L&S: Economic Mythology

In a previous lecture, Steve Horwitz took on a single economic myth – namely, that the Great Depression was a monumental failure of capitalism that was cured by the New Deal and WW2. An important myth to debunk, no doubt. But I like his current lecture even better, because here he takes on three economic myths:

• That the cost of living has risen steadily throughout the 20th century.
• That the rich are getting richer and the poor are getting poorer.
• That women earn 74 cents for every dollar that men earn.

Steve makes the important point that each myth has a kernel of truth, which helps explain why the myths persist. Nonetheless, the truth is often nearer to the opposite. Myth #2 is the best example: it’s true the rich have gotten richer – but the poor have also gotten richer. Steve does a phenomenal job of demonstrating this. Belief in Myth #1 is driven mainly by the fact that, while most things have become dramatically less expensive, a small handful of things have indeed gotten more expensive. Housing is the most important of these. As Steve observes, housing has also improved in quality, so the rise in price can be misleading. Still, increasing demand in the face of relatively inelastic supply also plays a role.

Economic mythology is much like religious mythology. Religious myths are often based on small bits of history and reality that have been exaggerated, dramatized, and embellished. For instance, the Trojan War probably did occur, but Homer’s account is not exactly a reliable record of the event. There was also probably a great flood, or perhaps many such floods, that provided the basis for numerous religions' flood myths. But if you want the truth about the flood, ask a geologist or archaeologist, not a theologian. Likewise, economic myths start from bits of truth that are stretched and warped into works of fiction.