Saturday, December 23, 2006

The Fixed Pie Fallacy

Quote of the day, from economist Milton Friedman:

“Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.”

In terms of globalization and international trade, we see the “economic fallacy of the fixed pie” in operation all the time, just listen to Lou Dobbs on CNN every night. Many people think that China or Japan are somehow benefiting at our expense because of trade, or because of a current account deficit with those countries. Many people think that the gains from globalization somehow lift up the standard of living in China or India, by bringing down the standard of living in the USA; or that the gain in wages in other countries comes at the expense of a decline in American workers’ wages, etc.

But all of those beliefs are all based on the fixed pie fallacy. There is NOT a fixed, static amount of wealth or wages in the world, which is what the fixed pie fallacy assumes.

Stand back from economics and trade and think instead about life expectancy or literacy. There is certainly not a fixed amount of “life expectancy” in the world, nor is there a fixed amount of “literacy.” It is certainly possible for the life expectancy or literacy rates in 0ther countries to INCREASE, without DECREASING life expectancy or literacy in the US! That is, advances in life expectancy or literacy in China do NOT come at the expense of the US, because there is NOT a fixed amount, and the most likely outcome is that advances will continue to take place in BOTH countries.

Likewise, since there is not a fixed amount of wealth or prosperity in the world, globalization and trade will benefit BOTH the U.S and China.

2 Comments:

At 1/27/2011 11:13 AM, Blogger Marvinlee said...

How unfair! I agree with most of Professor Perry's individual points, yet disagree with the central thesis that pies are not fixed.

Real constraints include the limits of cheap energy, the size of the planet. the amount of solar radiation, and our land mass. The truth that we can do much with science and technology should not obscure the risk that mother earth won't provide infinite wealth for infinite population.

China, sells us much, but is also a major new consumer of resources and consumes far more energy per unit of GDP than does our economy. I think we are in for a very stressful future. One that some citizens are already experiencing.

 
At 9/02/2011 8:59 PM, Blogger Sparky Jones said...

If I work more hours in a day, and produce more, I get more money. It DOES NOT take away from anyone else. There's not LESS money in the world because I worked more, there is more of the products we PRODUCE, and I therefore have earned my paycheck. Can you imagine a baker producing less bread today because he might think he's robbing the world of wealth? That's the essence of the static quantity of wealth fallacy.

 

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