Tuesday, March 3, 2015

Debunking Economic Fallacies

What follows is my recent Op-Ed in The Orlando Sentinel.  Enjoy...

While some people cannot resist the temptation to drive slowly and gawk at car accidents, I struggle with a different fascination that provides no more joy than is derived from staring at carnage on Interstate 4.

My problem occurs over a cup of coffee every morning with the Letters to the Editor page of the Orlando Sentinel in front of me.
It is here that I find the musings of residents of Central Florida on the favorite topic of economics. Specifically, the letters I most often gravitate toward are the ones filled with emotional rants against wealth, profit, self-interest, capitalism and anything that allows the letter writer to claim some sort of victim status at the hands of greedy businesses and "obscenely rich" Americans.

I always check to see if these folks are economists. Alas, they never are.

Unwittingly, many letter writers are passing along misguided economic fallacies that, when believed by others, welcome more unnecessary government intrusions into the lives of citizens who would be better off with less government in their lives.
Therefore, I will attempt to shed some light on some of the inherent, inarguable truths about economics that every American — whether they know it or not — implicitly agrees with.
One letter writer argues that people who apply their "time, effort, knowledge and skills to produce goods or services" are more valuable than those who enjoy the "accumulation of wealth from wealth."
I put in time and effort, possess knowledge and have skill in teaching college students the principles of economics. For my work, this letter writer would argue that I deserve more money than, say, an investor who pours millions of dollars into the stock market. The investor simply gains wealth from wealth, according to the Marxian theory espoused by this letter writer.

In reality, the investor is providing the necessary capital from which new and existing businesses can grow. This growth means job creation, new products and services, and greater income and wealth for far more people than I will ever assist. In order to have a vibrant, growing economy where even poorer people have cellphones, access to electricity, food and clothing, people like me are of far less value (measured by the returns to society from our work) than a wealthy person who is exposing his or her wealth to risks that generate immeasurable multiplier effects.

The same goes for the fallacy espoused by another letter writer. She argues that the "obscenely wealthy" become so on the backs of "thousands of poorly paid employees," citing the heirs to the Wal-Mart fortune as examples.


First, Sam Walton and his heirs are more special than their employees. This fact is derived from the laws (not theories) of supply and demand.

There are millions of people who can put a box of cereal on a shelf. There are not many people capable of starting (Sam Walton) or running (his kids) a global corporation. It is also a fact that the overall revenue generated by someone stocking a shelf is lower than the revenue generated by a CEO working on expansion plans all over the globe.

Without knowing it, we all agree with these ideas. Every day we pay homage to the capitalists out there who, out of their self-love, provide us with miraculous products and services and the jobs and income that follow. Everywhere in the world where people are not allowed to pursue money, we see poverty and emigration to nations that are more capitalistic. Yet, in America — the richest place in history, ignorance of where those riches came from abounds.

The inherent danger of failing to understand who creates wealth and where our pay comes from is clear. When economic ignorance is combined with a voters-registration card, terrible things happen.
Those terrible things come in the form of angry, resentful, coveting citizens voting for the politician who will promise the highest taxes, the most rules and the most redistribution of wealth that can be imposed on the real wealth creators.

When that trend starts, it does not take many years for the disgruntled masses to be left with greater poverty, fewer job opportunities and the question: "Where did all the rich people go?"

1 comment:

  1. To me there seems to be a difference between creating wealth and making money.
    Regarding your comment about investors, I understand companies raise capital by selling stock and investors are rewarded by selling the stock at a higher price later. I don't understand how the stock "market" benefits the company except in the minor capacity of facilitating trades. Managers, traders, and banks make a lot of money from derivatives of stock trading. I don't see that as creating wealth. It is more akin to "skimming" in my mind and a close cousin of gambling with others people's money. In fact, many economic problems have been created by these actions.
    Some.day I will have to sign up for one of your classes.