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Faculty of Business and Economics The IIPM, New Delhi

Very often, economists disagree because, as Henry Hazlitt has so succinctly put it, "Economics is haunted by more fallacies than
any other study known to man". Is there such a thing as "bad economics?" You bet there is, just as surely as there is good
plumbing and bad plumbing. If one means by "bad economics" the promotion of false reasoning, mistaken assumptions, and
shoddy intellectual merchandise, then Hazlitt's comment ought to be enshrined as a law!
It may be an oversimplification, but the essence of "bad economics" can be distilled into the undermentioned fallacies. Each of
them is a pitfall, which the good economist will faithfully bypass.

Fallacy of Subjectivity:
Most of generalizations in economic analysis are based on a set of assumptions. Some of these assumptions are sometimes stated
explicitly, and some implicitly in terms of phrases like ‘other things being equal’. Some of these assumptions are factual
statements, some are anti-factual or counter factual. As such, the interferences which are drawn from the set of assumptions can
at best be described as tentative hypotheses, subject to qualifications. The conclusions from economic analysis are, therefore,
probabilistic rather than deterministic. Those conclusions may be true. There is no certainty that they must be true. For example, a
statistical inference will hold true provided the sample size is sufficiently large and reliable. An economic theory will hold valid
provided assumptions on which it is based are more realistic and less restrictive. However in most of the arguments, the
propositions of economic analysis are accepted at their face value, without paying much heed to the nature of the underlying
assumptions. The result is probabilistic statements sell as deterministic ones. Consider this: workers often ask for high and higher
wages to compensate the increasing costs of living during periods of inflation. But wage increase may or may not compensate the
rising costs of living depending on whether or not workers maintain their productivity. If this productivity assumption does not
obtain, workers demand makes no sense. Thus, fallacious reasoning results from failure to unearth the underlying assumptions of
economic analysis.

Post hoc Propter hoc:


Post hoc ergo Propter hoc is Latin for "after this, therefore because of this." It is often shortened to simply post hoc. Some
philosophy books translate the Latin to simply: "If after, then therefore, because."
Post hoc, also known as "coincidental correlation" or "false cause," is a logical fallacy which assumes or asserts that if one event
happens after another, then the first must be the cause of the second. It is a particularly tempting error because temporal
sequence is integral to causality — it is true that a cause always happens before its effect. The fallacy lies in coming to a
conclusion based only on the order of events, which is not an accurate indicator. That is to say, it is not always true that the first
event caused the second event.
Post hoc is an example of affirming the consequent. It can be expressed as follows:
• When A occurs, B occurs.
• Therefore, A causes B.
Examples:
1. A rooster always crows prior to sunrise
2. Therefore: the rooster's crowing causes the sun to rise.
or,
1. Ice cream sales elevate greatly each June
2. The number of common colds lower greatly each July.
3. Therefore: higher ice cream consumption cures the common cold.
or,
Introduction to Micro Economics; Fallacies in Economic Thinking
Faculty of Business and Economics The IIPM, New Delhi

1. In autumn, leaves fall on the pavement.


2. Autumn is the season when cement pavements crack.
3. Therefore: the falling leaves crack the pavement.
This line of reasoning is the basis for many superstitious beliefs and magical thinking, connecting two things that have no actual or
logical connection. For example, if a person sees a coin on the ground and picks it up, and later receives good news, that person
may become convinced that finding the coin resulted in the good news, even though it was a mere coincidence.

The fallacy of the "free lunch":


Milton Friedman is one economist who has warned repeatedly, however, "there is no such thing as a free lunch!" Every "something
for nothing" scheme and most "get rich quick" plans have some element of this fallacy in them. Let there be no mistake about this:
if economics is involved, someone pays! An important note here regards government expenditures. The good economist
understands that government, by its very nature, cannot give except what it first takes. "Free electricity" for marginal and small
farmers is a good which millions of taxpaying Indians actually do pay for. All one needs to know about economics is "What is it
going to cost and who is going to pay for it?" That little nutshell carries a kernel of advice for the economist: don't be superficial in
your thinking!

The fallacy of composition:


This error involves individuals, wherein it holds that what is true for one individual will be true for all others. The example has often
been given of one who stands up during a football game. True, he will be able to see better, but if everyone else stands up too, the
view of many individual spectators will probably worsen. A counterfeiter who prints a million dollars will certainly benefit himself (if
he doesn't get caught) but if we all become counterfeiters and each print a million dollars, a quite different effect is rather obvious.
Many an economics textbook speaks of the farmer who is better off because he has a bumper crop but may not be better off if
every farmer has one. This suggests a widespread recognition of the fallacy of composition, yet it is a fact that the error still
abounds in many places. The good economist neither sees the trees and ignores the forest nor sees the forest and ignores the
trees; he is conscious of the entire "picture."

(Source: Adapted from various articles, the sources of which are


http://www.libertyhaven.com/theoreticalorphilosophicalissues/austrianeconomics/fallacieseco.html;http://en.wikipe
dia.org/wiki/Post_hoc_ergo_propter_hoc. and ‘Managerial Economics’ by M. Adhikary; Khosla Publishing House;
Reprint 2004. For more additional fallacies, please refer ‘Business Economics’ authored by M. Adhikari of Excel
Publishing; 2nd Edition)

Introduction to Micro Economics; Fallacies in Economic Thinking