Thursday, February 27, 2003

UNLV Abounds in Economic Fallacies
By Alexander Marriott
UNLV Rebel Yell: February 13, 2003

A little over a hundred and fifty years ago in France, Fredric Bastiat wrote a book called Economic Fallacies, which systematically went through commonly held notions of economics and showed how ridiculous they were. Unfortunately his work is unfinished and in most cases, forgotten. The UNLV campus is a great place to soak up some great economic fallacies which I will, in homage to this great Frenchman (they are few and far between), proceed forthwith to dismantle.

Fallacy the first: Businessmen can pass costs onto the consumer. This widely held notion is quite pernicious as tyrannical types like Kenny Guinn use it to justify higher taxes. But knowledge of simple economics reveals that this is impossible. Any time the price of a product increases the amount sold will be reduced, and for a small company with marginal profits unable to bear the loss in sales this can be devastating. This is why we often see large companies supporting taxation because they can absorb the costs for whatever benefits they think they can glean with politicians. Also, if this theory is true, then businessmen would charge millions of dollars for their products as the underlying premise of the theory is that one could pass along costs indefinitely.

Fallacy the second: Trading, the cornerstone of a free market, is exploitive. The common way this theory is presented is as follows; you pay a dollar for a can of coke, which didn't cost a dollar to make, therefore you've been exploited. This however is based on a labor theory of value; the amount of work and resources that goes into a product sets that product's value. If this is true, then pencils should cost a fortune. If you think about how much labor goes into the manufacture of a pencil, from the chopping down of the trees, the manufacture of graphite, the crafting of the metal ring at the top and however they make the rubber eraser.

Not to mention the labor of all the people involved in these tasks, and the transportation costs to get all of these pencils to market, a single pencil should cost much more than a dollar if we accept this labor theory of value. Prices are based, not on the labor theory of value, but upon the willingness and ability of the consumer to pay a given price for a given item. So if you trade a dollar for a coke, you're not being exploited because you obviously thought the coke was more valuable than the dollar, otherwise you would have had no motivation to trade the dollar in the first place. In other words, trading in mutually beneficial, the company values your dollar more than the coke and you valued the coke more than your dollar.

Fallacy the third: Licensing laws increase safety. "If we didn't license doctors then we'd be subject to bad or dangerous treatment." This is somewhat amusing with the current malpractice crisis facing most of the country. All states license doctors, yet malpractice suits run rampant. So are they really having any positive effects? To the doctors, "yes." With licensing laws, doctors have a convenient excuse to restrict the labor supply in the medical profession, much like a labor union does by restricting employment. With licensing doctors can drive up their own salaries, and with such a limited supply of doctors and a virtually guaranteed big salary competition in the field falls off. This will actually cause the exact opposite effect the laws were supposedly meant to prevent. If the profession were open to everyone, doctors would be forced to compete with one another and point out the deficiencies of their inept colleagues and trumpet their own ability. But with the current system they can do average and sub-par work without having to worry about competing doctors pointing it out to the consumers.

These are just a few of the many fallacies floating around campus, and like Bastiat, my pointing these ones out will probably not stop them from being used. But if even one of those who has used these in arguments, whether student or professor, realize their error and corrects it then I will consider the effort a success.

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