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Of Economic Fallacies

( Originally Published Early 1900's )



IN a former chapter certain fallacies in economic method were described. These consist in a generally incorrect way of viewing the subject in its logical bearings, and do not therefore necessarily lead to erroneous practical conclusions. We have now to consider fallacies which lead men into incorrect views of public policy, and opinions of governmental action. Although these fallacies are unlimited in the number and variety of their forms, we shall find on analyzing them that most of them proceed from one central root, from which they divide like the branches of a tree. The root of the whole system consists in mistaking the means of industry for its end.

Let us first see how natural is the process of thought which leads us to concentrate attention on means rather than on ends. We have before us a mechanic who is, for the time being, out of work. In consequence he sees before him the danger that his family will suffer for the necessaries of life. He wants a supply of food and clothing to protect them against hunger and cold. But he does not say to his fellow-men, " Give me food and clothing," because he knows they cannot or will not do it when asked in this way. He knows that he must have money to buy the commodities he wants. Ile knows, however, that it would be equally useless to say, " Give me money." He knows that to get money he must work for it. So what he really says to the public is, " Give me work to do," although what he really wants is, not the work, but the necessaries which the work will yield him. The work is the means, and the only means, of commanding the necessaries, but not at all the end of his exertions. Yet it is by an evidently reasonable process that he is led to asking, not for what he wants, but for the means to get it. So far, therefore, no fallacy actually shows itself, but only an open door through which an unending line of fallacies may come in.

The first fallacy of the line comes along in the character of what might pass muster as an obvious truth, and so is harbored by all classes.

The laborer thinks and says, The greater the means the more perfectly the end will be attained;. the more work I can get the more food and clothing I can buy for my family, and the more perfectly they will be fed and clothed.

The employer thinks and says, The greater the demand for my commodities the more employment I can give to my la-borers and assistants, and the better off' they and I will be.

The man of business thinks, The more buying and selling we can do the better off we will be, and the more perfectly our customers and patrons will be supplied.

The shipper thinks, The greater the quantity of goods I import and export the more pleased the country in general and my firm in particular will be.

The statesman says, The greater the amount of rolling and hammering of metal the more perfectly the country will be sup-plied with those requirements of wealth which are made of metal.

Is not all this obvious and true? I answer, No. The propositions are not true as general ones; they are true under some conditions and not under others. Their truth or falsity depends on the manner in which the increase of labor and of activity in business is brought about. Among all classes of society we find men who are desirous of increasing the activities just described by increasing the necessity for them. The mechanic finds that he is out of employment because some large manufacturer has been introducing machinery to do the work which he, the mechanic, formerly did, so that his labor is no longer necessary. He- therefore denounces the machine and tries to stop its products from reaching the public. If successful, he will create a greater necessity on the part of the public for employing him. The carpenter knows that if the house which he has just built should burn down the owner would be obliged to build another. He therefore looks upon the fire feeling that, although a loss is inflicted on some one else, it is a gain to him by increasing the demand for his labor. The laborer feels that if a dam is washed away by a freshet, a benefit is done him by creating a demand for his labor. The states-man says that if we can keep people from getting iron from abroad, there will be more made at home, and thus all the makers will be benefited. All these we may call labor fallacies.

From this same root comes out another branch, which may be called the money; fallacy. Since money is what the laborer wants to buy with, and since it seems evident that the more money the government puts into circulation the more easily he can command it, lie wants the government to issue all the money it can. The dealer in fancy goods wishes that economical man who is saving up his money to spend it more freely, because he can thereby give more employment to labor, or help somebody to do so. When a great body of summer tourists who had intended to go abroad are kept at home by the cholera, merchants congratulate themselves that the million of dollars which they would have carried away with them are to be spent at home and thus to benefit the country.

A curious feature of these fallacies is that they are the pro-duct of civilized training, and that a savage would see their logical character a great deal more clearly and quickly than the civilized man does. If we could give a savage a bird's-eye view of the country, and explain to him that from any cause whatever the people had made more clothing than could possibly be worn by the whole community, and had piled up greater quantities of food than they could possibly eat, and that a large body of industrious foreigners had thrust upon them more manufactures of iron and brass than they knew what to do with, and that in consequence there was a great dearth of something to do, his first notion would be that this was a very happy state of things for the people of the country. It would require long years of training to make him conceive how it could be an unhappy state of things, and possibly the attempt might utterly fail. Now, in reality, and from the point of view of commonsense, the savage would be right. Looking at the subject from the savage's standpoint, we see the utter absurdity of supposing that it can be bad for a country to have more of the commodities of life within its borders than its people know what to do with.

The essential character and plausibility of the labor-fallacy may be shown by the following illustration. A farmer is carrying hay to market. The county authorities prepare for him a very fine smooth road. It is obvious to him that the better his horse pulls the more hay he will get to market. A stranger meets him on the road and finds him applying this principle by lubricating his wheels with sand in-stead of oil. Inquiring the motive of this ingenious device, the stranger is asked whether he can deny that the better the horse pulls the more hay he will get to market.

The stranger is not prepared to deny this principle.

" The more sand I put on my wheels the better I find my horse to pull." The stranger cannot deny this either.

" Therefore it is an undeniable conclusion that the more sand I put upon my wheels the more hay I will get taken to market."

The student can have no more instructive exercise than that of framing a series of ingenious devices by which the farmer could baffle every argument of the stranger to prove that this position was unsound. He could show that his neighbor, who put oil on his wheels, had a very poor miserable horse, while he himself had a strong and sound one, and all the result of the exercise he was thus enabled to get by the sanding policy. He could taunt the stranger with being the agent of some oil-merchant who wanted him to buy oil in lieu of the lubricant which he could have for nothing on the wayside. He could demand if the stranger ever knew a case in which a horse that pulled well got less hay to market than one that did not pull at all. He could cite the case of a fellow-farmer who had been using oil and whose horse got so frisky and pulled so light a load that he ran away and destroyed the hay-cart and broke the farmer's leg.

The corresponding reasoning in the case of the laborer is simply this :

The more my labor is in demand the more perfectly my family will be supplied with the necessaries of life.

But the greater the need I create for my labor the more it will be in demand.

Therefore I advocate a policy which will make people need my labor.

So the dealer tries to make clothes as scarce and dear as possible in order that everybody else, mechanic, laborer, hod-carrier, merchant, and man of business, may be in greater need of clothes. The carpenter, bricklayer, and plasterer want houses to wear out as fast as possible, that the public need for houses may lead to their employment. The manufacturers of copper and iron want to cut off the foreign supply of their product, that the public may be in greater need of it. The cooper wants barrels made scarce, that the public may be in greater need to employ him. Thus the individual efforts of every man to collect the largest supply of the necessaries of life is accompanied by a general feeling throughout all society that other people ought to continue in need of these necessaries.

It goes almost without saying that no man ever applied the principle in his own individual case. We never heard of a man who, through some miscalculation, had bought more clothes than he could wear, throwing them away or burning them in order that he might have an inducement to buy more.

We have mentioned examples of these fallacies in a few of the many forms in which we daily see them in the newspapers, in the speeches of Congressmen, the resolutions of labor and socialistic meetings, and tacitly and by implication in the restrictive rules of trades-unions. In some of these examples the fallacy will be obvious enough to the reader. In others he may find it to need illustration. We may take as a typical average case that of a house which is burned down. By this accident the owner is undoubtedly injured; but are not carpenters, bricklayers, and plasterers thereby benefited, either to a degree equivalent to the loss of the house, or at least to an appreciable fraction of it ? We answer, No. It is true that these individual mechanics who may be employed to build the house may be benefited in a slight degree, but, as has already been shown, the demand for labor is not increased by the destruction of the house. The sum which the owner is now to spend in the employment of bricklayers, carpenters, and plasterers would, had the house remained, have been expended by him, or by those from whom he is to borrow the money, in the employment of labor in other forms. The demand for labor which is thus gained in one direction is lost in another direction, and one class gains at the expense of another. On the other hand, the owner of the house has lost its whole value, and, on the whole, the total loss to the community is measured by that of the house.

Special Consideration of the Money Fallacy. The fallacy which we have now to consider in detail, although from the same root as the labor fallacy, has little in common with it, and has an entirely different history. The labor fallacy may be described as affecting the great mass of the community in a mild form, and as not varying much from year to year or from generation to generation. The money fallacy, on the other hand, is periodic, overwhelming us, not at regular intervals, but from time to time, owing to the influence of changing events. The Americans more than any other people have been its victims. It was at its height during the ten years following the outbreak of the Civil War. During the decade following it greatly subsided; and at the present time, although shared by a large party, is not doing serious damage. Yet it is constantly latent in human nature, and therefore liable to break out at any time after the disastrous effects of the policy it gives rise to on one generation have been forgotten by the succeeding one. It is therefore one which the student of economics should thoroughly understand. It consists in considering the monetary unit which we call one dollar as an absolute measure of value, deriving its existence and its value from law.

During the years 1862 and 1863 our government issued hundreds of millions of legal-tender notes to circulate as money. The result was a gradual but continual rise in prices, until the great body of things which people had to buy cost twice as much as before. Wise men said the dollar was depreciated to one half, but the public said the paper dollars were as good as any other dollars because they performed all the functions of dollars. No one had any difficulty in passing off all the money that he received, and having it accepted as that number of dollars which it pretended to be. Money, it was reasoned, was only the medium of exchange. A man gets it by selling only that be may buy with it; and if he can do this, what more is wanted.

The reply is One very important thing more is wanted. He must not only be able to buy with it, but he must be able to buy a dollar's worth. The other replies, But he does get a dollar's worth. A dollar's worth is exactly what a dollar will bring, and he certainly gets that. You cannot enforce any law prescribing how much a dollar shall bring.

The economist admits all this, but yet claims that something is wanting. Although the man who takes a dollar cannot have any authoritative and legal understanding as to how much he can buy with that dollar next week or next year, yet he does want to feel a reasonable assurance that he can buy as much with it then as he can now. If he builds a house, neither the builder nor the law itself can guarantee him against the house being demolished by an earthquake, unroofed, burned by a fire, or worn out by the action of the weather. But because he cannot have such a guarantee, it does not therefore follow that he should not care how combustible the materials are and how poorly the house is built. Notwithstanding the impossibility of the guarantee, he wants a house that will probably be as good next year as it is this, and which will endure for the use of his children and grandchildren.

Now, it is the same with a dollar. If he foresees a reasonaable probability that a year hence his dollar will only buy him the tenth part of a dinner, then it can no more fulfil the functions of a dollar with him than the house which is sure to decay in a year can fulfil the functions of a house. He wants a dollar which will buy as good a dinner next year as it will now, and which, if he invests it, will buy as good a dinner for his grandchildren as it will for him. If Congress is to furnish him the dollar, the impossibility of an absolute guarantee of this sort does not justify the issue of a dollar which it is certain will not fulfil the required conditions.

The fallacy on which all this difficulty rests is that of looking upon the dollar as an absolute standard of value. During the period above referred to a gold dollar was worth two or more dollars in paper. This was a state of things which many intelligent people had a difficulty in understanding, and which they attributed to the machinations of speculators. They reasoned that both the gold and silver dollars derived their value from laws of Congress, and were declared of equal value by this authority. Therefore the value must really be the same, although in Wall Street and at the banks they were considered different. The answer to this is that a dollar is not a standard of value in any other sense than a foot is. If Congress should legalize two different lengths and declare each of them a foot, that would not make them equal. If it should direct the foot measure to be made of a kind of material which would shrink in a few days to one half its length, yet although this measure might be called a foot, it would not be of the same length. In declaring anything one dollar Congress only gives it a name, but does not give a value. The principle involved may be expressed as follows : Calling an object one dollar, and declaring it a legal tender for that amount, no more gives it a definite value than declaring a piece of metal to be a foot gives it a definite length.

We qualify the word value here by the word definite, because, as we shall hereafter see, this proposition is subject to an important limitation. Thus the difficulty which men experience in understanding how there can be two values to the dollar is as absurd as a difficulty in seeing how two different lengths could each be one foot. The reason why a difficulty is felt in the one case which is not felt in the other is that length is something which can be made evident to the eye, while value is not. The inequality of two foot measures is made evident by merely putting them together and seeing how they look. The inequality of two dollars can be shown only by going into the public market with them and seeing how much they will respectively buy. Even then the inequality is manifest only to the eye of reason and not to the eye of sense.

Connected with this notion is the belief that the dollar de-rives its value from the government stamp upon it. This belief admits of a test so simple that it is wonderful how it can acquire the currency it does. Were it correct, a coin might be vastly more valuable than the bullion out of which it was made, and the excess of value would depend on the greatness and power of the nation by which it was stamped. But, as a mat-ter of fact, leaving out the expense of minting, and the exceptional cases of fractional currency, the value of any coin is exactly that of the bullion from which it is stamped. The dollars of the poorest South American states, the sovereigns of England, and the uncoined gold bars fresh from the mines, all exchange in the markets of the world according to the amount of gold or silver in them.



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