A little knowledge may be dangerous, but not nearly so dangerous as a great deal of ignorance. Too often, when it comes to economics, we carry around just enough foolishness to make ourselves dangerous, believing “truths” that have no truth to them. Here are just a few:
War- What is it good for?
1. War is good for the economy. The principle invoked here (and it works just as well with looting or natural disasters) goes like this- when things are broken that creates demand for new things. Demand for new things stimulates the economy. That’s a good thing. There is a long list of things wrong with this reasoning, and it is simply and thoroughly debunked in one of the greatest economics books ever, Economics in One Lesson by Henry Hazlitt. Here’s my shorter version- wealth is stuff. Destroying stuff reduces wealth. Demand, in addition, is infinite. There is no need whatever to stimulate demand. It is constant, and as immeasurable as the sands on the sea. The problem is meeting demand, scarcity, not plenty. Breaking stuff that meets the demand makes us poorer, not richer.
Tax Man
2. Taxes on businesses are simply passed on to the consumer. Some argue that this means taxes on business are good things because they don’t hurt the businesses. Some argue that this means taxes on business are bad things because they don’t hurt the businesses. And they’re both wrong. Taxes on businesses hurt businesses, and those they do business with. Businesses cannot simply pass on the added cost of taxes for the simple reason that prices are determined by supply and demand, not by the cost of going to market. Suppose the car companies sell cars in the US for an average of $20,000. At that price there is neither a large unsold surplus, nor a great scarcity. Now comes Washington DC with a $10,000 car tax. Now do all cars sell for $30,000? No, because there isn’t the same demand for cars at $30,000 as there is at $20,000. If, however, the car manufacturers keep their prices at $20,000 then a. they haven’t passed along the tax to the consumer and b. they are selling cars at a loss and will go out of business, reducing the supply of cars and creating scarcity.
It’s What I Want
3. Businesses charge whatever they want, and make obscene profits. Remember all the grumbling when gas was $4.00 a gallon? How everyone insisted that those greedy oil companies ruthlessly jack up their prices, just because they can? Where are all those armchair economists now, and how would they explain the drop in the price of gasoline? Businesses do not set prices. Markets do. Every free trade requires two parties to come to agreement. Which means in turn, by the way, that in every transaction both parties are buyers and sellers. When you go to your boss and tell him, “I will not work here for $5 an hour” you are seller, and your employer the buyer. When you go to the mall and refuse to buy the $100 tennis shoes you are the buyer, refusing to do business with the shoe store.
Which means first there is no reason to call the cops. That is, when we go to the state and demand that they force Company X to sell product Y for less than a certain amount, or that they force Company X to pay employee Z more than a certain amount we are, in point of fact, trying to rob our neighbor. We’re the bully. This also means, second, that there is no reason to get bent out of shape when an agreement on a trade can’t be reached. I don’t think to denounce lobstermen as greedy and evil because I don’t want to buy their product at $20 a pound. I just don’t buy lobster. I don’t curse Hollywood for $12.00 movie tickets. I just don’t go to the movies. And I don’t curse the selfish, greedy people of the world who won’t allow me to make a living wage as a writer. I just try harder.
Economics isn’t rocket science. Our confusion is born more of our selfishness than our innate ignorance. It reveals the darkness of our hearts. Perhaps we’d do better were our minds just a bit more clear. Trading where and when and how we’d like, that’s not just freedom, but being a good neighbor.