Economic fallacies

Economics is a hard topic.

Economics is a highly theoretical discipline with particular characteristics of its own, the main one being that economic problems tend to require long chains of complex reasoning. It is this inherent difficulty that gives rise to an abundance of fallacies and explains why people, seeing only the immediate effects of a particular policy or investment decision, tend to fall into the fallacy of composition and assume the same must hold for the economy as a whole.

So what fallacies are we looking at here?

...continued in full post...

Two dangerous myths — one a crude derivation of the other — appeared as an explanation for Clinton’s boom. One was that a new economy based on information emerged in which “gain sharing” would replace rent, wages and profits. With information as a new and vital factor of production productivity and living standards would surge even as manufacturing disappeared. This is like saying that we don’t need farming and fishing because we have supermarkets. <snip> The other and more advanced fallacy stated that technology had resulted in less capital and labour per unit of output. In other words, not only is capital a substitute for labour but capital saving machinery has reduced the need for additional investment, which has even created more advanced products. And this is why America was able to grow with very little savings.

The Clinton boom was attributed to high-tech, which was supposed to bypass the need for more resource-intensive processes. However, those who look at high-tech solutions tend to forget about the large amount of processing that goes into making the pieces of each high-tech innovation. For example, they look at the magic of the Internet, and forget the labor and materials that go into, for example, manufacturing and laying the cables.

The fundamental point is that rising productivity comes from investment. That US investment is more productive than Japanese and European investment is due entirely it having freer markets. This is the basic reason it produces more for less. This dynamism (denied by some) has, I believe, caused more productive techniques to be developed.

In other words, sitting on one's laurels doesn't work.