Seven fallacies

[Lance Kennedy]

Taken from New Scientist, 22 September 2018, page 40

It appears that the intuitive ideas of ordinary people about economics are often just plain wrong. People who have not studied the subject and are not aware of the extensive empirical testing carried out by professionals fall into various traps. This, of course, includes politicians, and Trump is a classic economic moron.

The fallacies so many people believe are summarised as :

1. Wealth is fixed. When the rich get richer, the poor must get poorer.
2. Big corporations can impose prices on consumers.
3. Importing from other nations makes your own country poorer.
4. Prices can be effectively controlled by government regulation.
5. Free market competition has negative social effects.
6. It is better to trade with known parties, not strangers or businesses we do not know.
7. We should be suspicious of the profit motive.

Comments ?

[Austin Harper]

The rich have their own version of #1: When the poor get less poor, we must get less rich.

[Gord]

2. Big corporations can impose prices on consumers.
4. Prices can be effectively controlled by government regulation.

How are those two fallacies? We've seen corporations in trouble for price fixing, and we've seen government regulation fixing prices.

[ElectricMonk]

6. is completely accurate in the absence of consumer protection measures and a Rule of Law.

[ElectricMonk]

5. There is no such thing as a Free Market

[Lance Kennedy]

How are those two fallacies? We've seen corporations in trouble for price fixing, and we've seen government regulation fixing prices.

First, I am quoting an article, not pushing the ideas myself. But I can justify those two points.

Corporations cannot impose prices due to competition. Even big corporations will go under if they do not meet consumers needs. Think of Eastman Kodak. A fair price is one of the consumers demands and corporations have to meet this demand or lose business.

[Lance Kennedy]

How are those two fallacies? We've seen corporations in trouble for price fixing, and we've seen government regulation fixing prices.

First, I am quoting an article, not pushing the ideas myself. But I can justify those two points.

Corporations cannot impose prices due to competition. Even big corporations will go under if they do not meet consumers needs. Think of Eastman Kodak. A fair price is one of the consumers demands and corporations have to meet this demand or lose business.

Governments fixing prices usually make things worse. Here in NZ, we have seen this. Several decades back, we had a guy called Robert Muldoon as prime minister (you will appreciate how much he was loved by the people, when you realise that his nick name was 'Piggy '). He believed in government price fixing, and the NZ economy nose dived. The economy recovered spectacularly when his party was voted out of government and a new government operated according to good economic principles.

[ElectricMonk]

Drug companies can impose prices unless government intervenes.

[Lance Kennedy]

That is true, EM. The system is not perfect, and unwarranted patents permit a monopoly to arise. However, that is not true for corporations in general.

[Gord]

Drug companies can impose prices unless government intervenes.

This is another good example.

How can something logically be called a fallacy when there are such obvious exceptions?

[Lance Kennedy]

You know better than that, Gord. Most general rules have exceptions.

It has been said that the exception proves the rule. That is bull-{!#%@} of course. The correct saying is that an exception does not disprove the rule.

[ElectricMonk]

You know better than that, Gord. Most general rules have exceptions.

It has been said that the exception proves the rule. That is bull-{!#%@} of course. The correct saying is that an exception does not disprove the rule.

Wrong.

An exception highlights the shortcomings of the rule. It does disprove it in the specific case.

[Matthew Ellard]

Another counter-intuitive axiom is that monopolies and oligopolies can set their own price and make whatever profit they want. It's complete crap.

[OlegTheBatty]

Another counter-intuitive axiom is that monopolies and oligopolies can set their own price and make whatever profit they want. It's complete crap.

Please explain to OPEC that they are unable to do exactly as they have been doing for 3 decades - keeping oil prices right where they want them by manipulating supply.

[landrew]

Another counter-intuitive axiom is that monopolies and oligopolies can set their own price and make whatever profit they want. It's complete crap.

Please explain to OPEC that they are unable to do exactly as they have been doing for 3 decades - keeping oil prices right where they want them by manipulating supply.

Monopolies, virtual monopolies, and oligopolies are a fact of life. Anyone who doubts this hasn't played the board game.

[OlegTheBatty]

Another counter-intuitive axiom is that monopolies and oligopolies can set their own price and make whatever profit they want. It's complete crap.

Please explain to OPEC that they are unable to do exactly as they have been doing for 3 decades - keeping oil prices right where they want them by manipulating supply.

Monopolies, virtual monopolies, and oligopolies are a fact of life. Anyone who doubts this hasn't played the board game.

For some reason, Matthew thinks they don't price-fix.

[Lance Kennedy]

Please explain to OPEC that they are unable to do exactly as they have been doing for 3 decades - keeping oil prices right where they want them by manipulating supply.

If OPEC have been trying to do that, they have been most incompetent, because they repeatedly fail. The reason for failure is lack of unity, with assorted members stealing an advantage by offering discounts.

Certainly a monopoly is bad, and leads to higher prices. But relatively few true monopolies exist. Mostly, like inside OPEC, there are competitors.

It is kind of interesting that I post, on a skeptic forum no less, a statement of seven economic fallacies, clearly labelled as fallacies, and I get such a strange set of responses. People supposedly skeptics, wedded to evidence, argue against the reality, using the argument that exceptions to a generalisation falsify the generalisation.

Well, no !
Generalisations are generally correct because the exceptions are the minority. Not because there are no exceptions. If I make a generalisation (say that men are generally physically stronger than women), and you find an exception. A strong woman or a weak man. Does that disprove the generalisation ? No, it does not.

[Gord]

Another counter-intuitive axiom is that monopolies and oligopolies can set their own price and make whatever profit they want. It's complete crap.

Please explain to OPEC that they are unable to do exactly as they have been doing for 3 decades - keeping oil prices right where they want them by manipulating supply.

Monopolies, virtual monopolies, and oligopolies are a fact of life. Anyone who doubts this hasn't played the board game.

Monopoly, or Life?

[Matthew Ellard]

Another counter-intuitive axiom is that monopolies and oligopolies can set their own price and make whatever profit they want. It's complete crap.

Please explain to OPEC that they are unable to do exactly as they have been doing for 3 decades - keeping oil prices right where they want them by manipulating supply.

That's exactly what I said. OPEC has to raise and lower price to maintain the most profitable equilibrium between demand and profit. If it increased price, randomly, demand would drop and so would profit.

[Matthew Ellard]

For some reason, Matthew thinks they don't price-fix.

Everyone price fixes. That's how they factor in the right profit, so as to not reduce demand, through increasing price.

[Lance Kennedy]

Matthew

Only true to a point. Every business tries to set prices to a point that is profitable, but they cannot do that if it makes them uncompetitive. Think of all the big businesses that have gone bust. No one goes bust if they can sell their goods or services at a price they can set. But if they are too expensive, no one buys, and they go under.

[Matthew Ellard]

Matthew Only true to a point. Every business tries to set prices to a point that is profitable, but they cannot do that if it makes them uncompetitive. Think of all the big businesses that have gone bust. No one goes bust if they can sell their goods or services at a price they can set. But if they are too expensive, no one buys, and they go under.

You are discussing two competing firm's demand curves over a similar product that can't be substituted. They will reduce price in competition. In Australia Coles and Woolworths only make 1% margin on each product. They can't go lower, so their real competition have evolved to "who has the more convenient locations".

Bunnings destroyed Mitre 10 and Hardware House in Australia through better locations. Bunnings tried to move into the UK and got destroyed itself, as older UK hardware chains already had the better locations.

[Gord]

[Tom Palven]

Drug companies can impose prices unless government intervenes.

Au contraire. I have purchased Sildenifil citrate (Viagara) tablets in pharmacies in India without a prescription, which were made by Phizer in Germany, for about 1/20 th of what they cost here in the US.

It is government protectionism acting on behalf of big US pharma that keeps US prices high.

[ElectricMonk]

have you tried re-importing them?
What about drugs for people who are hospitalized in the US? Should we fly them to India for their medicine?

[Tom Palven]

have you tried re-importing them?

Yes, I've done that, too, but you can't do it legally.

You can find sources on line in India (And maybe Germany and other places, too. I've never checked.) who will ship them in plain wrappers that avoid US postal scrutiny.

Are there any Germans or others nationalities here on line that are willing to tell us what it costs in their country? How about Australia or Canada?

[ElectricMonk]

You understand that this has no bearing on the question of price-fixing, right?

Trump just made a new NAFTA deal that includes even longer patent protections for drugs.

[Tom Palven]

You understand that this has no bearing on the question of price-fixing, right?

No, I don't understand that. 'Splain it to me, Lucy.

[ElectricMonk]

You understand that this has no bearing on the question of price-fixing, right?

No I don't understand that.

so you propose that everyone break the law to get their medicine, including US doctors and hospitals?

[Tom Palven]

Another counter-intuitive axiom is that monopolies and oligopolies can set their own price and make whatever profit they want. It's complete crap.

Please explain to OPEC that they are unable to do exactly as they have been doing for 3 decades - keeping oil prices right where they want them by manipulating supply.

Monopolies, virtual monopolies, and oligopolies are a fact of life. Anyone who doubts this hasn't played the board game.

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