Economics Paradoxes

Ironies in Economics

 

0)  Money is annoying yet loved by all.

The prominent American monetary economist Irving Fisher once said that money is useless until we get rid of it. The flipside of his saying is that carrying useless money around is really annoying. Money occupies a large space in my wallet because it is volumy. It smells disgusting and gives me headache from time to time. When I bring a large armount of money, I get  wary and nervous whether I might come across such an unwanted guy as Ma Baker (a lady) who is extremely good at smelling money. I really hate hearing anything like "The money or your life."

Boney M. - Ma Baker (Sopot Festival 1979) (VOD) - YouTube

1) All real variables are fictitious.

 

We have many "real" variables in the economic world: Real GDP, real interest rate, real exchange rate, real wage, real money balance, etc. Alas! All these real variables are not real. They are inexistant and therefore fictitious.

           All that exist in the real world are nominal variables and they are really real. All the real variables are made up by economists or statistics authorities. They create real variables from vacuum by subtracting the inflation rate from respective nominal variables.

 

2) Competition for a profit is only to compete it away.

 

General economic theories (I mean theories in general, not Keynes's Genral Theory) assume profit maximization efforts by firms on the one hand, and perfect competition on the other hand. As we know, firms cannot earn economic profits in a perfect competition environment. All in all, the end result of "comepetition for profit maximization" is no profit at all. Always!

 

3) Competition is irrelevant in a perfect competition.

 

Strategy is one of the first things for firms in competition have to develop. As a matter of fact, stragegy is the flipside of competition: two of them must go hand in hand. Firms in perfect competition, however, do not need strategies. All that they do is make a decision of how much under the given market price.

 

 

4) Trade policy never promotes trade.

 

International trade is best promoted in a free environment. Free trade is not a trade policy. It is a trade non-policy. When we say trade policy, it means restricions on international trade in one form or another. For instance, tariffs, quota, VER, subsidies, outright ban, red-tape barriers and the like.

          Under all types of trade policy, trade is demoted. Always!

 

5) Protectionist policy never protects the majority in a democracy.

 

Democracy is basically about favoring the majority. Protectionism, like antying else, is supposed to protect interest of the majority, if  not all. Unfortunately, practices are just the opposite: Any protectionist policy is to protect domestic producers, the minority, at the expense of domestic consumers, the majority. Always and everywhere!

   Are we really living in democracy?

          FYR, some one invented "public choice theory" in order to explain this paradox. Take the beef industry for example. Total gain of beef producers from a tariff on foreign beef is much smaller than total loss of domestic consumers. But, precisely because comsumers are the majority while producers are the minority, per-capita consmer loss is incomparably smaller than per-person producer gain. So producers do conduct political lobbies while consumers do not care.

 

6) Try to save more, and save less. (Aka, parodox of thrift)

 

In some cases, individually rational behaviors may lead to irrational consequences. According to J. M. Keynes, who first formed this idea, "no one can save more if everyone wants to save more."

          Saving is a fraction of income and the leftover after consumption. When one saves more, her consumption decreases. National income shrinks when overall consumption is reduced, other things being equal.  Your saving may become smaller as you, like everyone else, earns less due to your down-scaled consumption. 

 

7) Hasten to save yourself, and kill yourself quickest.  (Aka, self-fulfilling prophesy)

 

Human beings have the animal spirits, as Kenyes points out. It may become real especially in difficult times and in the financial markets. When you believe, rightly or wrongly, the stock market will crash, the best way to save yourself, as your thinking goes, is to get rid of your stocks as quickly as possible. As you do that, so will others, because sense of crisis is contagious.

      As the "herd" moves in the same direction of selling, the stock market really collapses. What a large number of people believe will happen will happen. As the sotck market busts, you fail to save your fortunes!

 

 

8) Value stocks, by definition, are not popular.

 

If you chase popular stocks, you will never make extra profits. A stock becomes expensive to purchase when it is poluar, leaving little room to appreciate. On the contrary, a value stock, which has a great chance to appreciate sooner or later, is hidden and unpopular. 

The more popular a stock, the less worth investing in.  Not necessarily vice versa, though.

 

9) The right use their left brain while the left their right one.

 

The right wing explains things logically while the left tries to appeal to human emotion. This principle seems well to hold in political economy if not in economics.  

         * Clue: Your left brain governs your logic, while your right one your emotion.

The following is what Ludwig von Mises has to say: "Liberalism and Capitalism address themselves to the cool, well-balanced mind. They proceed by strict logic. eliminating any appeal to the emotions. Socialism, on the contrary,works on the emotions, tries to violate logical considerations by rousing a sense of personal interest and to stifle the voice of reaons by awakening primitive instincts." (1922, p.507)

 

10) To expel the bad only to eradicate the good

 

All values are relative: Rich vs. poor, cheap vs. expensive, abundant vs. scarce, efficient vs. inefficient, and so on. People prefers one to the other and want to remove the inferior. What if they succeed? Alas! The superior also disappear.  For instance, Audrey Hepburn, by herself, could neither have been graceful nor disgraceful.

 

11) Fallacy of Composition

 

What is true for induviduals can be false for the whole. Examples abound.

- (6) and (7) above

- Individuals can comsume more than they produce, but the society cannot.  (Except in 23 Something)

- Individual recklessness (aka entrepreneurship) is the driving force for progress in civilization.

- (J.M. Keynes) The market is liquid to individuals, but not to the whole.

 

12) Banks enter their credit in their debit.

 

If an economist says "the credit side of the banking," it means banks' business on the debit side which captures their loans to clients.  On the contrary, banks keep what their clients deposit on the opposite side of deposits.

13) Bank deposits are noe deposited at the bank.

I quote from Milton Friedman, 1965:

There are few words in the English language which are greater misnomers than the term “deposits” for those liabilities that are on the bank’s books. People think that a deposit means “you go and leave it there.” Now, we all know that the money goes in at one window and goes out at another, and that what is deposited is only a small percentage, the so-called fractional reserve.

 

14) Efficacy of a Threat

 

The more certain the contingent fulfillment of a threat, the less likely is actual fulfillment.

(Thomas Schelling. The Strategy of Conflict, p. 34) 

 

* This is the flipside of the concept of time inconsistency.

 

15) In quotation of survey numbers, precise is imprecise.

 

Any degits below the margin of error is meaningless, quotation of which is technically wrong.

 

e.g.) Robert Barro, a physicist-turned-economist in an article for WSJ, August 23, 2011

The administration found the evidence it wanted—multipliers around two—by consulting some large-scale macro-econometric models, which substitute assumptions for identification. These models were undoubtedly the source of Mr. Vilsack's claim that a dollar more of food stamps led to an extra $1.84 of GDP. This multiplier is nonsense, but one has to admire the precision in the number.

 

16) Public choices are more often than not public mischoices.

 

The majority voting principle in democracy often leads to policy decisions which benefit the minority interest group at the expense of the majority. This is the so-called "public choice" theory.

  

17) In the market economy, you are free in chains.

 

The free market economy presupposes that everyone abides the rules of the game.  Or, you can be free only when your are restricted by the rules. In this regard, J.-J. Rousseau famously declared, "Man is born free, and everywhere he is in chain" (On the Social Contract, 1762).

 

18) GDP, the happiniess index, discourages marriage.

 

The gross domestic product (GDP) is defective as a happiness index. Nonetheless, it is the single most popular one worldwide only because there is no alternative (TINA). Ironically, it discourages marriage, supposedly a road to happiness. Suppose John Doe and Jane Doe (oops, same family names cannot marry in  Korea.). Each of them has to buy meals and many types of househlod services, which all help enhance the GDP. After marriage, a large part of goods and services are home-made, which do not count as GDP. So, an effective way of lifting the GDP is to prevent people from marriage. (Caution, this logic holds for less than a year before a child.)

 

19) The Keynesian Liquidity Preference Theory tells us not to prefer liquidity to interest earnings.

 

Unless the interest rate is zero, which almost never is true, people should prefer other assets to money that is barren.

 

20) Law is the enemy of and a premise for liberty.

On the one hand, Jeremy Benthams says, "Every law is an evil for every law is an infraction of liberty."

On the other hand, numerous sages, including Kant and Hayek, proclaim liberty is impossible without  the rule of law.

 

21) Democracy can perfectly work only because it is imperfect.

 

Demoracy is based on the majority ruling. However, if everything is determined by the majority ruling, democracy becomes totalitarianism, which will surley destroy the democracy. To that regard, a  relevant quotation from F.A. Hayek is at hand:

 

I doubt whether a functioning market has ever newly arisen under an unlimited democracy, and it seems at least likely that unlimited democracy will destroy it where it has grouwn up. To those with whom others compete, the fact that they have competitors is always a nuisance that prevents a quiet life; and such direct effects of competition are always much more visible than the inderiect benefits which we derive from it. In particular, the direct effects will be felt by the members of the same trade who see how competition is operating, while the consumer will generally have little idea to whose actions the redcuction of prices or the improvement of quality is due. (1979, p. 77)

→ A human can become perfect (as a human) only by being imperfect.              

 

22) (American) Liberalism is an effort to escape from liberty.

 

The American liberalism supports more regulation and a bigger government. The job of the government or a rule is restriction of people's behavion, the very opposite of liberty.

 

23) The growing GDP increases the price level in the short run while decreasing it in the long run.

 

This is claimed in all the macroeconomic textbooks.

 

→ Somewhat relatedly, an increase in the money supply reduces the interest rate in the short run, but raises it in the long run.

 

<Your question> What happens in the medium run? No economist or textbook author has answered this question. Or, no one has asked this question if you will.

 

24) The monetary policy works only because the market is imperfect.

 

If the market is perfect, money is simply a veil not making any change in substance.

 

25) Nearly everybody keeps chasing money which is useless until she gets rid of it.

 

No one in the right mind would eat, wear, or burn money because it is almost useless for her purposes

whatever. She can acieve her goal(s) only after handing  her money over to someone else.

<Disclaimer> I borrow the second half of the above paradox from Paul Samuelson. (p.458)

 

26) Institutions, which are to decrease transaction costs, surely increases transaction costs.

  

Basically, rules of the game in human interactions are to decrease transaction costs through a removal of uncertainties. Nonetheless, each and every rule of the game incurs compliance costs all parties concerned. Worse, many rules of the game in the real world add transaction costs by "restricting entry, requiring useless inspections, raising information costs, or making property rights less secure" according to Douglass North (1990. p.63).

27) The Paradox of Banking (비올 때 우산 뺏기)

Depositors to the bank: If you can pay me, I don't want my money back. If you can't, I do.

Bank to the borrowers: If you can pay me, I don't want my money back. If you can't, I do. 

28)  Ricardo denies the Ricardian equivalence proposition.

The Harvard economist G. Mankiw testifies: "It is one of the great ironies in the history of economic

thought that Ricardo rejected the thory that now bears his name!" (Macroeonomics 2010, p.484).

29) The cigarette tax taxes "the poor to the benefit of the rich." (Angus Deton)

Many localities in the United States are currently raisng substantial sums of money from

the perdomenantly poorer people who choose to smoke; these funds are largely used to

offset property taxes for better-off people. (The Great Escape 2013. p.134)

30) The theories of oligopoly are absolutely true microscopically (in the short run)

while utterly useless macroscopically (for the long run). (J. Schumpeter 1947, p.83)

31) Motorcars travel faster than they otherwise would because they are provided with a brake. (J. Schumpter 1947, p. 88)

32) The Irony of Adam Smith's Life

He is the master general of free market and free trade, but spent the last 12 years of life as a customs commissioner in Scotland imposing tariffs on imports. (White p.209)

33) The Bretton Woods System broke down in 1971 because the Fed, supposedly the last party to default, did default on its promise to redeem the US dollar into gold while all the other banks had been keeping their words.

If a commecial bank defaults, it is out on that spot. However, the Fed was not and is alive and well. Why?  The answer: It's the sovereignty, stupid.

34) The stock market cannot be efficient precisely because it is supposed to be so. (David Friedman)

The stock market is the typical efficient market according to the Nobel laureate Eugene Fama. If so,  all the stock prices are kept right and rational investors do not need to take any action. Then, mispricing of stocks due to whatever reason will never be corrected due to the very inaction of investors . No actions, no orrection, no efficiency of the market.  

35) Benevolence vs. self-interest.  I may give you an aid of $10,000 from my benevolence, while a job from my self-interest. Which would you prefer, an aid or a job, or: for that matter, benevolence of self-interest?  

36) Being Keynesian

- J.R. Hicks: I am more Keynesian than Keynes (1935).

- J.M. Keynes: I am the only non-Keynesian in this room (1944).

- M. Friedman: In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian(1966).

- Richard Nixon: I am now a Keynesian in economics (1971). 

37) Supranational Institutes are Infranational 

Which would you choose, the chief of a nation or the chief of the supranational UN?

Which would you choose, the chief of a national central bank or the chielf of supranational IMF?

<Clue> The Wall Street Journal, July 16, 2019, the 50th anniversay of man's moon landing

On Path to ECB, Lagarde Resigns as IMF’s Chief

Christine Lagarde submitted her formal resignation as managing director of the International Monetary Fund to prepare for the nomination process to be the next president of the European Central Bank and to allow the IMF to begin finding her successor.

38) "Man never is but always to be blest" (W. Stanley Jevons, p. 34)

For most peole, the real pleasure is in anticipaiton of an event rather than experiencing it on the spot.

This is what Jevons elaborates in that respect: "It is certain that a very large part of what we experience in life depends not on the actual circumstances of the moment so much as on the anticipation of future events."

39)  New Kwynesians say the AS curve  is upward sloing because of sticky prices.

As long as they are true to themselves, sticky prices should mean something constant. How in the world can anything still make a difference?