Economic Fallacies Flashcards
What is the ‘Lump of Labour Fallacy’?
The argument that a fixed amount of work exists, which you can divide up among as many people as you want, is often presented as a cure for unemployment. The idea goes that if you convert from a 40-hour work week to a 20-hour work week, firms have to hire twice as many workers. In 2000, for ex., France reduced its work week to only 35 hours, in the hope that firms would hire more workers and cure France’s persistent unemployment problem.
Did France’s solution to unemployment (the 35-hour work week) work?
No. Such policies have never worked. One problem is that hiring workers involved many fixed costs, including training costs and health insurance. So two 20-hour-per-week workers cost more to employ than one 40-hour-per-week-worker. What’s more, two 20-hour-per-work-week workers don’t produce any more output than one 40-hour-per-week-worker.
What would happen if laws were passed forcing firms to move from a 40-hour work week to a 20-hour work week?
Firms wouldn’t double the size of their workforces. They’d hire fewer than twice as many workers because costs would go up, which is one reason why, in 2005, France relaxed its experiment with the 35-hour work week.
What would happen to unemployment if the work week was cut in half (doubling the no. of workers used)?
It would only hide the overall unemployment problem by spreading it around. If 100 per cent of workers are working half-time, they are all 50 per cent underemployed. That situation is not a significant improvement over having 50 per cent of the population employed full-time and 50 per cent unemployed. What you really want is a situation in which every worker who wants a full-time job is able to get one. Shortening the work week doesn’t achieve this goal.
Is the world facing an ‘Overpopulation problem’?
No. This idea has been floating around since the late 18th century when Thomas Malthus first asserted the notion that living standards can’t permanently rise because higher living standards cause people to breed faster. He believed that population growth would out-pace our ability to grow more food, so we would be doomed to return to subsistence levels of nutrition and living standards.
When Malthus first published his idea, what did most of the evidence say?
Even at the time, lots of evidence indicated that his theory was bunk. For generations, living standards had been rising while birth rates had been falling. And because that trend has continued up to the present day, we’re not going to breed our way to subsistence.
What is the population problem faced by most developed countries today?
An UNDERpopulaton problem. Birth rates have fallen below the replacement rate necessary to keep the country stable. As a result, their populations are soon going to start shrinking dramatically. And because birth rates are falling quickly all over the world, the UN expects the total human population to max out at around 9 billion people in 2017.
What is the problem with rapidly falling birth rates?
They are wreaking havoc on gov-sponsored retirement systems because too few young workers exist to pay all the taxes needed to fund retirees’ pensions. In desperation, some countries are going as far as to pay cash bounties to mothers for each new child they give birth to. ex. Italy, which has had one of the lowest birth rates as well as one of the most generous pension systems, is particularly worried.
What is the fallacy of ‘Confusing Sequence with Causation’?
Post hoc ergo propter hoc is Latin for ‘because you see one thing precede another, you think that it causes the other’. That is, if A happens before B, you assume that A causes B. Such a deduction is false because A and B often don’t have any relationship. ex. if it rains i the morning and you get a headache in the afternoon. that doesn’t mean that the rain caused your headache.
How do politicians try to pull this logical fallacy (confusing sequence with causation) when discussing the economy?
Imagine politician A gets elected, and a few months later a recession hits. The 2 may have nothing to do with one another, but you can be sure that during the next election an opponent of A claims the recession was the result of A’s policies. The only proof offered is that one event happened before the other. In these cases, it’s worth looking for good reasons to support the argument.
What are the arguements for ‘protectionism’?
The good arguements include the need for strategic security for certain goods.
i.e. most developed countries place a degree of protection on their defence industries.
However, arguemenets in favour of trade barriers and taxes on imports, on the grounds that these policies benefit citizens and prevent jobs from being exported, tend not to be good arguements.
The problem is that their arguements consider only the benefits of protectionism without also condiering the costs.
Give an ex. of how protectionist policies only consider benefits and fail to take into account the costs?
ex. Raising tariffs on foreign coal protects the jobs of domestic miners. But such a policy results in higher energy costs all over the economy.
Domestic manufacturers have to pay higher energy costs than if they had access to the cheaper foreign coal, and so they have to raise the prices of the goods they produce.
As a result, demand for these goods decreases, and the manufacturers don’t need as many employees.
What is another problem with protectionism?
Citizens are consumers as well as producers.
ex. if the gov prevents the importation of lower cost, higher quality foreign cars, it preserves jobs in the domestic car indusrty. But costs for domestic consumers rise as a result.
What happens when unproductive industries (that onbly face foreign comp) are protected?
It allows the industry to keep using resources that would be better used by more vibrant industries.
Workers who would have otherwise moved on to jobs in innovation instead are stuck in an industry so unproductive that it can survive only by having the gov rig the economy in its favour.
Explain the following fallacy: free markets are dangerously unstable.
free markets are volatile because supply and demand often change very quickly, causing rapid changes in eq. prices and quantities.
Rapid change isn’t a problem, however. The responsiveness of markets is actually one of their great benefits. Unlike gov bureacracy which can never react quickly to anything, markets can adjust to huge changes in world events in only minutes.
The new eq. prices and quantities ensure that resources are allocated to their best uses and that society suffers from neither shortages nor gluts.
So don’t call markets unstable, call them RESPONSIVE.
