Fifty Economic Fallacies Exposed (Revised)

Geoffrey E. Wood

• Publisher: London Publishing Partnership
• Year: 2014
• ISBN:
  9780255366656
• Edition: 2

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.

Introduction

Each of the short essays in this volume comprises the application of basic economic analysis and logic to a frequently repeated but fallacious belief about one aspect or another of the economy. Occasional reference is made to an item of data, but that is always simply to illustrate a point; the argument never depends on data, but always on logic.

The essays aim to serve two purposes – to illustrate aspects of economic reasoning, and to expose wrong, occasionally counterproductively or even dangerously wrong, arguments. The topics are drawn from both micro-economics and macro-economics. But in every case the reasoning applied to them is either explicitly micro-economic or clearly derived from micro-economics. This reflects the fact that micro-economics, the analysis of firms and individuals interacting in markets, is the basis of all economic analysis.

Part 1. Regulation and markets

Ticket touts are harmful and wicked. They should be stamped out by law

There is an idea about that being a ticket tout is in some unexplained way disreputable, and that those who deal with them, whether buying or selling, are disgracing themselves and their associates. One cannot refute a moral judgement by logic. It is not a matter of economics. But what economics can do is to show that ticket touts are useful, and that they provide a service to both seller and buyer. There is absolutely no case for making their activities illegal.

To see this, think about what a ticket tout does. And just for the moment, we shall not call what he trades in ‘tickets’ – we shall call them ‘the item’.

Some person has a supply of the item surplus to what he wants. The item does not keep for ever – indeed, after a certain date it becomes useless. He can do several things with it – give it away, not use it (and thus let it go to waste), or he can sell it. If he wants to sell it, there are many methods open to him; but a very convenient one is to find someone who deals in the item, and is willing to buy it with the aim of reselling it, but bearing the risk that he may fail. The original possessor of the item, who is not a professional dealer, is willing to sell for a little less than he might receive from the final consumer in return for someone else bearing the risk of not selling the item.

The intermediary now has a stock of them, which he tries to sell. He tries to sell at a price higher than he paid, to people who want to buy it.

Now consider the whole transaction. One person had some items surplus to his wants. He sells them to someone who then tries to sell them to a person who does want to use them. No one has been harmed by the chain of transactions – and that is fortunate, for there are millions of such transactions every day. A newsagent buys newspapers and sells them on. A grocer buys food and sells it on. A dealer in government securities buys them and sells them on. We don’t attach the discreditable name of ‘tout’ to newsagents, grocers and bond dealers and say their activities should be made illegal. Why do we do it to dealers in tickets?

If we banned ticket touts, we would be making both buyers and sellers worse off. And by making illegal a harmless activity which benefits all who take part in it, it would divert police effort away from dealing with real crime. The idea that ticket touts should be banned is nonsense.

June 1989

The conduct of an industry – in particular, how it serves consumers – is improved by government regulation

It is widely believed that government intervention in industry can and does benefit consumers. Economists have developed careful and clear analyses of the situations when regulation could be desirable. But does regulation in practice have these desirable effects?

Adam Smith certainly doubted its efficiency. To restrain people from entering into voluntary transactions ‘Is a manifest violation of that natural liberty which it is the proper business of law not to infringe but to support’. Nevertheless, he argued, ‘those exertions of the natural liberty of a few individuals which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments…’ He defended regulation in such cases in principle. But he objected to the practice. The legislature, he argued, is directed not by a view of the common good, but ‘the clamorous importunity of special interests’. His view was that whatever regulation could do in theory, in practice it usually benefits those regulated.

What does the evidence say? A pioneer in this area was George Stigler. In a study of the electricity industry in the US, he found that regulation affected neither rates charged to customers nor profits earned for shareholders. In a study of the securities industry, he found that regulation governing the listing of new securities, presumably intended to protect the investor, had no significant effect on the returns to new shares as compared to ones already in the market.

A current UK example which should lead one to wonder about the benefits of regulation is food. When it was feared that eggs were likely to be harmful, and sales dropped, egg farmers were offered compensation – which was paid of course by a levy on consumers, who had just very plainly indicated in the market that they did not wish to support egg farmers! In contrast, how was a different group, one not close or important to the regulators, treated? Producers of non-pasteurised cheeses – a tiny group of farmers – and foreign cheese makers, were both threatened with having their products banned on health grounds before consumers had a chance to show if they were concerned!

Regulation has two vices. It restricts competition – all producers are compelled to behave in a similar way. And it restricts information – information has to go to the regulator, but not to the consumers who buy the product. Informed choice is not possible without information; and restricting competition means that there is less pressure to raise quality and lower cost. For these reasons, regulation by government generally harms the consumer. The best regulation is by competition combined with provision of information.

August 1989

The state should step in to protect the environment

There is now widespread popular concern about the ‘quality of life’ and the environment. Both are said to be deteriorating and, it is claimed, this can be stopped only by the state preventing destructive private actions which have no regard for the consequences for people. We need, it is said, planning to protect the world.

This is in many cases the opposite of the truth. It is state action that is the destroyer, private the preserver.

Two examples are useful. Consider the proposed High Speed 2 rail link. Even in its revised form this will be destructive of how people want to live. That is not a private action. It is the result of the state giving a body – High Speed 2 Ltd – the right to dispossess people of something at a price below that which would induce them to move voluntarily.

Town planning is another example. Buildings can be put up when permission is given – regardless of the wishes of those who live nearby – at the whim of a civil servant or the vote-catching urge of a politician.1

Both these problems arise because politicians either take away property rights or refuse to acknowledge their existence. If people have rights in property – if they own it – they will preserve it.

Consider the above two examples. If people had to be paid to leave their homes or tolerate a train near their garden, the costs to society of building the rail link would be taken into account. If owners of houses were entitled to compensation for a hideous new building increasing congestion around them, again the cost of the building would be taken into full account.

This would produce efficient resource allocation; costs would be taken fully into account. And it would also produce the desired amount of preservation. Not, no doubt, everyone’s desired amount – too much for some, too little for others. But it would produce what people were willing to pay for.

Acknowledging property rights in the environment would thus serve two purposes. More efficient resource allocation would take place. And the present debate about preserving the environment would be clarified. At the moment people call for preservation unthinkingly because the costs do not fall on them. If the cost of resisting a development was not being paid a large sum in compensation, then the objectors would think. As it is, they might as well resist.

Acknowledging property rights in the environment would preserve what people want. Not acknowledging these rights, having state planning, leaves the present and future environment up to the accidents of election timing and chance.

December 1989

(Updated April 2014)

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1 A colleague of mine has been sufficiently unfortunate to suffer both types of damage. Present HS2 plans threaten the foundations of his house, and a building two streets away has blocked a fine view from his study.

Firms should not make profits

There seems to be an idea about that firms should not make profits. Railway companies are criticised for making profits. That a company which aimed not to make profits did not win the first franchise to run Britain’s national lottery was thought by some to be undesirable, even disgraceful. Utility companies are condemned for making profits. But all this barrage of criticism is based on a fundamental misunderstanding; profits are a useful, indeed essential, part o...

Table of contents

• The author
• Foreword
• Acknowledgements
• Introduction
• Part 2. International trade and finance
• Part 3. Inflation
• Part 4. Fiscal policy: taxation
• Part 5. Fiscal policy: government spending
• Part 6. Monetary policy: theory
• Part 7. Monetary policy: practice
• Part 8. Cost, price and value
• Part 9. Labour markets
• About the IEA