Economic theory tends to make a lot of assumptions that are good approximations mostentimes but not always.
"For a successful technology, reality must take precedence over public relations, for Nature cannot be fooled." - Richard Feynman
Think this page needs an overhaul - several bits here entirely misrepresent basic principles of economics.
(Non-comprehensive) Examples:
1.Note 5 - Perfect Information is NOT assumed as a matter of course in economic models, nor is it related to the rationality assumption: generally simple models will be constructed with perfect information, and then imperfect information will be added as you learn more complex econ. I think the cereal example here is really misguided - the decision to purchase name-brand cereals is not 'irrationality', but based on preference (in fact this example commits the fallacy of intrinsic value).
2. Note 7 - Misuse of coase theorem (which is to do with allocation of PROPERTY rights leading to an efficient outcome). I accept that civil liberties shouldn't have a bearing on economic efficiency, but there is a decidedly inverse relationship between workers rights (which I take to mean their power to set wages/minimum wages/etc) and efficiency. The more powerful workers' organisations, the further away from efficient free-market levels wages are set. In a generally free market state this leads to higher unemployment: http://en.wikipedia.org/wiki/Calmfors%E2%80%93Driffill_hypothesis
(usually we'd be on the left hand side of the hump in a modern developed economy).
3. Note 8 - my issue is with the caveat someone has clearly tacked on here. There is no fear that people will suddenly stop buying govt bonds (in fact, yields are extremely low). The worry is that they will become more expensive as risk premia increase (but again, this isn't too significant a worry).
4. Note 9 - 'In Real Life, monopolies are hard to maintain without at least either blatantly criminal means or collusion/support by the government.' - ??? First, a monopoly does note collude (there is no one to collude with), secondly, this completely contradicts the point the author was trying to make that free markets don't equal monopolies! If you have to make something illegal to stop it, then it would obviously occur in a free market!
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I'm actually going to go ahead and make these changes since this discussion seems fairly dead. Hope that's ok (I'm quite well versed in economics).
Is there a difference between simply not mention the economic system and you fail economics forever? Is it possible to build a world and not even offer the slightest clue about how the economy operates?
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This actually is a pretty interesting question.
It probably depends on what one considers an "economy" to be.
If we were to define an "economy" as "a network of agents acting to economize their means towards various ends," then arguably there are two situations that wouldn't be an economy; 1) A single man on a desert island (only one agent, hence whilst an individual must economize (i.e. prioritize various ends and direct means towards them), the definition requires multiple agents doing this and trading/interacting with each other
or
2) Various agents, each individually possessing all the means they individually need to reach their individual ends. These agents could be considered as "post-scarcity" (i.e. having all the means required to achieve their ends).
However, various different definitions of "economy" exist, and I'm sure those above two situations aren't the only ones that fit the criteria.
Thanks for the question! That's quite a fascinating thought-experiment.
So if I just wanted to write a simple fantasy story where the farm boy lives a peaceful life out in the boonies until one day the evil overlord's henchmen come along , change his life forever, force him to go on a mythic quest, and visit a few adventure towns; how worried do I have to be about making one of these economic mistakes?
Well if some peasants decide to make him King, the fate of many a poor simple lad, then yes I presume he'll to finf someone to teach him economics, or face a mob of dissatisfied subjects.
The article says: "In Real Life, monopolies are hard to maintain without at least either blatantly criminal means or collusion/support by the government.". This assumes that the laws are written in this way. In a "pure" free market system monopolies tend to be stable because the dominant player can:
1: Write contracts that exclude the competition ("if you buy anything from my competitors, you can buy nothing from me: which do you need more?", or "You pay me a royalty for every computer you sell, regardless of whether it contains my operating system")
2: Write contracts with the competition to divide up the market ("I'll bid on this and you bid on that").
3: Tie goods and services together to leverage dominance in one market into dominance in another ("If you buy my oil then you have to have it delivered by my tankers")
Fanra
Someone put in the poverty has been decreasing in the USA. The actual figures, which I put a link to, prove otherwise.
This is just normal for (generally Right Wing) tropers to make various claims without any factual basis.
I also reported that a true "Free Market" has never existed in real life. A free market (according to The Other Wiki) is a market in which there is no economic intervention and regulation by the state, except to enforce private contracts and the ownership of property.
From the regulation of weights and measures, anti fraud laws, tariffs, taxes, subsides, trade restrictions, etc, there is no government that has done this. Of course, you may have a different definition of "Free Market".
But the USA has never had this, one of the first laws pass by the US Congress was a tariff act.
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Send to TRS?
If you eat a live frog in the morning, nothing worse will happen to either of you for the rest of the day.
Point 2 seems to contradict itself. Inflation comes from wealth being a zero sum game, but it is listed as a fallacy on the next item.
Also, the USA example is not good, because the USA economy is not a closed system. USA as a whole can be seen as "stealing" from poorer countries
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This is an interesting point. The USA "stealing" from poorer countries.
Interesting, because one of the reasons the USA revolted against the UK and became a nation (one almost never mentioned in popular history books) was that the UK demanded that the USA produce raw materials for them and buy manufactured products, they prevented the USA from creating their own manufactured products.
It's not mentioned often in school history books that American greed was a reason for The American Revolution :). Although, one could say that it was simple economic justice.
However, it is only "stealing" if the terms are inequitable. If all a nation has is raw materials, and they are purchased at market prices, with an open market (the UK prevented the USA from trading with other nations, as well as making it illegal to manufacture items in the Colonies), then it is not stealing to buy them.
It is "stealing" if illegal or immoral methods are used. If a contract is made with corrupt dictators, that is legal but immoral. The dictator usually (but not always) will cheat the people of his nation, thus stealing the wealth of the nation from them.
Although the USA has stolen from poorer countries, they have also greatly helped them. China right now is been seen (fairly or unfairly) as stealing jobs from the USA, so the accusation is on the other foot. Both nations have benefited from the actions of the USA, although they have also suffered.
Nothing is simple :)
Edited by Fanra
the rationality issue contains a faulty example in my opinions: [quote]A good example of this can be seen in any given grocery store that stocks both name-brand and generic versions of the same product, like breakfast cereals. Generic breakfast cereals are invariably cheaper than name-brand cereals, usually identical in quality, and sometimes even contain slightly more food per box/bag (for the same or cheaper price). If the ridiculous rationality fallacy were real one would expect generic cereals to constantly sell out and name-brand cereals to be shelf-warmers. In reality, the opposite is true. Sales for name-brand cereals leave the generics in the dust, mostly because consumers come to the (irrational) conclusion that name-brand cereals are better because they come in colorful boxes and/or are promoted by entertaining cartoon characters and/or because, if the brand name cereal turns out to be of inferior quality, the consumer has a multi-billion dollar corporation to shun/sue.[/quote]
The problems with this claim: 1. Most generic breakfast cereals contain more sugar per gram. 2. Most generic breakfast cereals ARE lower quality. 3. You cannot sue a company for producing lower quality goods, only for producing dangerous and unhealthy goods.
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I agree that this is a faulty example, and to point out a few more issues in which the brand name would be a rational choice:
4. Consistency. Even if the generic cereal is of a better or similar quality, the quality varies from one (possibly regional) store to another. Whereas Kellogg's will be the same quality in North America, Europe, Oceania, and Asia.
5. Transmission of information. A tainted regional brand may get a mention on the local news, but if there was a bad batch of Captain Crunch, you would hear about it on CNN, Fox, and MSNBC, so you can, reliably, assume that there have been no major issues since no news is good news here.
6. Established trust in safety. Kellogg's has been making corn flakes since the 19th century. Shop 'n Save was founded in 1979. Having to operate without detailed information of the snack industry, one would assume that at this point Kellogg's has worked out most issues of production and thus be a safer investment.
If every economy is unhealthy then how are those fallacies?
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