Book Review: Economic Facts and Fallacies

Aaron Bandler
Posted: Aug 04, 2015 12:01 AM
Book Review: Economic Facts and Fallacies

Banks are discriminatory in handing out loans to minorities. Women earn less money than men due to employer discrimination. There are wide disparities in wealth and income because the rich steal from the poor. Tenure provides comfort and security and enables teachers to better educate students.

These are among the several fallacies that economist Thomas Sowell debunks in “Economics Facts and Fallacies: Second Edition.” In seven chapters, Dr. Sowell takes the most common economic misconceptions and deconstructs them with thorough research, scrutiny, and very sophisticated writing.

The first chapter focuses on the zero-sum fallacy (that economic well-being occurs by taking from somebody else), fallacy of composition (assuming that because something works for some people it works for everyone), post hoc fallacy (assuming correlation equals causation), chess pieces fallacy (central planners thinking they can arrange members of society like pieces on a chess board), and the open-ended fallacy (not factoring that resources are limited and have other uses). Each fallacy is taken apart with data and concrete examples.

For instance, the zero-sum fallacy, which Keynesian economists like Paul Krugman commit all the time, is illustrated through Sowell’s example of rent controls. Rent controls are implemented with the intention of making housing cheaper for tenants, but because the prices are below market value, there is less supply in housing:

The immediate effect of rents set below where they would be set by supply and demand is that more people seek to rent apartments for themselves, now that apartments are cheaper. But without any more apartments being built, this means that other people cannot find vacant apartments. Moreover, long before existing buildings wear out, auxiliary services like maintenance and repair decline, since a housing shortage means that landlords are no longer under the same competitive pressures to spend money on things in order to attract tenants, when there are more applicants than apartments during a housing shortage.

Dr. Sowell cites Egypt as an example, explaining that when Egypt implemented rent controls in 1960, many Egyptian families were unable to find places to live and had to resort to living in cramped, poorly maintained homes as a result. Fallacies have consequences.

The first chapter in and of itself is more than most people have ever learned from a college economics textbook. The fact that Dr. Sowell goes on to debunk under pervasive fallacies, many of which are taught on college campuses, makes the book even better.

I had an anthropology class once where my professor was constantly lamenting on what she perceived to be as massive stratifications in wealth and income in the U.S. and worldwide. She cited statistics saying that the top 1% worldwide own over 80% of the wealth. Many “young skulls full of mush,” as Rush Limbaugh would say, ate it up and were convinced, that this showed the evils of capitalism. If only they had read Chapters 5 and 7 of “Economic Facts and Fallacies.” Dr. Sowell writes that the fallacy of wealth and income inequalities is that they study inequalities between groups rather than individuals. When Dr. Sowell presented the data that studied changes in an individual’s wealth and income over a period of time, it showed that the people inhabiting each income bracket are constantly changing, with those who are poor becoming rich and vice versa. Dr. Sowell also points out that the inequality statistics also don’t take into account transfer programs (food stamps, Medicaid, etc.), and when they are taken into account it shows that there really isn’t as much inequality as those on the left (like my former professor) say there is.

Chapter 7, which focuses on wealth inequality between countries, is a particularly interesting chapter since it shows the variables that aren’t taken into account when global wealth inequality statistics are presented. The left would have you believe that it’s due to Western imperialism and exploitation of Third World countries, but Dr. Sowell provides research showing that, in fact, countries touched by Western influence performed better economically than those who rejected it (and a subsequent economic collapse followed). The variables that cause a country to be Third World status include geography, culture, and law and order.

The law and order section was especially fascinating to me since it explained that there is actually a lot of wealth that is created in these countries, but it’s completely off the books due to massive amounts of government regulation and corrupt governments targeting entrepreneurial minorities and not recognizing property rights. As Dr. Sowell explains, millions of homes are built in Third World countries illegally due to regulation and because they’re not recognized the government. As a result, banks won’t provide start-up capital to somebody living in property that’s not legally recognized, meaning that individuals have to resort to receiving money from close friends and family, which severely limits their sources of capital. That’s why many peddlers in the Third World remain peddlers their entire life. It becomes clear then that many Third World countries would be able to perform better economically if they simply had better government policies, and that redistribution of wealth would not solve the problem.

Some of the other notable fallacies that Dr. Sowell debunks include the feminist claim that women earn less than men because of employer discrimination, a claim that falls apart under scrutiny when taken into account the fact that women work in lower paying fields and work more less hours due to motherly responsibilities. Dr. Sowell also dispels the notion that inequalities in race are due to racism, explaining that there have always been differences in ethnic groups worldwide because of differences in geography and cultures, among other factors.

While it is a difficult read due to the sophisticated language, Dr. Sowell’s “Economic Facts and Fallacies” is essential reading for those who are interested exposing and taking down the common fallacies that the left makes in their arguments. This book will be especially helpful in arming yourself with information to argue with your professor when they try to teach these fallacies as if they’re fact.