News: Bust Produces Glut of Economic Fallacies

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In
a striking development, the economics profession, government and
the media can now produce economic fallacies at a more rapid rate
than at any time in the post-war period. The production of economic
fallacies is now so great that they are being produced more quickly
than they can be consumed.

There
are three sectors of the economy that produce most fallacies: government,
the economics profession, and the media. By some estimates, economists'
rate of productivity in turning out fallacies has doubled in the
last five years, with government and the media close behind.

This
"productivity miracle" is believed to be due to growth
of economic illiteracy in universities, especially economics departments,
which has a "multiplier effect" on the media and government
as fallacies are created by university economics departments, and
then repeatedly propagated by government and the media.

Earlier
this year, the Chicago Tribune ran a four part series titled
"The Economics of Glut" which contained the following
fallacies:

  • The economy
    is afflicted by a general overproduction crisis.
  • An increase
    in the use of capital equipment causes unemployment.
  • Cost-cutting
    by business firms risks sending the economy into deflationary
    spiral afflicting the entire economy.

Numerous
publications have repeatedly stated that

  • Consumption
    drives the economy.
  • Saving
    causes recessions.

The
production of economic fallacies was strong during the 90s. The
recently ended stock market boom produced a number of popular fallacies:

  • Improvements
    in technology result in permanently higher rates of profit for
    business firms.
  • A rise
    in stock prices "creates wealth".
  • The central
    bank can effectively "manage" the economy, keeping
    it on a permanent growth path out of recession.
  • An increase
    in the supply of money creates real wealth.

Economic
fallacies are not new. They have been a regular feature of the economy
dating back to the Depression Era. Austrian economists believe that
these fallacies are obsolete, most of them having been refuted long
ago by economists from Bastiat to Hazlitt. However, there is still
a strong demand for them by the public, which the media, government,
and even the economics profession steps forward to fill.

There
are differences, however, between the current period and the boom
years. During the boom, both supply and demand grew. In fact, demand
grew so rapidly that new, more roundabout production processes for
economic fallacies had to be developed in order to disseminate them
in the quantity and quality demanded by consumers. News media such
as CNBC and numerous financial sites were launched to compete with
established purveyors of economic fallacies such as the New York
Times and the Wall Street Journal.

What
is different now is that the supply of economic fallacies has continued
to expand while the economy searches for an elusive recovery. Demand
is not keeping pace, resulting in a glut of economic fallacies.

One
Austrian economist contacted by this publication commented on the
present trends: "Usually demand for economic fallacies increases
during a recession because there is an immense pressure on the government
to Just Do Something. This usually translates into Just
Do Something Really Stupid
.

"The
public doesn't understand that it was the misguided policies of
the central bank that caused the recession in the first place, and
that the best thing they can do is to keep their hands off while
the distortions are worked off.

"Instead,
governments can be relied upon to choose policies that produce counter-productive
results, contrary to their intentions. And while they're at it,
they should reform the monetary system to 100% reserve gold backed."

Some
other recently sighted fallacies include:

  • Recessions
    are caused by a deficit in aggregate demand.
  • The government
    should do everything it can to encourage consumption at the
    expense of savings, including creating a housing bubble to encourage
    homeowners to fund additional consumption by taking on more
    debt.
  • The government
    has the ability to inflate the economy back to prosperity.
  • Cost cutting
    by business firms risks sending the economy into a deflationary
    spiral.

Fed
Governor Ben Bernanke, in a speech to professional economists, stated
that the Fed would do anything to fight deflation, including printing
unlimited quantities of money and monetizing any and all assets
within the economy.

The
Austrian Economist commented "Bernanke's remarks display a
high level of economic illiteracy. To start with, deflation is not
a dangerous self-feeding process that attacks the economy like a
disease. The type of deflation that they are trying to fight is
the consequence of a massive policy of inflation that has been pursued
since the late eighties and has created tremendous distortions in
the world economy."

With
economic fallacies continuing to be produced at a rapid rate in
the face of slack demand, inventories of unsold fallacies are reaching
an all-time high. Public consumption of fallacies is significantly
diminished. Many financial web sites have folded, and viewership
of CNBC is down.

Analysts
are predicting that this will result in heavy price cutting. Soon,
economic fallacies will be liquidated at bargain prices. "With
any luck, this will drive their price down to their intrinsic value,
which is zero," one said.

February
28, 2003

Robert
Blumen (send him mail)
is an independent software consultant based in San Francisco.


     

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