financing is samller for the government than for the private sector. I propose an auction process by which the true cost of business support programs could be made transparent. Iconcludewith an appeal for amore rigorous use and management of public fiunds.Iexpect that miscalculation, misinformation, mismanagement, and fallacious analysis will backfire, as always.

Boudreaux on high wages; a critique

Professor Don Boudreaux has made many contributions to pro- moting liberty and good economics including his refutations of common economic fallacies concerning unions, free trade, occupa- tional licensure, and the minimum wage.
 Yet, we must take issue with a recent column of his entitled «Do We Need to Bring Back the Reagan Years?» In it he offers what we consider several economic fallacies. We start off by repeating it in its entirety, one, because it is so short, and two, to obviate any pos- sible misinterpretations. Then, we make clear our criticism of it.
 Do We Need to Bring Back the Reagan Years? By Don Boudreaux
 Heard on the radio this morning while driving in northern Vir- ginia:
 We need policies to bring back the high-paying jobs this coun- try lost since the Reagan years.
 I missed the name and affiliation of the particular interviewee who issued this proclamation. Of course, this proclamation is, in one form or another, a familiar one. It trips frequently out of the mouths and off of the keyboards of politicians and pundits too numerous to count. Yet it is economic foolishness.

Gospodarka jako zinstytucjonalizowany proces. Instytucjonalizm Karla Polanyiego i jego etyczne konsekwencje

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Defence industrial policy – a sound security strategy or an economic fallacy?

This article explores whether it makes sense for national governments to employ defence industrial policies – such as offsets and discriminatory procurement practices – to support their domestic defence industries. This question has so far primarily been discussed by economists, who have argued strongly against the use of defence industrial policies. This article maintains that these economists fail to address the often complex motivation behind the introduction of these policies. It illustrates these shortcomings by contrasting their arguments against a case study of Norway, which accounts for the country’s use of defence industrial polices from the early post-Second World War era up until today. The article concludes that, depending on their objectives, defence industrial policies can be seen as either a sound security strategy or an economic fallacy.

“Visual Presentations of Social Matters” and Later Changes in Polanyi’s Social Theory

“Visual Presentations of Social Matters” and Later Changes in Polanyi’s Social Theory

“Visual Presentation Of Social Matters” as a Foundational Text of Michael Polanyi’s Thought

“Visual Presentation Of Social Matters” as a Foundational Text of Michael Polanyi’s Thought

Visual Presentation of Social Matters

“Visual Presentation of Social Matters” is a 1936 Polanyi lecture, delivered to the Association for Education in Citizenship, which lies in the background of Polanyi’s 1940 film Unemployment and Money. Polanyi argues that the complex modern market system is misunderstood by ordinary citizens who subscribe to economic fallacies; this misunderstanding has contributed to violence and turmoil in the twentieth century. Polanyi proposes a program to discover a dynamic visual symbolism (“moving picture writing”) that he believes can clearly represent modern economic life, releasing ordinary people from economic fallacies and exasperation and creating “economic consciousness.” This economic enlightenment is part of Polanyi’s effort to rehabilitate liberalism. He envisions an economic order in which there is freedom and “complete co-ordination” which he suggests already exists in the domain of scientific research. Heroism and Happiness The dictators of Germany and Italy have repudiated the utilitarian idea and following the lead of some philosophers of the past century have proclaimed that heroism stands above utility. They despise base comfort and aspire to noble tragedy. There might be truth in this philosophy, yet it is as inappropriate in a statesman as it would be in a doctor. Both have to do their best to improve the condition of those entrusted to their care and not to cause their destruction for the sake of making them fulfill a nobler fate. But the statesman might well reject the utilitarian doctrine on other grounds; not because it wants to make people happy but because it gravely misjudges the conditions of human contentment. This doctrine assumes that people are content if they are given the means to satisfy their needs. Unfortunately, this is not so. Even more than they need goods, people want for their contentment a full understanding of their condition. None can find comfort in a position which he fails to comprehend, and protracted perplexity leads to mental derangement.

Fifty Economic Fallacies Exposed: Second Edition

Whilst it is impossible to argue that the earth is flat without fearing ridicule, fallacies in economics are widespread. Such fallacies pervade the intellectual sphere and even influence policy. Professor Geoffrey Wood of the University of Buckingham exposes such popular economic fallacies in this revised edition of Fifty Economic Fallacies Exposed. Professor Wood looks at, for example, the supposed dangers of free trade, the abilities of governments to control the economy, the effects of government regulation and whether millions of jobs depend on our continued membership of the European Union. These lucid and stimulating articles are invaluable to students struggling to master some of the complexities of economic theory and its applications, who often find that the most effective way to learn economic analysis is to see such fallacies exposed. It is a text particularly suitable for first-year economic students, complementing existing textbooks as it does, and clarifying basic concepts in economics while demonstrating the practical uses of economic theory. Contents: 1. Regulation and markets 2. International trade and finance 3. Inflation 4. Fiscal policy: taxation 5. Fiscal policy: government spending 6. Monetary policy: theory 7. Monetary policy: practice 8. Cost, price and value 9. Labour markets

Long-Term Unemployment in the Varieties of Capitalism

Usually, when the attention is focused on the different performances of the labour market, the overall rate of unemployment is at the center stage. But this is misleading: while short term unemployment can be seen as physiological for the the working of the labour market, long-term unemployment is certainly pathological. The paper considers how the different varieties of capitalism affect the rate of long-term unemployment, rather than the aggregate rate. The liberal market variety, where employment protection is the lowest, presents lower rates of long-term unemployment than the continental European and the Mediterranean varieties. In the latter both employment protection and long-term unemployment are the highest and labour market participation the lowest. The social-democratic Scandinavian variety gets the best of both worlds: low rates of long-term unemployment, high rates of labour participation, lower degree of inequality, with relatively high levels of employment protection. However the Scandinavian model may be hardly applicable in countries, such as the Mediterranean ones, where a sizable part of public opinion apparently adheres to the various specifications of the “lump of something” economic fallacy. Low rates of long-term unemployment and high levels of labour participation are also produced by the far-Eastern Asian variety, but at the cost of a markedly dualistic labour market structure.

Rothbard on V Shaped Average and Total Cost Curves

Rothbard (1993, pp. 638-45) refuted the important economic fallacy that excess capacity is a normal consequence of profit maximizing behavior by businesses in some industries when they are in long-run equilibrium. And, in so doing provided a manifest example of misuse of mathematics in modern economics.According to standard theory, given a U-shaped, average-cost curve (ACC), in equilibrium, a firm whose demand is perfectly competitive will operate at the point where its horizontal demand curve is just tangent to the ACC; i.e., at the point where average cost (AC) is at its minimum. Alternatively, a firm in an industry characterized by monopolistic competition will face a downward-sloping demand curve. In that case, again in equilibrium, the firm will operate where the demand curve is just tangent to the U-shaped ACC. However, in that case, the point of tangency will occur at lesser quantity than that at which AC is at its minimum.

Economic facts and fallacies

Economic facts and fallacies

Understanding the economic fallacies of the intergenerational debate

This paper demonstrates that Federal spending is not inherently financially constrained and does not have to be facilitated via prior taxation or debt‐issuance. It also refutes the claim that budget deficits result in higher interest rates in the future, with lower levels of capital formation and economic growth as a consequence. These misconceptions together lead to the nonsensical claim that by running surpluses now the Government will be better able (because it has ‘more funds stored away‘) to cope with future spending demands. The paper thus challenges the conventional view, such as that espoused in the 2002 Australian Treasury Intergenerational Report, that the ageing population will place unsustainable demands on the Federal budget.

Rothbard on V shaped average and total cost curves

R othbard (1993, pp. 638-45) refuted the important economic fallacy that excess capacity is a normal consequence of profit maximizing behavior by businesses in some industries when they are in long-run equilibrium. And, in so doing provided a manifest example of misuse of mathematics in modern economics. According to standard theory, given a U-shaped, average-cost curve (ACC), in equilibrium, a firm whose demand is perfectly competitive will operate at the point where its horizontal demand curve is just tangent to the ACC; i.e., at the point where average cost (AC) is at its minimum. Alternatively, a firm in an industry characterized by monopolistic competition will face a downward-sloping demand curve. In that case, again in equilibrium, the firm will operate where the demand curve is just tangent to the U-shaped ACC. However, in that case, the point of tangency will occur at lesser quantity than that at which AC is at its minimum. Rothbard, however, puts an end to this notion, despite its vast popularity within the profession. He notes that a necessary condition for the above conclusion is that the ACC be smooth. As proof, he offers his famous diagram (1993, p. 644, fig. 72), the essential burden of which is that though the ACC curve slopes downward continuously until it reaches its minimum and then slopes upward continuously, and is in fact a graph of a continuous function, nevertheless the function is not differentiable at critical points, including especially, at its minimum. Our figure 1 accentuates this even more, drawing the ACC not in a quasi-U shape, but in a V shape. Note that in either of these cases, the downward sloping demand curve can, in contravention of the standard theory, touch 1 the ACC curve at the minimum point of the latter.

Fifty Economic Fallacies Exposed

Since 1988, Professor Geoffrey Wood of the Sir John Cass Business School, has written a regular column in the IEA's journal, Economic Affairs, in which he exposes popular economic fallacies. Fifty Economic Fallacies Exposed collects fifty of these columns and exposes numerous common fallacies. These lucid and stimulating columns are invaluable to students struggling to master some of the complexities of economic theory and its applications, who often find the most effective way to learn economic analysis is to see such fallacies exposed. It is a text particularly suitable for first year economics students, complementing existing textbooks as it does, and clarifying basic concepts in economics while demonstrating the practical uses of economic theory.

Lectures on Regulatory and Competition Policy

This volume, the IEA reprints revised versions of twelve lectures in three areas where Dr. Stelzer is acknowledged as an expert - competition policy, regulation, and energy and environmental policy. He discusses the role of competition policy and the form it should take; the proper place of regulation in competitive and monopolised markets; and the content of energy and environmental policies. The essays contain many positive proposals for extending the reach of competitive markets and they comprehensively refute come major economic fallacies. This is a stimulating collection of ideas from one of the foremost economic commentators of the day.

‘More mighty than the waves of the sea’: toilers, tariffs, and the income tax movement, 1880–1913

Social movements are at once the symptoms and the instruments of social progress. Ignore them and statesmanship is irrelevant; fail to use them and it is weak. Walter Lippmann In the spring of 18...

Givings, Takings, and the Fallacy of Forward-looking Costs

Mr. Sidak and Professor Spulber extend here the analysis in Deregulatory Takings and Breach of the Regulatory Contract, published last year in this Review. They respond to comments and criticisms raised not only by Professors Baumol and Merrill, but also by Judge Williams and Professor Williamson in their Comments published last year. Sidak and Spulber begin by exploring the constitutional limitations on the government's ability to redefine the public purpose to which a regulated utility has dedicated its private property. Then, the authors examine whether the government has made givings that implicitly compensate the regulated firm for its diminution in value owing to the imposition of policies mandating network unbundling at regulated prices. Sidak and Spulber refine the limiting principles for the recovery of stranded costs that they articulated in their earlier article and show how those principles reconcile with the actual treatment of losses from deregulation in disparate industries. Next, they expose the economic fallacies in the notion of forward-looking costs as that term has been used by the Federal Communications Commission and state public utility commissions to set prices for mandatory network access under the Telecommunications Act of 1996. The authors analyze the Supreme Courts 1996 decision in United States v. Winstar Corp. and argue that the reasoning employed by seven Justices in that case comports not only with earlier decisions of the Court construing the regulatory contract with public utilities, but also with the contemporary economic analysis of why the regulatory contract is essential and efficient. Sidak and Spulber explain how transition bonds may solve the stranded cost conundrum in the telecommunications and electric power industries by permitting the securitization of stranded costs in a manner that restores investors' faith in the state's ability to make credible commitments. Finally, the authors examine the significance of the Eighth Circuit's 1997 decision in Iowa Utilities Board v. FCC for the debate over deregulatory takings and breach of the regulatory contract.

Ten popular health economic fallacies.

Important decisions about the financing, determining priorities in and provision of health services depend on beliefs about facts and relationships. It is argued in this paper that many popular beliefs are either logically wrong or are not supported by the evidence. Important errors exist in the beliefs about the effects of technology and ageing populations on health care costs, affordability of care, capital resources, financing mechanisms, efficiency and economies of scale, the growth of litigation, priority setting and the importance of getting people back to work. This paper aims to correct some of these fallacies and suggest alternative beliefs that better match the theory or fit the evidence.

Molting time for antitrust: market realities, economic fallacies, and European innovations

Foreword Preface Introduction Origins of the Sherman Act The Saga of Standard Oil The Legislative Odyssey of the Sherman Act Antitrust as Economic Policy The Theology of Antitrust: Fanciful Teachings of Economic Theory Flaws in the Price Theory Dissatisfaction with the Market Reflections from Abroad The Elements of a Competitive Policy Epilogue: A Final Consultation with our Friendly Cynic Bibliography Index