Fallacies and false arguments in economics

© July 2014 Paul Cooijmans

Introduction

Economics is one of those fields wherein much of the information that is presented to the public as established facts is false. This is an attempt to set some of it straight.

The fallacies and false arguments

A constant inflation rate of about 2 % is good for the economy, serves as a lubricant

This is likely the most evil fallacy in economics. Of course, inflation is bad, because it rewards bad behaviour (like making debts, spending money, consuming more than one needs) and punishes good behaviour (saving, being frugal, consuming only what one needs). Inflation is a tool to confiscate value produced by the conscientious, creative, productive, hard-working, frugal, and redistribute that value among the wasteful, the unconscientious, the unproductive, the borrowers, the parasites, the pleasure-seekers.

The idea behind this fallacy is that inflation encourages people to buy things now because prices will be higher in the future, and that the mere buying of things (consumption) is "good for the economy", even when people buy things they do not really need, and even when they buy those things with money that is not their own but borrowed (inflation encourages borrowing because it reduces the value of one's debts). But obviously, economic growth that results from consuming more than one needs, and from doing so with borrowed money, is empty, bad for the ecology, and does not reflect a real increase in value but rather the opposite.

Deflation is bad because it discourages people to buy goods

This is a fallacy for largely the same reasons mentioned under "A constant inflation rate of about 2 % is good for the economy..." The idea is that people will be less inclined to buy goods if prices are expected to be lower in the future; but of course, if one truly needs something, one buys it anyway, and what one does not truly need one should not buy at all. The buying what one does not need (overconsumption) is hollow with regard to economic growth, does not add value, and endangers the environment. Since deflation encourages one to buy only what one needs, it is actually a benign instrument in fighting overconsumption and environmental pollution. In a healthy economy that is in balance with the ecology, neither inflation nor deflation are desired, and the value of money should simply be constant.

The official inflation figures accurately reflect the true inflation

In fact, the official inflation figures are manipulated downward through various tricks in the calculation method. This is done because a high official inflation figure is in several ways disadvantageous for the government. Ever since the gold standard was abandoned, the true inflation has become such that governments feel the need to hide it, hence the downward manipulation. The true inflation lies somewhere between the official inflation and the long-term return on equities (shares); the latter is estimated to be between 7 and 10 % per year in the developed countries, depending on which source one consults. For clarity, the true inflation will, as a result of the constant trade in shares, be naturally incorporated in the stock prices and dividends, together with the possible real increase in value of the companies. Therefore the long-term return on shares will at least match the true inflation (unless the real value of the companies goes down in the long term, in which case the true inflation is higher than the return on equities).

Government bonds are a safe investment

They are not, because the entity that issues the bonds is the same that has the power to create unlimited money out of nothing and thus cause any desired degree of inflation. This is a conflict of interest. When a government obligation is redeemed, its value is generally less than when it was purchased, and it is the government itself that determines how much less. In addition, government bonds are never truly redeemed to begin with, but "rolled over" by issuing new ones; a pyramid scheme that would be highly illegal in many countries if anyone else than the government did it. If the public fully understood this, it would become instantly impossible for any government to borrow money.

The market mechanism determines the value of goods

No, it determines only the price. A good in itself does not change when demand and/or supply change, so its value remains unaffected. The many "bubbles" and subsequent crashes on the various markets — tulips, houses, shares — have made it painfully clear that price is not value, and is in fact a bad indicator of value, and that value always wins out in the end. Demand and supply are deceptive and imperfectly related to the economic value of goods.

Commodities like gold and silver are unattractive for investment as they do not pay interest or dividend

This argument overlooks the fact that interest and dividend serve to compensate the risk run in investing. With durable commodities like gold and silver however, there is no risk as the value of such commodities is immutable. Therefore, interest and dividend are not needed.

The value of commodities like gold and silver is volatile

No, only the price is volatile, while the value remains the same. When the price of gold is $ 1300 per ounce, the value of the dollar is 1/1300 ounce of gold. It is the value of money that is volatile, not that of the commodity.

Reintroducing a gold standard would curtail economic growth because of the limited amount of available gold and the limited production of gold

This is not so, because (1) the price of gold can be set so as to allow growth, and (2) there are other commodities besides gold that can be included in the standard. The only thing that matters is that the growth of the amount of money in the economy does not exceed the growth of the amount of value in the economy. Linking money to value, and the increase of money to the increase of value, is the only way to achieve this goal. This linking is what a gold standard helps to enforce. With fiat money, that link is conspicuously absent.

All money is debt, rests on agreement

No, only fiat money is debt. Money with an intrinsic value, such as coins of gold or silver, is not debt. Defenders of fiat money want the public to believe that fiat money is the only money, because fiat money allows those in power to easily confiscate value possessed by citizens (by means of inflation).

Economic growth is good and must be striven for

Economic growth is not always good; all resources are finite, and the ecology humans live in allows growth only up to a certain size, no matter how technology advances. The number of humans and size of economic production are bound by natural constraints. And even within those constraints, growth is only good insofar it is growth of real value. Empty growth, as in people consuming more than they need, and especially when this overconsumption takes place with money that is not their own but borrowed, is always bad. The reason for spreading the lie that economic growth is always good is that in a growing, inflated economy it is easy for leeches to make money without being productive, without creating value.

Mortgages make it easier for people to buy houses

This is only true for people willing to make high debts. For conscientious, frugal, saving people, mortgages make it harder or impossible to buy houses. This is so because mortgages allow very many to enter the house market who would otherwise never in their lives be able to buy a house, simply because they spend all of their available income every month. Thus, the demand for houses is artificially inflated, and therewith the house prices are inflated (again, notice that price is not value). These exaggerated prices make it as good as impossible for frugal, saving people to buy a house without borrowing, and if they do succeed in buying one they pay an unfairly high price.

It is good to allow labour immigration for work that native citizens do not want to do

This is often said to justify an abuse of economic differences between countries by insulting native citizens, who are supposedly too lazy to do certain types of work. In reality, native citizens would be willing to do that work if only they were paid in accordance with the true value of the work, but the employers prefer to let foreigners from countries where the cost of living is lower do the work for unrealistically low wages. It is the phenomenon of "wanting a champagne taste on a beer budget". The hidden costs are in the unemployment or social security benefits of the native citizens supposedly unwilling to work, in the writing off and insulting part of the native population, in the destruction of the social structure of society, and in the many other problems inherent to immigration. An essential cause of this abuse is that certain types of work — in particular, manual and technical work — are priced below their true value (underpaid), while other types of work, such as higher "white collar" functions, are priced too high, sometimes extremely far too high. The wages for some jobs are such that, given the cost of living in an advanced society, one can hardly afford to take a job like that, and those who do are what one calls "working poor" and need multiple jobs to survive.

Historically, this situation results from overshot social mobility, increased social stratification based on I.Q., and the decrease of solidarity between social classes that inevitably results therefrom. The higher classes, who are in control, have priced their own work ever higher and that of the lower classes ever lower, and prefer to let immigrants from low-wage countries do the low-paid jobs rather than to pay their own people (with whom they feel no solidarity) enough to live from.

In an economic recession, lowering the interest rate is a good measure

Again, this rests on the perverted notion that growth for the sake of growth is good, and that it does not matter if the growth is hollow with respect to added value. For clarity, a low interest rate makes it attractive to borrow, and the borrowed money is created out of nothing, not counterbalanced by newly created value, production. Thus one hopes to create inflation, for if there is anything one fears it is deflation, and the spiral of deflation and recession. What one is actually creating is a spiral of "boom" and "bust", of bubbles and crashes, which is likely not the most ethical and ecological way to run society. What one fails to see is that, in an inflated economy that harms the ecology, recession and deflation are not problems but solutions.