Economic Sophisms Jude Wanniski August 9, 2002

Memo To: SSU students
From: Jude Wanniski
Re: Guest Lecture by Gene Callahan

Mr. Callahan, author of Economics for Real People, is a regular commentator on the Mises.org website. His offering of August 3 caught my eye because it addresses very basic issues in economics that are not addressed sufficiently in the news media. They seemed a perfect fit for our summer session in supply-side economics. Short and sweet.

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By Gene Callahan

Special-interest-group pleading often tries to hide behind supposedly economic arguments. It is important to debunk such arguments as they arise, so that the interest-group politics can be seen for what it is. So, in the spirit of Frederick Bastiat's Economic Sophisms, I offer the following:

'There Is a Shortage of Programmers'

Many advocates of government funding for technical education trot out arguments like the above. "There is a shortage of programmers," they say, "and it is hurting the U.S. economy; therefore, the government should sponsor more training programs."

What could they mean? On the one hand, there is a "shortage" of programmers in the same sense that there is a "shortage" of any economic good. Carl Menger demonstrated that people will pay a price only for goods that they could use more of than is currently available, and he called such items "economic goods." People don't (currently) pay for air, because there is more around than we can use. So, in that the service of programmers fetches a price, we can acknowledge that they are in scarce supply. But the same can be said for maids, ditch diggers, truck drivers, CEOs, and so on. Indeed, for any paid labor, we can conclude that it is scarce.

The people making the claim that there is a shortage of programmers must mean something else. But what could it be? Clearly, anyone who is a purchaser of programming services would like to see the supply more abundant, so that he could purchase the services more cheaply. On the other hand, suppliers of programming services would like to see the supply less abundant, as they would then be able to charge a higher price. The argument is usually put forward by tech company executives. We can conclude that what they mean is that they would prefer if everyone else subsidized their purchases of programming services. And I am sure they would. That doesn't mean their argument makes any economic sense.

'There Is No Affordable Housing in X'

This one regularly appears on the news, discussing housing prices in New York City, San Francisco, Silicon Valley, Los Angeles, Marin County, Fairfield County, and so on.

What should puzzle the person forwarding the contention is, if housing is "unaffordable" in those areas, then what are all those people doing living there? Obviously, the people residing in those places must find the housing "affordable," since they are affording it! In fact, it is usually places that are quite densely populated about which this argument is advanced. We never hear anyone complaining that housing in the Utah desert is "unaffordable."

What this boils down to is that the people who are complaining wish houses in the unaffordable area were cheaper. Again, we can see that, for those who do not have housing in that area but who hope to someday, it would be nice if someone would subsidize their desire. On the other hand, such a policy would hurt anyone who already has housing in those places, by lowering the value of their property. It would also hurt the property values of those who live in places where housing is "affordable," since not only would they probably be taxed to subsidize "affordable housing" in the area in question, but also the policy would result in a net migration of people from the "affordable" locations to the "unaffordable" one.

'America Has Enough Oil for Its Needs'

The opponents of drilling in ANWAR forward this argument. "Proponents of drilling in ANWAR," they say, "cannot demonstrate the need for more oil in the U.S."

This argument ignores the basic economic fact that decisions are made on the margin. How much oil one "needs" depends crucially on what one thinks the price of that oil might be. I might "need" far more gold if it were priced at $1 an ounce, just as I would "need" far less milk if it were priced at $100 per gallon.

Similarly, America's "need" for oil depends entirely on what the price of oil is. If the supply increases, for instance, because ANWAR is opened to oil exploration, the "need" for oil will increase as well. There is no single number that defines the human need for any economic good.

'Shorting Stocks Is Betting Against America.'

Peter Lynch and Warren Buffett, among others, have said, in the wake of the 9/11 attacks and the stock market downturn, that "betting against America" is a bad idea. Apparently what they mean is that investors should expect the American stock markets to always head upward, now and forever, world without end.

But shorting any particular stock or the market in general is not a "bet against America," whatever that might mean. There is no benefit to "American society as a whole" from having stock prices rise without rhyme or reason. The American people benefit from having stocks priced as realistically as possible. If you feel stocks are overpriced at some particular level, then by shorting the market, you are acting to bring those prices back into what you see as a more reasonable range. Such an action is not unpatriotic, nor does it hurt the American economy.

Of course, as Robert Murphy and I have pointed out (echoing Fritz Machlup), it hurts those who are currently holding overpriced stocks, while benefiting those who do not own them. Therefore, we can expect some of those who do hold those stocks to squeal like stuck pigs when the prices of those stocks go down, and to complain that those who are acting to lower those prices are unpatriotic scoundrels.

'We Are Suffering from Excess Capacity.'

Keynesians, such as Robert Brenner, in his book The Boom and the Bubble, put forward this argument to explain the bust following the late '90s boom.

But what would it mean for "society" to have "excess capacity"? Have all current human wants been satisfied, so that there is "too much" productive capacity at present, and we must wait until human wants increase before it can be used? Such an idea is on its face nonsensical.

Excess capacity can only make sense when we take into account the Austrian concept of capital structure. Capacity is excessive in that certain capital goods have been created that rely on complementary factors of production that are more expensive than the builders thought they would be. For instance, oil refiners might have built plants that relied on crude oil being priced below $20 a barrel in order to operate profitably. With crude prices running above that amount, the plants represent "excess capacity." They are not "excessive" in the sense that all human demand for oil has been satisfied.

"Excess capacity" arises chiefly from government efforts to promote some particular economic outcome. For instance, as the governments of many developing nations and many U.S. states decided in the 1990s that a vigorous technology sector was important to their economic future, they poured subsidies into high-tech ventures. As a result, the world found that there was excess capacity for chip fabrication plants, among other things.

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Gene Callahan, who writes frequently for Mises.org, is author of  Economics for Real People from the Mises Institute. See his Mises.org Articles Archive and send him MAIL. His book is available through Mises.org or Amazon.com.  Read more about Callahan's book at Economics for Real People.