Archive for the ‘Fallacy’ Category

Fallacy of Tariffs as an Economic Advantage

December 3, 2007

Suppose that in our country we import woolen sweaters from country A, and the sweaters sell for $25.

The local sweater industry petitions the government to impose, say, a $5 tariff (duty) on the imported sweaters. They argue that they cannot produce woolen sweaters for $25 and need this tariff in order to compete with country A. So, the government imposes a tariff.

As a result, the local sweater industry is able to employ many people. However, the consumers now pay $30 for the same quality sweater. The consumers no longer have that $5 to spend on other things. Thus the local sweater industry thrives, but a hundred other industries shrink.

You can see the sweater employees going to and from the factory each day, and you think, “The tariff was a good idea, it has given employment to people in our country.” But you don’t see the hundred other industries that have shrunk and all the lost jobs from that.

— Extracted from Economics in One Lesson by Henry Hazlitt

We see this cognitive error recurring over and over: humans focusing on what they can immediately see, and failing to consider those things that are not immediately or easily visible. See Cognitive error: acting on only what is immediately visible

The price-equals-quality fallacy

September 11, 2007

“We tend to think of higher-priced goods as being of better quality than lower-priced goods; but while You get what you pay for may be folk wisdom, it isn’t always true.”

“In the 1950s, Pepsi competed with Coca-Cola by selling its soda at half the price of Coke and advertising twice as much for the nickel. But more people bought Pepsi after it raised its price, a lesson not lost to other marketers. ”

“The price-equals-quality fallacy is exploited in many ways. Many second-tier private colleges and universities make sure the sticker price of their tuition is close to (or even higher than) Harvard’s, Princeton’s, and Yale’s, in the hope that parents and students will take the mental shortcut of equating price with quality.”

“Consumer Reports magazine, which conducts carefully designed tests on all sorts of products from automobiles to toasters to TV sets, often finds lower-priced goods to be of higher quality than those costing much more. For example, in a comparison of upright vacuum cleaners on the magazine’s website in 2006, the $140 Eureka Boss Smart Vac Ultra 4870 was rated better overall than the $1,330 Kirby Ultimate G Diamond Edition or the $700 Oreck XL21-700. The Eureka was also better than the highly advertised $500 Dyson DC150.”

Unspun by Brooks Jackson and Kathleen Hall Jamieson

Fallacy of Destruction as an Economic Advantage

July 16, 2007

A young hoodlum heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies.

After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier (window maker).

As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles.

The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has to replace a window, he will have to go without the suit (or some equivalent luxury or need). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit.

If we think of the baker as part of a community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier’s gain in business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten about the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

Thus we see the fallacy of destruction as an economic advantage. Anybody, one would think, would be able to avoid this fallacy after a few moment’s thought. Yet this fallacy, under a hundred different disguises, is the most persistent in the history of economics. It is solemly reaffirmed every day by great captains of industry, by chambers of commerce, by labor union leaders, by editorial writers and newspaper columnists and radio and television commentators, by learned statisticians using the most refined techniques, by professors of economics in our best universities.

— Economics in One Lesson by Henry Hazlitt