Following the money

by Russ Roberts on May 15, 2009

in Myths and Fallacies

Here are two totally intuitive common sense arguments:

"Buying local is better than buying from a chain store—the money stays in the community."

"New products only benefit the inventor—the money he receives necessarily reduces the money available to other producers."

Both are intuitive and common-sense. Both are wrong. Both illustrate an additional fallacy—that economics is "just common sense." The fallacy in the two statements is the equating of money with prosperity. They are not the same. What we care about isn't the number of green pieces of paper with pictures of dead statesmen on them. It's what the pieces of paper buy. The fallacy is to see voluntary exchange as necessarily zero-sum. It is not. It is positive-sum. Understanding this is perhaps the single most important and basic lesson of economics. It is also one of the hardest to learn.

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