10 Persistent Myths About Free Market Economics

Free markets, capitalism and economics are often surrounded by misconceptions. Here are 10 myths about economics that either don’t stand up to further scrutiny or are just downright wrong, but which continue to dominate discussions surrounding the topic.

1. Greed is all economists care about, right?

imgur.com / Via imgur

Wrong. Supporters of free markets are often accused of believing that 'greed is good'. Greed is not good, and economists do not believe that greed is necessary for capitalism to flourish. What economists do believe is that self-interest is a powerful motivator when it comes to financial transactions. No one denies the wide range of feelings that motivate us to act in certain ways, nor does anyone deny that people often make sacrifices for others and are altruistic. The beauty of free markets is that they work, regardless of whether people are greedy or selfless.

2. Oh, and economic growth

s3-ak.buzzfeed.com / Via buzzfeed

“Addicted to growth”, “GDP fetishism” and “the crack-cocaine of economic indicators”, are just some of the phrases used to convey society’s supposedly unhealthy fixation with Gross Domestic product (GDP). But no politician or economist has ever expressed support for the ‘growth at all costs’ mantra that is alleged to be central to ‘neo-liberalism’. Far from the be all and end all, GDP is an economic indicator just like employment and inflation. If governments aimed to maximise GDP alone, we would have a much smaller state, huge tax cuts, no planning system, no carbon-reduction targets, legalised drugs, no immigration controls whatsoever and extremely limited regulation.

3. The rich get richer while the poor get poorer

giphy.com / Via Giphy

The concern that the rich are getting richer while the poor become poorer is a myth that has been around for many years but is false - or at least only half-true. The rich certainly get richer, but so do the poor. Over a century's worth of growth has led to a steady rise in wages across the board and government figures show that between 1977 and 2012, the incomes of the poorest fifth of Britons rose by 93 per cent (adjusted for inflation). Much of this is made up of benefits, but wages have also risen significantly. Since 1986, the hourly wages of the poorest fifth of workers has risen by 49 per cent (adjusted for inflation).

4. We are working longer and longer hours

stats.oecd.org / Via OECD stats

In 1900, British workers spent roughly 3,000 hours a year on the job. Compare this to the present day, when individuals in most of the world’s developed societies each work fewer than 1,800 hours a year. It is a common misconception that we are all working longer, but average working hours for British employees continues to fall. According to OECD figures, over half UK employees work less than 40 hours a week and fewer than 12% work more than 50 hours a week. Some people on high incomes have seen their working week increase but this is not the norm.

5. Inequality is on the rise...

ONS (2014a) The effects of taxes and benefits on household income, 2012/13. 26 June.

From Russell Brand to Thomas Piketty, commentators love to remind us that the UK suffers from spiralling inequality, which, if we're not careful, will revert us back to Victorian extremes. Claims such as these are misleading at best. By any conventional measure, income inequality peaked in Britain in 1990 and has been flat or falling ever since. It is currently lower than it has been for nearly 30 years.

6. ...while social mobility is falling

Giphy.com / Via Giphy

The majority of those born poor swiftly move up the income ladder and almost all become wealthier than their parents, contrary to the beliefs of the Polly Toynbees of this world. Far from grinding to a halt, social mobility in the UK is better than it has ever been before and, as a recent study from Oxford University concluded, 'with relative just as with absolute rates, there is no evidence at all to support the idea of mobility in decline.'

7. We’ve got all we can from economic growth, so let’s focus on the simpler things in life.

Giphy.com / Via Giphy

Sceptics of further economic growth should bear in mind the benefits to be had from ongoing prosperity. Not only does money allow us to pursue our goals and enjoy the fruits of our labour but it is also a consequence of human ingenuity and ambition. What’s more, the ever widening welfare state isn’t going to pay for itself. So perhaps we can afford a little more optimism.

8. Money doesn’t buy happiness after all

giphy.com / Via Giphy

Surely the failure of aggregate happiness to rise as everyone gets wealthier is proof that pursing growth is pointless? Not necessarily, no. A number of studies have shown not only that rich people are happier than poorer people, but that countries tend to become happier as they become richer. Of course, people’s aspirations rise as they and the people around them achieve better living standards, and this is a good thing. Most, though not all, happen to think that having a better income allows them to do what they want to do. So money isn't an obstacle to a good life – it facilitates it!

9. Inequality is bad for your health, literally

Giphy.com / Via Giphy

It is sometimes claimed that high rates of income inequality are associated with a number of negative social outcomes, including lower life expectancy. This claim was first made by the sociologist Richard Wilkinson in the early 1990s but subsequent research contradicted it. Wilkinson later co-authored a book - The Spirit Level - which popularised the theory while ignoring all the evidence to the contrary. The Spirit Level includes a graph which appears to show a negative correlation between inequality and life expectancy, but the graph uses old data and excludes a number of countries which don't fit the pattern. If up-to-date data are used - or if the full complement of countries is shown - the correlation (funnily enough) disappears.

10. We’re heading back to the 1930s

Picasa / Via peterberthoud.co.uk

We are far richer today than we were in the 1930s and GDP is many times higher, so it is meaningless to compare government spending today with that in the 30s. Even if the government meets its target, it will still be spending eight times more than the government of 1935 (adjusted for inflation). And, as a proportion of GDP, the figure will only be slightly lower than it was in 2001 - hardly The Road to Wigan Pier. And with a growing economy, why shouldn’t spending as a proportion of GDP fall? Demonstrating fiscal responsibility is a far cry from condemning us all to a life of poverty and destitution.