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Useful Notes: Economics

The nice thing about Mathematics and other Hard Sciences is that there is no question that 2 + 2 = 4.

The complicated thing about Sociology and other Social Sciences is that there's room for interpretation and debatenote .

The horrifying thing about Economics is that both of these are true.

This violent collision leaves a few absolutes to take refuge behind, and a wide open mine field for catastrophic assumptions and mistakes, and prime Flame Bait. There are a fair number of widely divergent economic schools of thought, each with a reasonable claim to accuracy, and each which believes the others to fail economics forever. The major difference between this schools is in what they decide to grossly oversimplify in their bid to understand something. This is probably one of the reasons Thomas Carlyle called economics "the dismal science". (And few agree on that term... Economists will claim their science isn't dismal, and many other fields will claim it's not a science. The dance goes on.) note .

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    General Economic Fallacies 
The following fallacies are always accepted as fallacies, but only if the following two points are true about the economy in question:
  • First, the economy is healthy. Schools of economic thought greatly differ on matters relating to an unhealthy economy. For instance, a Keynesian would only accept Fallacy 1 (the Broken Window Fallacy) is a fallacy in a healthy economy. In an unhealthy economy, committing this fallacy is (according to Keynesianism) a potentially beneficial thing. Thus, all the following fallacies are controversial in an unhealthy economy.
  • Second, any given thing is worth only what its purchaser will pay for it. These fallacies are based on Neoclassical economics, which is a broad designation that refers to all economic schools that accept the consensus formed in the wake of the "Marginalist Revolution" caused by the work of Leon Walras, William Jevons and Carl Menger. Basically, this approach to economics emphasizes economic subjectivism; the belief that a good is valued by a subject and that market prices for a good only come about when subjects desire them. This is a great contrast to the Classical economists like Adam Smith and Karl Marx, who argued the value of commodities are related to the labor to produce them (the labor theory of value, a theory derived from the philosophy of John Locke).

With that out of the way, let's move on to the economic fallacies.

  1. The Broken Window Fallacy aka. Destruction Equals Employment aka. Digging and Filling Ditches: Named by Frederic Bastiat, this fallacy consists of ignoring opportunity costs. Specifically, an important principle in economics is when one has an opportunity to choose between multiple outcomes, the cost of picking one outcome is having to forgo the other outcome/s. In practical situations, this means resources spent on one thing cannot be spent on another thing. Some examples include:
    • Destruction Equals Employment: or when someone says "breaking windows is good for the economy because people will then buy new windows, thus increasing business done by glaziers." The ignored opportunity cost is that the money used to repair windows could've been used to buy other things and the business would've gone to other merchants. On a larger scale, the belief that "war is economically productive" ignores the opportunity cost of spending resources on building bombs instead of building something else. Of course, this is profitable for the arms industry, but for the economy as a whole it isn't. There's also the minor matter that society's poorer by what was destroyed; the resources spent replacing it are used to restore lost wealth. A Raubwirtschaft economy based on plunder often works in the short term but is unsustainable in the long run as existing territory becomes depleted of resources and conquering new territories is not possible - or would cost you more than you could rob. Cases in point: The Roman Empire and Those Wacky Nazis.
    • Digging And Filling Ditches: The government (or a corporation) gives everyone a job and pays them, without regard for the actual usefulness of said jobs. There are significant opportunity costs associated with the resources required to pay the people working on the newly-created jobs (because these resources could have been used to do something else, which may have been more beneficial).
  2. Fallacy of Intrinsic Economic Value aka. Money for Nothing aka. Superiority Equals Success aka. Wealth Is Zero Sum: This fallacy consists of forgetting that the value of a good is not necessarily related to any measurable quality of this good, but is rather granted by the fact that people desire more of the good than is immediately available. Examples include:
    • Money for Nothing: The government prints more money or a gold mine gives out free gold to everyone, claiming they are creating more wealth. This does not create "more wealth" because "wealth" doesn't exist inside gold or money. All it would do (holding demand constant) is lower the market price of gold, or generate inflation (i.e. more money is required to purchase the same good/s). Regarding the printing-money example, in the short term (i.e. before the inflation kicks in) this gives the issuer some extra wealth; but as time goes on the effect becomes a wealth-transfer from the holders to the issuers of the currency; holders are left with Worthless Yellow Rocks.
      Though one reason why this one is so persistent is that discovery of new gold mines has often heralded economic booms. This is not because it was intrinsically valuable, though; it was because either the money supply was insufficient to maintain a larger economy, or the country with the gold mines was made better off at the cost of its neighbors.
    • Wealth Is Zero Sum: This fallacy alleges that someone can only get wealthy by making someone else poor. X's gain must be Y's loss. It's a dog-eat-dog world and business consists of grabbing the largest share of the pie one can. The fallacy is the belief that the "pie" is a fixed size. If economic value is objective, then it is finite; it cannot be created. However, that premise is wrong; economic value is subjective. Thus, the pie size can be increased by increasing the supply of subjectively-valued goods. Technological progress is a large contributor to this.
    • Superiority Equals Success: This fallacy alleges that a product's market price is determined by an objectively measurable aspect of the product. For instance, lets say you place a bucket of your phlegm on the market. And then you place two buckets of phlegm on the market. By the logic of Superiority Equals Success, you should get more money for two buckets of your phlegm than one. Thankfully, no one wants your phlegm and as such you wouldn't get any money for either bucket (clarification: you might get money for the buckets themselves; but the phlegm would have to be removed from the bucket). Objective superiority of any good along any measurable aspect (for instance, quantity) only translates into a higher market price if people want more of that measurable aspect (holding all other variables constant). And let's not even mention adding marketing into the mix...
  3. Exporting Good, Importing Bad: It's usually used something like this: Exporting something makes others dependent; this is good. Importing things makes you dependent; this is bad. Note that there was an early economic theory, mercantilism, which taught this exactly. And in fact it is still taught in many business and economics classes, or at least implied by referring to a situation where a country imports more than exports as a "trade deficit" and the inverse as a "surplus". In truth, some countries have a relative productive advantage in some areas, while other countries have different relative productive advantages. Trade allows countries to specialize in whatever production they have an advantage in, thus producing more in total, and then trade with each other. This makes both countries better off. For example, perhaps Country A can produce 4 cans of butter, or 2 cans of butter and 1 carton of eggs, or 2 cartons of eggs. Country B can produce 4 cartons of eggs, or 2 cartons of eggs and 1 can of butter, or 2 cans of butter. With trade, they can produce at their advantages of 4 cans of butter in A and 4 cartons of eggs in B and then trade so they each have 2 cartons and 2 cans. Making them both better off than if they produced everything in their own country.
    • It's worth noting that in an Empire that has expanded sufficiently the Mercantile system makes more sense (although probably still isn't optimal) from the perspective of enhancing state power (because state power is relative to other states, and by engaging in mercantilism you are potentially harming other states more than yourself). However, in terms of delivering an economically optimal outcome (i.e. maximizing utility), the Mercantile system still Fails Economics Forever.
    • In theory, Empires can benefit from mercantilism. In practice, of course, this was often not the case. The late 19th century European empires all spent far more maintaining their empires than they got back in revenue, and the colonies themselves represented a very small fraction of their overall GDP.
    • Some economists (e.g. Ha-Joon Chang) consider avoiding imports extremely important when the economy of a country is still developing. If country A currently produces 4 cans of butter and country B can't produce any butter at all, but could potentially produce at least 4 cans, country B should limit the importation of butter from country A to encourage the development of the local butter industry. In the modern world this applies most strongly to third world countries, which are dependent on imports in nearly all sectors of economy and have a very limited selection of exports. That is, real protectionism is about either having certain production at all or balancing import and export. So the export may be seen as a problem toonote 
    • Most of the arguments about promoting exports and avoiding imports for developing countries center around the idea that a country needs to industrialize to be truly prosperous, and the best way to do that is to promote local industries by limiting foreign competition. It seems to work with Export-Led Industrialization, but not so much with Import Substitution Industrialization, although obviously this is a major simplification of the internal economic processes of each country that tried these policies. In any case, it's no surprise that countries very much want to have a productive advantage in advanced technological industries and not, say... drugs, prostitution, and making sneakers for three cents an hour.
    • It's also worth noting that importing and exporting will always balance in the long-run. If the US buys stuff from China, but doesn't sell anything, they'll have a bunch of dollars that are worthless to them, unless they start buying stuff from the US, or loan the money back to them, or something else to that effect. If both countries use the same currency, this won't happen as quickly, but in this example the currency would slowly get more valuable in the US and less in China until the trade balances.
  4. Ridiculous Future Inflation: The main problem with this is that it is often portrayed as being a natural and normal result without any of the many social and economic problems hyperinflation show in the real world. It is, however, normal to see drastically inflated prices as a result of a past inflation.
  5. The resource halt: A source of conflict in many post-apocalyptic scenarios is the sudden exhaustion of a valuable natural resource such as oil and the conflicts that inevitably flow from it. Any microeconomics principles student will tell you that the real world does not work this way. If mankind is faced with such a threat, owners of the resource will withhold some of their stockpiles now in order to take advantage of the future scarcity. Furthermore this will mean that the price of the resource will rise slowly, giving humanity time to adapt. As a result, the point where we do run out will not be a trigger for a massive calamity, rather it will hardly be noticed.
    • This would presume that the progress of science, and, indeed, the circumstances of the physical world itself, are determined by economic demand; events may very well occur to which humanity is simply unable to adapt. Furthermore, if the resource is sufficiently important - for example, water - the tactic of stockpiling may backfire by way of having your throat cut by a thirsty mob.
    • A sudden, temporary decrease in availability, however, can be entirely plausible. This can occur (and has occurred) due to the obstruction of transportation routes, the destruction of the production apparatus, or monopoly/oligopoly producers artificially withholding supply in order to serve other motives. The effects of these scenarios are likely to be tied to relatively specific times and places rather than being The End of the World as We Know It (although it may feel that way to those affected).
    • Also as the price rises former non-profitable actions have to be reconsidered - they might generate a profit now. Case in point - the Bakken formation in western North Dakota is currently undergoing a huge oil boom because of both technologic advances and rising oil prices making it very profitable to drill there now; not ten years ago North Dakota was losing population like much of the Great Plains.
  6. America the bankrupt: National debts don't work like your personal debt. For example, people don't buy your debt to prop up your currency. Yet for some reason a lot of writers tend to think of the national debt in the same terms as a bank loan, with angry creditors and everything. When this trope is invoked expect to see a consortium of angry foreign dignitaries banging on a conference table that they want their money back. In reality, if countries actually acted like this, the global financial system would probably collapse pretty spectacularly and everyone would be screwed. This trope is not specific to America, but for some reason Americans are exceptionally paranoid about the National Debt, particularly when the Chinese are buying it up, and now not buying it anymore. Oddly enough, America's National Debt isn't even that bad by international standards. Also, the US national debt is in terms of dollars, and the government can create as many dollars as they need to pay off the debt. Everyone would be paid the amount owed, but the new dollars would lead to inflation.
    • The key here is that governments usually owe substantial portions of their debt to 'themselves,' i.e. either the government owes money to different branches, or those branches hold their assets as bonds and treasury bills instead of money; by owing money to yourself, you usually don't charge yourself interest (beyond inflation) and you theoretically can't default on money you owe yourself. This is how Japan can have gross debt worth over 100% of their yearly economic output and have little economic effects: 70-80% of its debt is owned by the Japanese Central Bank. In the United States, around 35-40% of the government debt is owed to itself, mainly to the Social Security Administration. Also, debt owed to foreign entities makes up MUCH less of the debt than people seem to think: as an example, China owns only 6% of the total US debt.
    • There have been cases in history where creditor nations have launched military actions of debtor nations in order to force repayment - the most well-known is the occupation of the Ruhr in 1923 by France and Belgium after Weimar Republic Germany had repeatedly defaulted on its (huge) debt obligations to the Allied Powers under the terms of the Treaty of Versailles (France believed Germany was testing Allied resolve to enforce the Treaty by skirting the payments). It ended poorly for the French, as they got cast as the bad guy internationally (despite the occupation being legal under Versailles) while Germany got sympathy once the passive resistance campaign against the occupation in the Ruhr started. Other cases include the Anglo-Egyptian War of 1882, the United States' occupation of Haiti in 1915, and the proposed joint Anglo-French-Spanish expedition to Mexico in 1861 (Britain and Spain backed out and made separate deals with Mexico when it became clear Napoleon III had more on his mind than just recovering the debt it was owed). In all these cases, forcing repayment of debt was a more secondary reason to exercising hard power (which may explain the acute American paranoia over this trope, however infeasible it would be in practice).
  7. Third World Countries: Paradise of rich nations' investments: Ah... Third World Countries, with their cheap labor supply, lax regulations, and prime materials just waiting to get exploited. With such advantages, wouldn't the average Joe invest his life savings into opening a business in say... Somalia? As you probably answered... not so, normally, the reason labor is cheap in TWCs is because the workforce is also unskilled, lax regulations also usually mean a high crime rate or even political instability. That's why it's usually the big businesses the ones that take the plunge to do the tremendous investments in TWCs, since they can absorb the cost of giving training to the workforce and providing security for their investments.
  8. Ideological Identity Idiocy: This is the intersection of Artistic License - Economics and Strawman Political. Often, a work that wants to make a political point will (probably accidentally, but possibly deliberately) make mistakes about the definitions of specific economic systems. In short, authors often don't know (or don't care) how economists actually define economic systems. Economic systems exist to allow a society to economize, i.e. allocate their supply of means towards various different ends. The supply of means is scarce because it cannot achieve all these ends. Thus, an economic system is something that provides a method by which these ends are prioritized and means are directed to fulfilling them.

    Economic Systems 
  • Socialism: In terms of Political Ideologies, Socialism refers to a broad family of ideologies united by an opposition to Liberalism and a goal of improving the lot of the working classes, refer to its page for details. However, self-proclaimed Socialists have advocated various different economic models, quite a few of which would fit under the category of "mixed economy" (for instance, market socialism and social democracy).
    In economics, Socialism is often used to refer to State Socialism; a scarcity economy where all the means of production are property of the State (on behalf of the working classes) and all economic activity is controlled by the State. Thus, economists typically refer to nationalization of a specific industry as the "Socialization" of this industry. However, there are many variations on this theme, mainly varying in matters of degree (i.e. how much control the State exerts over economic activities):
    • Public Enterprise Centrally Planned Economy in which all means of production (stuff used to make other stuff) is owned by the State and all key economic decisions are made centrally by the State, e.g. North Korea in The Seventies (it's an interesting mix nowadays) or, partially, the former Soviet Union, where always existed at least some tacitly allowed private sector.
    • Public Enterprise State-Managed Market Economy, one form of market socialism which attempts to use the price mechanism to increase economic efficiency, while all decisive productive assets remain in the ownership of the state, e.g. China, Venezuela (although Venezuela is moving towards the above), and arguably Fascist Italynote .
    • Public Enterprise Employee Managed Market Economies, another form of market socialism in which publicly owned, employee-managed production units engage in free market exchange of goods and services with one another as well as with final consumers, e.g. mid twentieth century Yugoslavia. Some versions have a single monopoly production unit for each type of product or service, while others have open competition between employee-owned businesses. Two more theoretical models are Prabhat Ranjan Sarkar's Progressive Utilization Theory and Economic democracy.
    • Public Enterprise Participatory Planning, an economy featuring social ownership of the means of production with allocation based on an integration of decentralized democratic planning, e.g. Catalonia during the Spanish revolution. More developed theoretical models include those of Karl Polanyi, Participatory Economics and the negotiated coordination model of Pat Devine, as well as in Cornelius Castoriadis's pamphlet "Workers' Councils and the Economics of a Self-Managed Society".
    • Note: The "market socialist" models are arguably examples of mixed economies; some Socialists do not accept them as forms of Socialism.
  • Mixed Economy, Social Democracy or Social Market Economy: An economic system where the scarcity economy is remedied by a mixture of both state and free market means. To qualify, both the State and the market must have a significant role in the economy (i.e. an advocate of free markets that gives a very small role to the State is not advocating a Mixed Economy, and a socialist that advocates a small role for markets is not advocating a Mixed Economy either). The vast majority of the world's economies, including those of Western Europe and the United States, fit in this category.
  • Free Market Economics or Laissez-Faire: An economic system where the scarcity economy is remedied exclusively via a system of private property. All the inputs to the production process are owned by individuals or voluntarily-formed groups thereof whose property rights are derived from those of the underlying individuals that make up said group (for instance, businesses with more than one owner).
    • Some advocates of Free Markets give a slightly larger but still strictly limited role to the State, and some advocates of Free Markets are Anarchists that believe the existence of the State cannot be justified.
    • Many economists use "Capitalism" as a synonym for "Free Markets", but amongst many schools of political theory (including most forms of Anarchism and Marxism) "Capitalism" refers to something different. See the Capitalism page.

    Post-Scarcity Economy 
The supply of means is no longer scarce. This means that people don't need to economize. A society in this stage cannot be meaningfully described as any of the following labels since those labels only apply to societies with scarcity economies.

Of course, many systems described in fiction as post-scarcity are not post-scarcity. Scarcity exists as long as any human (or Sufficiently Advanced Alien) cannot have all its wants met. If not everyone who wants the house on the hill, Jimi Hendrix's bandana, or the front row seats at a concert can have them, then there is in fact still scarcity. If The Singularity is capable of producing any commodity (say, gold), then those goods won't need to be economized. However, if the Singularity cannot let everyone enjoy goods like the front row seats at a concert, then there is still a need to economize them.

This is not to say that its impossible to imagine. If we're talking about a post singularity society, it is possible that they will figure out a way to replicate all the essential qualities of even seemingly unique goods. The house on that one hill next to that waterfall could be replicated right down to the waterfall and the hill with sufficiently advanced terraforming technology. We could reshape the landmasses of a planet to maximize the beachfronts if that's what people want. Alternatively, a society which exists totally within a virtual universe could do the same thing arguably for a much cheaper price.

There's also the issue that some things might be post-scarcity while others still need to be economized. For example, even if there was more than enough consumer goods for every person on Earth being provided by automated robots without human intervention you would still need an economy for things that cannot be reproduced that way, such as land (barring space stations or something similar) and unique items like antiques and historical treasures, but most people wouldn't care. This doesn't even require a singularity, the Earth's resources are such that it is virtually impossible for us to ever use it all. For example, enough energy falls on the Earth from the sun to power our projected energy needs in 2050 about 5000 times over, and that is without drastic measures like sending satellites into space to collect more energy. Collecting all that solar energy is difficult however. Similarly, there is an overabundance of water on the Earth, but most of it is salt water or trapped in the atmosphere and desalination is expensive while atmospheric condensers are still in their infancy, the farmland currently in use could feed 80 billion people if converted to emerging farming methods (and that's not even counting the possibility of farming more area) but that will take time and money, and enough raw materials exist in the Earth's crust to supply a virtually unlimited amount of consumer products including advanced technology and electronics, but harvesting it is hard. The majority of what we are economizing in the 21st century is actually labor, technology, and information, and advances in these areas could very well lead to major shifts in the world economy within a few years. Or not, the future is hard to predict.

Also note that there are already resources that aren't scarce, such as air. As such, this would yield exactly the sort of economy we have.

     Human Nature and Economics 
An example of a Spanner in the Works, many economic theories can sound nice and wonderful on paper. However, when they are enacted in real life, the results can be wildly different. Economists have a concept known as Homo economicus; a hypothetical being that is completely self-interested, rational, and has a desire to either maximum utility if they are consumers, or profit if they are producers. So a society of homo economicuses would only purchase items that provided the most utility and were the cheapest, and sellers would only sell at the highest price possible their consumers would pay. Any other reason why an human agent would act the way he or she does in an economical sense in a real society would not exist in a homo economicus society.

On the other end of the scale, there is Homo reciprocans, a hypothetical being that is motivated not by self-interest, but by improving their environment. They are also motivated by justification, as some of their economic activities done can be used to "punish" another actor that they believe has done wrong, even at their own expense. Examples of this can be people refusing to shop at a store that they believe has mistreated workers, upheld an unpopular or controversial belief or has done something else seen as wrong. In real life, many boycotts of businesses are due to owners going public with political beliefs, or doing practices certain members of the public find disagreeable can be an example of this. On the producer side, firms can refuse to do business with a customer they believe to have done or are doing something wrong. An example in real life is how certain companies refused to sell drugs to prisons that were using them to execute prisoners.

However these concepts are used to describe behaviors and concepts in an economic system and not necessarily does it describe how things will play out in reality. Human beings can be one side at times, the other side at other times, or some wild combination. Human beings may try to purchase or sell at the best price for them possible, but they may buy a product that is cheaper because it is cheaper, then have it cause trouble for them and cost more in the long run due to low quality, or perhaps a person might buy a more expensive/lower quality product/etc. from a producer because they are friends with the producer, or they prefer that brand due to false perceptions, or they believe it is a better buy due to some other reason, be that reason be rational or not. A criticism of homo economicus is that real humans do not always know what is best for them in the long-run, and may perform an action due to its short term benefits, but run into problems when unforeseen (or willfully ignored) long-term costs rear their ugly heads. Also, homo economicus runs on the idea of actors having perfect information available, while real humans do not.

As for homo reciprocans, in real life, a human may buy from a firm, or sell to someone someone that has "done wrong" in someone else's eyes, but they may either not see it as wrong, feel that the issue isn't something they could change, or they simply do not care about it. Another possibility is that a person might support a boycotted business due to beliefs that the boycotters are the ones that are wrong. Another wrench in the homo reciprocans idea is that a human being might be in a position in which the costs of helping the community would be too high for them to handle. A person might shop at a big box store because of cheaper prices that they can afford, even though a better choice for the community would be the mom and pop shop in the neighborhood. However, since they cannot afford the latter, they'll do business with the former.

    Parting Thoughts 
Finally, and as always, there is the general zeroth rule of the Author Tract: Regardless of quality, writing a work of fiction neither adds nor subtracts empirical evidence to or from your point of view. It may display evidence, it may make an argument using that evidence, it may convince the reader using that evidence. However, merely writing a fictional work about a free-market/socialist utopia/dystopia does not prove anything. The only thing about which fiction can prove a point is fiction.
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