Understanding Economic Fallacies

Post-Hoc Fallacy:

The post-hoc fallacy originates from the Latin phrase post-hoc ergo propter hoc, which translates to "after this, therefore because of this." In simpler terms, it suggests that because event Y followed event X, event Y must have been caused by event X. An illustration of this fallacy is the assumption that the 1929 stock market crash directly caused the entire US economy to collapse and led to a surge in unemployment. The narrative states that the significant crash triggered a prolonged crisis.

However, upon closer examination, it becomes evident that shortly after the stock market crash, unemployment actually started to decline. The situation worsened for job seekers much later, following government intervention. US policymakers fell prey to the post-hoc fallacy, blaming the stock market for the economic downturn.

Reality, however, has a way of prevailing. More than fifty years later, during the stock market crash of 1987, the economy unexpectedly grew despite the pessimistic predictions of many politicians.

Zero-sum Economic Fallacy:

Essentially, the zero-sum fallacy implies that if one individual prospers, it must come at the expense of another. This misconception often arises in the context of international trade. Some argue that the "winners" are typically wealthy, developed nations, while the "losers" are poorer, less developed countries. They contend that powerful nations have exploited the vulnerability of their less affluent counterparts.

Yet, those who subscribe to this notion are allowing self-righteousness to cloud their judgment. They fail to recognize how trade has brought prosperity to many of these economically disadvantaged countries. Countries like South Korea, Hong Kong, and Singapore have thrived since opening up to investments from affluent Western nations.

The outcome was far from a zero-sum game: both parties appeared to benefit significantly from the exchange.

The Fallacy of Composition:

This fallacy entails assuming that what holds true for a part is also true for the whole. For instance, "the door of the house is made of wood, therefore the entire house must be made of wood."

An instance of this fallacy is how local governments aim to "revitalize" specific city districts and neighborhoods. While these efforts may attract external investments, they often displace struggling businesses and low-income residents. Such initiatives do not yield any overall economic advantage. Nevertheless, governments worldwide persist in undertaking extensive 'improvement' projects.