No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter One: Introduction to Economics 27 Term Capital Management (LTCM). LTCM had Nobel prize-winning economists to help design their computer trading programs, yet they were unable to mathematically predict all possible outcomes, and nearly wrecked the entire financial system in 1998. (See When Genius Failed, by Roger Lowenstein, for an excellent outline of this event.) Christians can also find this reasoning incomplete. Surely the biblical figure Job was unable to quantitatively predict all possible outcomes. What happened to Job was not a risk he could have planned for, but a true, uncertain event that could not have been planned for, and could not have been “hedged” away by buying an insurance policy (Job 1 ). Because God is sovereign and works all things according to His purposes, this means that we face a world of uncertainty—at least in the events our lives may see—while we also face total certainty that God will work everything together for His glory and for our ultimate good. Ironically, economic thinking that can reduce all events to a probabilistic distribution of risk leads to a deterministic outlook and elimination of free will. A proper understanding of uncertainty allows for free will, while knowing the end result is predetermined by God’s sovereign will. Fallacies should be avoided at all costs if you want correct economic analysis; but they are all too easy to buy into. Here are some of the more common ones. A fallacy of composition occurs when one assumes what is true of the whole is necessarily true of the parts (or vice versa). For instance, if the government decides to give a “stimulus” check to one constituent, that constituent obviously benefits. But does everybody benefit? We’ll see in this text that everyone does not. Another fallacy is the post hoc fallacy , from the Latin phrase post hoc ergo propter hoc , which means “after this, therefore because of this.” In statistics classes, the phrase “association does not mean causation” refers to essentially the same thing. If taxes are raised, and the economy subsequently booms, does that mean that raising taxes is good for the economy? Someone that commits the post hoc fallacy would say yes. But as we’ll see later, there are other likely causes that actually improve the economy. A common but obviously wrong example is that if a member of the original National Football League (now the NFC) wins the Super Bowl, the stock market will go up that year. Similarly, if an American Football League (now the AFC) team wins, the stock market will go down. This has actually been a good predictor of stock performance. But just because the stock market rises after the NFC team wins, does that mean a NFC victory is a causal force driving the economy? Sadly, no; this is just fallacious thinking. The ancient Israelites were guilty of the post hoc fallacy in their rebellion against God. When God challenged them to stop sacrificing to other gods (Jeremiah 44 ), they responded by noting that when they sacrificed to the other gods things went well, but when they stopped things went poorly. Their faulty reasoning (after this, therefore because of this) led them to sin grievously and suffer God’s wrath. The true causal relationship is that every good and perfect gift comes from the Father above (James 1:17) , not from gods who are no gods (Psalm 115:4-7) . post hoc fallacy: an error in reasoning that because an event A preceded another event B, A caused B. Or, after this, therefore because of this. fallacies: errors in reasoning fallacy of composition: the assumption that what is true of the parts is necessarily true of the whole.