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.
