What Is an Economic Fallacy?

An economic fallacy is an economic theory or policy that is misleading or based on faulty reasoning and yet continues to be widely accepted as fact. Such a fallacy can be problematic if it leads to a government instituting a policy that is harmful to society at large. There are times when an economic fallacy comes from a misreading of facts or statistics, while at other times it could occur due to a prevailing theory not backed by any pertinent information. It can be difficult to identify such a fallacy until its negative effects actually come to fruition.

Economists try to take information based on statistics and facts about the economy and postulate meaningful theories from that information. Of course, economists and others who make decisions on economic policies are human, and humans make mistakes. As a result, there are some occasions when seemingly logical policies can actually lead to negative results when instituted. When that occurs, it is known as an economic fallacy.

There are several different ways for an economic fallacy to develop. In some cases, an economist or economic policy-maker might take a sound piece of information and misinterpret it. Some fallacies are theories that may have been sound at one point in history, but have failed to take into account changing economic realities. It is important to realize that the purveyors of such fallacies might promote them without realizing their consequences until it’s too late.

One example of an economic fallacy is the so-called lump of labor fallacy. Those who believe in the lump of labor theory believe that the quantity of the work force in a society is a fixed and unchangeable amount. It has been labeled as a fallacy because many economists believe that the quantity of the work force can be both raised and lowered by job creation or contraction.

This example illustrates the difficulty of spotting an economic fallacy, because others have come to the defense of this theory, even pointing out relevant examples where they believe it has been proven. Such contradiction often is evident in supposed economic fallacies, with many supporters rushing to the defense of a theory even as detractors claim that it is a fallacy. In most cases, a fallacy can’t actually be properly identified until after a significant amount of time has passed and a majority of the evidence available disproves its claims. Until then, debate often rages on two sides of an economic theory or policy.