# Economic myths and fallacies **URL:** \ **Category:** Great Debates\ **Created:** [August 25, 2013, 6:05pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140 "2013-08-25T18:05:00Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [August 25, 2013, 6:05pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/1 "2013-08-25T18:05:00Z")
Muth: When you buy stocks, you put money in the stock market. This one is one that’s easily proven wrong, but that lots of people seem to believe implicity anyway. For example: [When Stock Market Prices Drop , Where’s the Money?](http://onswipe.investopedia.com/investopedia/#!/entry/when-stock-prices-drop-wheres-the-money,5216b1bcda27f5d9d0101213) [When stocks take a beating, where does the lost money go?"][Q:]When stocks take a beating, where does the lost money go?]([Q:) The money doesn’t “go” anywhere, of course, because there’s no money in it. It’s like a Ponzi scheme (I use “like”, rather than “is”', on purpose.)You buy for a price, hoping someone else will buy for a higher price later on. Myth: Stocks are called [“The Greatest Wealth Creating Machine of all Time.”](http://www.investmentu.com/2007/November/stock-market-investing.html) But, if you’re talking about capital gains, there’s not “wealth” being created. Imagine a group of men sitting around a table. One of them owns a pebble, and sells it for a dollar. He proceeds to sell it for $2. The new owner sells it for $4, and they keep at it, eventually bidding up the price of the pebble to $1,000,000,000. The men sitting at the table have - collectively - increased their net wealth by $1,000,000,000. They’re all a lot richer, but nothing’s been made. Nobody’s served coffee, or planted corn, or patented anything, or written a novel. Stock trading doesn’t itself create wealth. It makes some people richer, the exact amount amount it make other poor. (Plus, a lot of Wall Street peole make money along the way.) ---
**Author:** ![tomndebb](https://avatars.discourse-cdn.com/v4/letter/t/b9e5f3/32.png) [@tomndebb](https://boards.straightdope.com/u/tomndebb)\ **Post date:** [August 25, 2013, 6:08pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/2 "2013-08-25T18:08:20Z")
Were you looking for a debate, here? ---
**Author:** ![Johnny\_L.A](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnny_l.a/32/1084_2.png) [@Johnny\_L.A](https://boards.straightdope.com/u/Johnny_L.A)\ **Post date:** [August 25, 2013, 6:23pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/3 "2013-08-25T18:23:13Z")
> [@tomndebb](#): > > Were you looking for a debate, here? ISTM he is proposing two things: That the stock market is like a Ponzi scheme, and that the stock market doesn’t produce anything. So the debate would be whether those proposals are true. ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [August 25, 2013, 6:25pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/4 "2013-08-25T18:25:10Z")
[TVTropes](http://tvtropes.org/pmwiki/pmwiki.php/UsefulNotes/Economics), believe it or not, has a good list of economic fallacies. Note this one in particular: > [@](#): > > 1. **America the bankrupt:** National debts don’t work like your personal debt. For example, people don’t buy your debt to prop up your currency. Yet for some reason a lot of writers tend to think of the national debt in the same terms as a bank loan, with angry creditors and everything. When this trope is invoked expect to see a consortium of angry foreign dignitaries banging on a conference table that they want their money back. In reality, if countries actually acted like this, the global financial system would probably collapse pretty spectacularly and everyone would be screwed. This trope is not specific to America, but for some reason Americans are exceptionally paranoid about the National Debt, particularly when the Chinese are buying it up, and now not buying it anymore. Oddly enough, America’s National Debt isn’t even that bad by international standards. Also, the US national debt is in terms of dollars, and the government can create as many dollars as they need to pay off the debt. Everyone would be paid the amount owed, but the new dollars would lead to inflation. The key here is that governments usually owe substantial portions of their debt to ‘themselves,’ i.e. either the government owes money to different branches, or those branches hold their assets as bonds and treasury bills instead of money; by owing money to yourself, you usually don’t charge yourself interest (beyond inflation) and you theoretically can’t default on money you owe yourself. This is how Japan can have gross debt worth over 100% of their yearly economic output and have little economic effects: 70-80% of its debt is owned by the Japanese Central Bank. In the United States, around 35-40% of the government debt is owed to itself, mainly to the Social Security Administration. Also, debt owned to foreign entities makes up MUCH less of the debt than people seem to think: as an example, China owns only 6% of the total US debt. ---
**Author:** ![Walton\_Firm](https://avatars.discourse-cdn.com/v4/letter/w/45deac/32.png) [@Walton\_Firm](https://boards.straightdope.com/u/Walton_Firm)\ **Post date:** [August 25, 2013, 6:31pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/5 "2013-08-25T18:31:25Z")
> [@LinusK](#): > > The men sitting at the table have - collectively - increased their net wealth by $1,000,000,000. > > They’re all a lot richer Really? Wow, I didn’t know getting rich was so easy! I’m going to get some friends together and organize a pebble-selling party right away! ---
**Author:** ![treis](https://avatars.discourse-cdn.com/v4/letter/t/bc79bd/32.png) [@treis](https://boards.straightdope.com/u/treis)\ **Post date:** [August 25, 2013, 6:35pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/6 "2013-08-25T18:35:24Z")
> [@LinusK](#): > > It’s like a Ponzi scheme (I use “like”, rather than “is”', on purpose.)You buy for a price, hoping someone else will buy for a higher price later on. Or you buy if the net present value of expected dividends is higher than the current stock price. ---
**Author:** ![aNewLeaf](https://avatars.discourse-cdn.com/v4/letter/a/ac91a4/32.png) [@aNewLeaf](https://boards.straightdope.com/u/aNewLeaf)\ **Post date:** [August 25, 2013, 6:46pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/7 "2013-08-25T18:46:57Z")
The stock market certainly makes it possible for many businesses to grow and expand and become more profitable. So in that sense it makes money, even if stock trading itself is a zero-sum game. ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [August 25, 2013, 6:51pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/8 "2013-08-25T18:51:06Z")
> [@tomndebb](#): > > Were you looking for a debate, here? So the points of debate would be, (1) is there any money in the stock market? (And if it’s obvious that there’s not why do so many people think there is?) And, (2) if the market doesn’t so much “build” wealth, as shift money from one place to another, why do the call it a “wealth building machine”? ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [August 25, 2013, 6:59pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/9 "2013-08-25T18:59:39Z")
> [@Walton\_Firm](#): > > Really? Wow, I didn’t know getting rich was so easy! I’m going to get some friends together and organize a pebble-selling party right away! Alternatively, you could organize a gold selling party (it could be a gold pebble, if you like, or a gold colored one), or a baseball card party, or beanie-babies, or tulip bulb, or what’re. The principles the same, regardless. ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [August 25, 2013, 7:04pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/10 "2013-08-25T19:04:16Z")
> [@aNewLeaf](#): > > The stock market certainly makes it possible for many businesses to grow and expand and become more profitable. But that only happens when the **company** sells the stock. Subsequent trades of a given share provide no revenue to the company. ---
**Author:** ![Simplicio](https://avatars.discourse-cdn.com/v4/letter/s/c37758/32.png) [@Simplicio](https://boards.straightdope.com/u/Simplicio)\ **Post date:** [August 25, 2013, 7:05pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/11 "2013-08-25T19:05:11Z")
> [@LinusK](#): > > Alternatively, you could organize a gold selling party (it could be a gold pebble, if you like, or a gold colored one), or a baseball card party, or beanie-babies, or tulip bulb, or what’re. The principles the same, regardless. But a stock isn’t like any of those things. A stock represents ownership of a company, which is (hopefully) growing, buying more physical capital, patenting more goods, etc. If you bought stock in Microsoft in 1986 and still have it, you own something that is in fact a much larger company then it was, and is correspondingly worth more money. Or put another way: how much does a pebble pay in dividends? ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [August 25, 2013, 7:09pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/12 "2013-08-25T19:09:50Z")
> [@Simplicio](#): > > But a stock isn’t like any of those things. A stock represents ownership of a company, which is (hopefully) growing, buying more physical capital, patenting more goods, etc. If you bought stock in Microsoft in 1986 and still have it, you own something that is in fact a much larger company then it was, and is correspondingly worth more money, OTOH, the stock market is hypersensitive. An item in the news can send prices soaring or plummeting, and not because of any change in business success of the publicly-traded corporations represented. ---
**Author:** ![Honesty](https://avatars.discourse-cdn.com/v4/letter/h/f04885/32.png) [@Honesty](https://boards.straightdope.com/u/Honesty)\ **Post date:** [August 25, 2013, 7:10pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/13 "2013-08-25T19:10:24Z")
> [@Walton\_Firm](#): > > Really? Wow, I didn’t know getting rich was so easy! I’m going to get some friends together and organize a pebble-selling party right away! Laws and policies are structured so that getting rich is very hard if you’re starting from the bottom, but (those same the laws and policies) are carved in such a way that\* staying\* rich is much easier. Play with me here. Let’s say you win the lottery for $2 million dollars. Say, you’re responsible, so you spend the first $1 million and park the additional $1 million in a savings account with an annual percentage yield of 4%. You get ~$40,000 a year salary just for sitting on your ass, doing nothing, **and** that money is taxed at a lower rate than the rest of us. If I were God-King of America (please elect me), this would be reversed: capital gains would be taxed at highest marginal income-tax rate (which is currently 39.6%), while primary income up to the first $100,000 (or median income for zipcode, \*if \*greater), would be taxed at 0 - 15%, sliding up toward the highest marginal income-tax rate on the first $400,000 made. - Honesty ---
**Author:** ![Human\_Action](https://avatars.discourse-cdn.com/v4/letter/h/ac91a4/32.png) [@Human\_Action](https://boards.straightdope.com/u/Human_Action)\ **Post date:** [August 25, 2013, 7:13pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/14 "2013-08-25T19:13:35Z")
> [@LinusK](#): > > So the points of debate would be, (1) is there any money in the stock market? (And if it’s obvious that there’s not why do so many people think there is?) Yes, using the common conception of what a stock market is. Buying stocks on the open market is “putting money in the stock market”, in that it is an investment in a specific investment vehicle. Selling a stock would be “taking money out of the stock market”. Similarly, buying gold as an investment is “putting money in the gold market”. > [@LinusK](#): > > And, (2) if the market doesn’t so much “build” wealth, as shift money from one place to another, why do the call it a “wealth building machine”? It does both; the stock market funds companies that then create wealth. As a result, investment in stocks over the long run has produced outstanding returns, as your article illustrates. For an individual who invests in stocks and sees a great lifetime return, the market has functioned as a “wealth building machine”, but this is because of the performance of the companies that issue stock. The wealth doesn’t come from thin air. ---
**Author:** ![Simplicio](https://avatars.discourse-cdn.com/v4/letter/s/c37758/32.png) [@Simplicio](https://boards.straightdope.com/u/Simplicio)\ **Post date:** [August 25, 2013, 7:14pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/15 "2013-08-25T19:14:25Z")
> [@BrainGlutton](#): > > OTOH, the stock market is hypersensitive. An item in the news can send prices soaring or plummeting, and not because of any change in business success of the publicly-traded corporations represented. Becuase share prices represent expectations about future earnings as well. So a news item that makes it sound like profits will shrink will affect the share (which is why small companies with no profits can still be a worth a lot, people expect them to be worth more in the future). But that doesn’t change the fact that shares represent something physical, and something whose value changes over time for (usually) rational reasons.\* ---
**Author:** ![Simplicio](https://avatars.discourse-cdn.com/v4/letter/s/c37758/32.png) [@Simplicio](https://boards.straightdope.com/u/Simplicio)\ **Post date:** [August 25, 2013, 7:16pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/16 "2013-08-25T19:16:27Z")
> [@BrainGlutton](#): > > But that only happens when the **company** sells the stock. Subsequent trades of a given share provide no revenue to the company. Trades don’t, but the stocks themselves do. A stock represents a claim on the profits of a company. In some cases this is actually paid out in the form of dividends, but in others its reinvested in the company. This reinvestment funds the companies further growth. ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [August 25, 2013, 7:17pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/17 "2013-08-25T19:17:44Z")
> [@Simplicio](#): > > Trades don’t, but the stocks themselves do. A stock represents a claim on the profits of a company. In some cases this is actually paid out in the form of dividends, but in others its reinvested in the company. This reinvestment funds the companies further growth. But, that reinvestment comes from the profits, not from the stocks. A privately-held company could reinvest its profits in exactly the same way. ---
**Author:** ![Simplicio](https://avatars.discourse-cdn.com/v4/letter/s/c37758/32.png) [@Simplicio](https://boards.straightdope.com/u/Simplicio)\ **Post date:** [August 25, 2013, 7:31pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/18 "2013-08-25T19:31:40Z")
> [@BrainGlutton](#): > > But, that reinvestment comes from the profits, not from the stocks. A privately-held company could reinvest its profits in exactly the same way. A privately held company has stock, its just not traded on the market. More generally, I don’t think there’s really any difference between “stock” and “a claim on the companies profits and capital”\*, so saying a company could reinvest its profits without stock is kind of meaningless. \*(Indeed, that’s basically the etymology of the term: stock: “supply for future use” (early 15c.), “sum of money” (mid-15c.)) ---
**Author:** ![aNewLeaf](https://avatars.discourse-cdn.com/v4/letter/a/ac91a4/32.png) [@aNewLeaf](https://boards.straightdope.com/u/aNewLeaf)\ **Post date:** [August 25, 2013, 7:44pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/19 "2013-08-25T19:44:24Z")
> [@BrainGlutton](#): > > But, that reinvestment comes from the profits, not from the stocks. A privately-held company could reinvest its profits in exactly the same way. Indeed. The purpose of offering stock is to open up ownership to more people, bringing in more money. A privately owned company has a more limited pool of funds but greater autonomy. A publicly traded company can have greater resources, but is accountable to stockholders. ---
**Author:** ![elucidator](https://avatars.discourse-cdn.com/v4/letter/e/8edcca/32.png) [@elucidator](https://boards.straightdope.com/u/elucidator)\ **Post date:** [August 25, 2013, 7:57pm UTC](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140/20 "2013-08-25T19:57:20Z")
There are the CEO’s who are paid bonuses that often exceed their actual salary by factors of ten thousand according to how much they add to the stock value. They are voted these blandishments by the Board, elected by or consisting of people who own lots of stock. Value of the stock goes up, CEO gets richer, Board that hires him gets richer. Or its doesn’t, and you do the Ballmer Bounce, you get fired and turned out wearing the Golden Cone of Shame and cry all the way to the bank. Actually, the bank sends a limo, but you get the idea. Hysterically, Wall Street luvs luvs luvs the guy who comes on board talking about getting “lean and mean”, cutting labor costs, increasing productivity without raising wages for the peed upon. Feh. [Next page](https://boards.straightdope.com/t/economic-myths-and-fallacies/667140.md?page=2)