IANA economist, but ISTM there are certain principles of “folk economics” that are so widely-believed that politicians have no choice but to pander to them.
When I googled “folk economics” I see that there’s a Wikipedia page but it’s just a stub. Maybe there’s a better term for this?
Anyway, in the meantime, I thought it would be interesting to try to list out some of the implicit economic premises many believe:
[li]Obvious one to start: economics is zero sum. For one person / company / country to gain wealth, an equivalent number of people must lose the same amount.[/li][li]Countries need to “balance their books”: a country running a deficit year on year is as ominous as an individual living off a credit card.[/li][li]When we say a country is in debt, we mean the population of that country collectively owes money to other countries.[/li][li]It’s good to export and bad to import. Making tangible goods is better than providing services (these are not always wrong of course, but they’re a long way off always right too)[/li][/ol]
I’m not an economist by any means, either, but it seems to me that the “law” of supply and demand has become a kind of folk economics, because it’s effectively applicable only when all other things are equal, which they never are, yet so many people, after taking econ 101, clutch onto it without taking that into consideration, and unthinkingly believe that it justifies or explains everything.
Do you mean examples like when people believe that monopolies / price gouging will simply be corrected by the market eventually: the more unfair prices are, the easier it becomes for competitors to flourish (ignoring that the real world is not quite so simple, and also why must we wait for “eventually”?)
Newton’s “Laws” of motion are effectively applicable only in a frictionless world with no air resistance, but so many people, after taking HS physics (or even Science Class, if they are paying attention) clutch onto them. Why? Because it explains a lot of how the real world works.
Well, you can certainly find real economists who would agree that laws can be appropriate in response to certain forms of monopolies or oligopolies, particularly if barrier to entry is very high. They may not agree with ‘the people’ as to which real world situations fall under this category, but the appropriateness of regulation in response to some monopolies isn’t going to be a wierd position for a real economist to have.
Widely believed folk economic law: Fiat money isn’t real and will inevitably collapse into worthlessness. Only money backed by gold (preferably species) is real and gold-backed money holds a stable value forever.
“You get what you pay for.” That is, price is a reliable predictor of quality.
Perhaps related to this, the notion that the amount of money we spend on something is directly proportional to the degree to which we value it. Seen in statements like “The Federal Government spends X billion dollars on A, but only Y amount on B (so our priorities are obviously out of whack).”
Not that these don’t have a grain of truth to them, but they don’t apply as consistently as some people think.
Interesting thread (and idea) but I’m not sure “folk economics” is the right term or base idea. Maybe it is. Folk etymology is popular, seemingly logical explanations for word meaning; okay. But there are lots of popular misunderstandings of complex systems that aren’t tagged with the back-porch, sippin’-lemonade benignity of “folk.”
And I don’t think the misunderstandings of economics are as benign as believing that “okay” comes from an old Indian word. Have the wrong idea about a word, lose a grade point; have wrong basic ideas about economics… make all kinds of life-affecting poor decisions, down to voting for clowns with simple solutions.
Don’t have better term on tap, though. This one is so close to the mark, but unfortunately too “gentle” for my comfort. Cargo cult economics? Voodoo economics? Ignoromics?
I think he means that the law of supply and demand is only applicable in the real world to things like collectibles. The supply of everything else is virtually unlimited, according to planned use of resources, and as the economy expands, desire replaces demand. In real commerce, prices are whatever people can be persuaded to pay for them. If an economy is expanding, it is an elite who is the driver and beneficiary of the expansion, and prices are then based not on supply and demand, but marketing and desire.
Do you recall the “Jewel” app for the original iPhone? It did nothing but show an image of a rotating jewel (a ruby, IIRC). It cost $5,000, which was its whole point. It sold some large number of instances.
I’d add in: “For countries, the debt to GDP ratio passing 1 is some kind of tipping point – a number greater than 1 is much much worse than one less than 1”. GDP is just a measure of “income” for a country that is used to normalized debt measurements for comparison. Paying off debt by confiscating the total economic output of the country for a year is not something that is ever likely to happen.
Related to this last one:
[li] It is very dangerous for National Debt to be held by foreign sovereigns [/li][li] … because the National Debt can be “called” by the holder on-demand[/li][li]Conversely, defaulting on the debt is a trivial way to just leave the specific creditors screwed, you OTOH will be fine and flush with cash.[/li][/ul]
Fallacy. The method of producing and distributing fiat money may collapse, but that will be concomitant with an alternate or parallel fiat. As long as goods and d
services are moved from he point of production, there will need to be an agreed-upon means of valuing them, and if there isn’t, there will be by 9 oclock tomorrow morning.
If the world suddenly loses faith in the US dollar, there are plenty of substitutes in existence that can be declared to have a certain value, or which will float with a certain value according to the worth of goods and services for which they will be accepted in exchange.
There have been in very recent times, and may still be as I write, “currerncy” being accepted that was printed by local private banks. I saw some in Argentina about 20 years ago. First time I was in Britain, I had pound notes from the Scottish Linen Bank, accepted everywhere at par with those with the queen on them.
If you have eggs and know your plumber will accept dollars, you will continue to give me eggs for a dollar, and your plumber will accept dollars because he knows you will take them for eggs. That is not for the global central banks to decide, that is beween you and me and the plumber. If you refuse the dollar, you’ll accept something else for them, before they spoil.
I’ve found that when people say “it’s basic supply and demand…” whatever they say next is almost always wrong. I think that’s because for people who actually understand economics, supply and demand are so foundational to microeconomics that they’re rarely the best terms for whatever we’re trying to describe. We have so many other terms available to communicate. So the only people left trying to tell everyone it’s all supply and demand are people who don’t understand it.
The price elasticity of demand for most consumer goods is perfectly inelastic, or nearly so. When a new tax is imposed or someone sues a company, the added costs are just “passed on” to the consumer. There’s never a tax incidence for the supplier at all and people who think otherwise are naive.