Economic falsehoods

Stolen from the blog StoneTablet

Just checked to see what was new on a blog I follow and found that it hadn’t been posted to in quite some time. Looking at the post, which I had read when it was first posted, caused me to rethink that post.

The key points were:

1. A dollar today is worth more than a dollar tomorrow.

2. Investors are risk averse. (You have to pay them to take a risk).

3. More money is better than less money. (Not in a greedy way, just in a "I'd rather make money than lose money" way.)

4. People are rational and markets are competitive.

So, what do I find wrong with these points? Each of them presumes facts not in evidence as the lawyers say.

1. A dollar is not intrinsically worth anything it is only worth what it will buy. If it will buy a quart of milk to day and a quart of milk to morrow it’s value is static. If how ever it takes a dollar to buy a quart of milk today and a dollar an a penny to buy that same quart tomorrow then it’s worth less BUT, and this is critical to thinking about the economy, if I worked for one hour to get that dollar today ($1 / 60 minutes = $0.017 per minute) so if I only have to work for 58 minutes to get that dollar tomorrow then the baseline dollar is not worth more. A dollar is only worth more if you assume a utility change. Just the assumption that the dollar is worth less tomorrow is one driver making it worth more.

2. Investors are not risk averse; their business is risk in exactly the same way that an auto mechanic’s business is fixing cars. The auto mechanic has to add some costs to his bill to cover his slack time – the “risk” in his business is that he won’t have another customer when he finishes the current job. The false belief that investors have more risk than an auto mechanic allows everyone to play a gigantic game of The Emperor’s New Clothes. Everyone has agreed to the myth and has convinced the general population to accept that the emperor is not naked.

3. More money is better than less money until some individually determined minimum is met. The vast majority of people work at something until they have enough money to quit and do what they really want. The current crop of Internet millionaires is the most visible example. A significant number work unbelievably hard for a few years, sell up and go do something else. At some point more money is not worth more effort to most people. This falsehood is foisted on the gullible by people trying to justify their own pathological need for MORE!

4. People are rational and markets are competitive. Not! If people were rational most investments would not make or loose a significant amount of money and bubbles were never happen. Sudden large swings in the market are traced directly to people who made irrational value decisions. Markets are indeed competitive but only in the sense that if two people want the same thing, they will compete for it. In it’s generally accepted meaning though it is dead wrong. What most people mean is that the competition will find the true value and price of stocks. If this were so, those pesky bubbles still couldn’t happen. To paraphrase John Maynard Keynes, the stock market is a beauty contest. Look at the total number of stocks on any of the stock markets and then look at the trading volume of each. Most of the trading is in the same small number of stocks so the herd effect is in full swing.

Accepting these four false foundational concepts as real is one of the single biggest causes of our current economic crisis. If you try to live in a fantasy, even a widely accepted one, you are in for a huge crash when you finally face reality.

We often misquote by saying “money is the root of all evil” when in fact first Timothy 6:10
 actually says, “For the love of money is a root of all kinds of evil”. This subtle difference teaches us that it’s not the money itself that is the root of all evil; it’s the excessive desire for money (remember point 2 above?) that leads us into evil behavior.