Paradoxes in Economics

Ironies in Economics 

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 nonexistent 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 General 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, strategy is the flip-side 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 anythying 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, paradox 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 Keynes 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 popular, 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. 

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 individuals can be false for the whole. 

        Examples abound. - (6) and (7) above - Individuals can consume 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. 

13) 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 flip-side of the concept of time inconsistency. 

14) In quotation of statistical numbers, precise is imprecise. 

        Any digits 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. 

15) Public choices are more often not public mis-choices. 

      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.

16) You may pay the highest cost by trying to save the most. 
        For instance,

        -Adam Smith: "The work done by slaves, though it appears to cost only their                            maintenance, is in the end the dearest of any." (p. 418)
        -Henry Ford: "Our double-the-market-rate wage was one of the finest cost-                            cutting moves we ever made."

You know why? That is simply because people respond to incentives (due to Mankiw).

17) Hayekian Paradoxes (from The Constitution of Liberty, 1960)

<Ch. 5, p. 142> Liberty is an opportunity for doing good, but this is so only when it is also an opportunity of doing wrong.

       (p. 146)   As everybody's property in effect is nobody's property, so everybody's responsibility is nobody's responsibility.

<Ch. 7, p. 175> The argument for democracy presupposes that any minority opinion may become a majority one.

<Ch. 12, p. 269> All rational thought moves within a non-rational framework of beliefs and institutions.

       (p. 275) The US Federal government (in addition to the state governments) makes the government more limited.

       (p. 276) The US Bill of Rights has caused people's rights to be less well ans less comprehensively protected.

<Ch. 14, p. 315> The more general and abstract the law is, the more certain the outcome from a dispute is. (And, the less litigation the society will see.)