Common logical fallacies surrounding capitalism
We live in an age of extreme abundance compared to our ancestors. This fact isn’t often reflected in Western media or online discourse. Indeed, there is a growing sentiment that ‘the system isn’t working’, ‘the system is rigged’, and that ‘things are getting worse’.
I actually have a lot of sympathy for that sentiment, particularly given high inflation. It’s clear many people feel like they’re barely treading water, gasping for each breath as the monthly receipts roll in. Understandably they’re frustrated. Understandably they’re looking for who’s to blame.
Of course, populist politicians across the political spectrum are only too happy to provide the answer. The rich. Big corporations. The penny-pincher, salary squeezer, price inflater, greedy, mustache twirling industrialists sitting on their hoards of ill-gotten gains.
Fuelling this sentiment is a set of common logical fallacies. These misinformed ideas, seemingly held by much of the population, and peddled by politicians, may seem rational at first, but quickly collapse under anything but a surface-level analysis.
The following is an attempt to catalog some of the more common fallacies I’ve seen:
Greedflation Fallacy
Fallacy: Inflation is caused by corporate greed.
Reality: A corporation’s greed is constant, and the main drivers to their pricing are cost of goods and competition. A corporation’s incentive is always to raise their prices as high as the market will bear. In healthy markets this greed is checked by competitors undercutting them.
Example: During periods of inflation, consumers and politicians might blame companies for price gouging. However, the rising prices are more likely due to increased costs for raw materials, labor, and logistics, and supply chain disruptions. In addition a spike in demand, say caused by a large influx of money into the system via government printing and spending, can increase prices.
Further reading: Corporate Greed Is Not the Cause of Inflation
Scrooge McDuck Fallacy
Fallacy: Wealthy people hoard their money in bank vaults (or gold swimming pools).
Reality: In reality, the vast majority of a billionaire’s wealth is put to work in public and private equities, meaning it’s transferred to companies in exchange for stock. These companies then use the money for their growth, operations, r&d, job creation, etc.
Example: People might imagine billionaires like Jeff Bezos or Bill Gates as having vaults full of cash. However, their wealth is mostly tied up in the shares of the companies they founded, such as Amazon and Microsoft. When they sell these shares, the money typically gets reinvested in other businesses or philanthropic activities. Even the cash they do hold would typically be held in a money-market fund invested in something like US Treasuries, since otherwise it would be inflated away.
Golden Age Fallacy
Fallacy: There was a perfect time in history, and we should strive to return to that.
Reality: Sometimes referred to as ‘Rosy Retrospection', this is a misconception that there was a perfect time in history, overlooking the actual issues and challenges that existed during that time. In reality, we’ve never lived in a time of such peace and abundance as we have today.
Example: Some might nostalgically refer to the 1950s as a golden age with traditional values and prosperity. However, this period also had significant issues like racial segregation, gender inequality, and Cold War fears. Comparatively, today’s era has higher standards of living, better healthcare, and more widespread civil rights.
Lump of Labor Fallacy
Fallacy: There is a finite amount of work—a lump of labor—to be done within an economy which can be distributed to create more or fewer jobs.
Reality: The amount of work available is dynamic and can expand with innovation, technological advancements, and changes in consumer demand.
Example: Fears that immigrants will take jobs away from native citizens often stem from this fallacy. In reality, immigrants can create additional economic activity by starting businesses, increasing demand for goods and services, and contributing to innovation. Historical data in the US, for instance, shows that immigration can lead to job creation and overall economic growth, benefiting both immigrants and native citizens.
Corporate Tax Dodge Fallacy
Fallacy: Corporations don’t pay any tax.
Reality: Corporations pay a huge amount of employment tax and other state and federal taxes. The confusion arises from the fact that corporations typically reinvest earnings to lower their income tax burden, but this is the system as designed because it results in more growth and ultimately larger tax revenues.
Example: Large companies like Amazon are often accused of paying no taxes. While they might reduce their income tax through reinvestments and tax credits, they still pay substantial employment, sales, and property taxes.
Further reading: Ten common tax myths debunked.
Fair Share Fallacy
Fallacy: The rich pay no tax.
Reality: In the US the reality is that the top 10% of taxpayers paid 71.4% of all individual income taxes.
Example: Headlines might highlight that billionaires like Warren Buffett pay a lower tax rate than their secretaries. This often refers to the lower capital gains tax rate compared to income tax rates or, even more misleadingly, to unrealized “paper gains”. However, in absolute terms, wealthy individuals contribute the majority of total tax revenues.
Further reading: Tax burden by income bracket
Wage Dictation Fallacy
Fallacy: Salaries are set by individual companies or the government, and that some salaries are artificially inflated or deflated.
Reality: In reality, salaries are driven by the market and subject to the law of supply and demand. As with any market, prices are the aggregate result from millions of individual decisions around value and scarcity. Salaries are no different.
Example: It is often said that CEOs are paid too much. However, boards don't pay CEOs a cent more than they have to. It’s the market that determines the price.
Further reading: Determination of wage rates
Rent Control Fallacy
Fallacy: Rent caps lower prices.
Reality: rent caps (or rent-control) leads to inefficiencies in the housing market by artificially creating a shortage of rental housing, leading to a reduction in the overall supply of rental units, driving up prices in other areas of the market.
Example: In cities like New York and San Francisco, rent control laws are intended to make housing affordable. However, these laws often cause a limited supply of available rentals and higher prices in the market segments not subject to rent control.
There are other negative second order effects. For example, in New York there are 26,000 rent-controlled apartments that are sitting there empty because it is not profitable for landlords to refurbish and rent them out.
In practice, the only thing that has been shown to reduce a city's rent prices is to build more housing.
Further reading: Rent control effectiveness
Affordable Units Fallacy
Fallacy: Building luxury apartments doesn’t improve the affordability of existing apartments, or even that it increases their prices.
Reality: Luxury new-builds impact the entire housing market by increasing overall supply for everyone, thereby reducing home and rental prices.
Example: In 2024, Austin is expected to add more apartment units as a share of its existing inventory than any other city in the country. Despite barely building any affordable units (reaching 2% towards the city's affordable unit goal), rents have fallen by 7%.
Further reading:
The Fixed Pie Fallacy
Fallacy: There is a fixed pie of wealth, and that every winner creates a loser.
Reality: In reality, the vast majority of wealth creation is not zero-sum and innovation can generate new wealth from nothing, leading to a rising tide that lifts all boats.
Example: As a carpenter turns wood into a chair, wealth can be created out of nothing. Some wealth creation is zero-sum, like some of Wall Street trading, but other wealth creation is positive-sum, like a new drug discovery. And even zero-sum trading provides other benefits like pricing and liquidity.
Further reading:
The Work Exploitation Fallacy
Fallacy: Employment is a form of exploitation.
Reality: Employment is a mutually beneficial arrangement where both employers and employees gain more value than they would independently.
Example: Some ideologies claim all labor is exploitative and unfair. However, if this were true all value exchanges, like buying from a local farmers market, would be exploitative. In reality, customers get fresh produce, and farmers earn income. Likewise, employment gives workers income and skills while employers gain productivity.
Unaffordable Innovation Fallacy
Fallacy: Technology is unaffordable and only for the rich.
Reality: Technology is the great normalizer and gets cheaper over time the more it is improved and distributed.
Example: Early personal computers and cellphones were extremely expensive and out of reach for most people. Today, advancements and mass production have made these technologies widely accessible and affordable. The US president uses an iPhone, the same you could buy in any Apple store.
Further reading: The cost of 66 different technologies over time
Scarcity Fallacy
Fallacy: Earth is running-out of resources.
Reality: Contrary to pessimistic predictions, resources tend to become more abundant and cheaper over time. Any short term scarcity creates higher prices, which creates incentives to discover more resources or innovate alternatives.
Example: Fears of running out of resources like food, oil or rare earth metals often surface. However, technological innovations in agriculture, alternative materials, and renewable energy sources continually expand our resource base and efficiency.
The 1970s “Population Bomb” scare is an example of this fallacy in action, a movement erroneously predicting mass starvation. Since then the world population has more than doubled, our standard of living has improved, and relative food prices have decreased. An analysis tracking 50 commodities over a period between 1980 and 2017 found that, on average, their prices fell 36.3%.
Further reading: Are We Running Out of Resources?
Thanks to Philip Joubert and JD Ross for review drafts of this essay.