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Warren, a patron of Cafe Hayek, e-mailed me over the weekend to ask what, in my opinion, are “the silliest ideas ever held by serious economists.” I take his question to refer to modern economists – that is, post-1871 and the marginal revolution. And I take “held by serious economists” to mean “held by a significant number of serious economists.” Finally, I take “silliest” to refer to something worse than mistaken. The labor theory of value, for example, is mistaken, but it’s not silly (at least not if — like Adam Smith [2], David Ricardo [3], and other classical economists — you’ve not been exposed to marginalism). Likewise, the Keynesian notion that more consumer spending is key to creating jobs is mistaken but not silly.
Warren’s question is interesting. I have five candidates for really silly ideas held by serious economists, offered here in no particular order.
1. The belief of many Keynesians (including John Maynard Keynes [4] himself) that modern capitalism suffers a paucity of attractive investment opportunities.
2. The belief — especially prominent among a number of antitrust scholars in the 1970s and 1980s — that innovation is a means of monopolistic predation that should be policed by antitrust authorities. (I wrote on this topic of “nonprice predation” many years ago in Regulation [5].)
3. The fear that economic growth causes inflation.
4. The theory of Perfect Competition [6] — and the equally static theory of Monopolistic Competition [7].
5. The Phillips Curve [8] notion of an inherent tradeoff between unemployment and inflation.
Dishonorable Mention: the notion that government debt isn’t a problem to the extent that it’s held domestically — to the extent that “we owe it to ourselves.” Jim Buchanan’s 1958 book, Public Principles of Public Debt, [9] exposed the foolishness of this idea.