How to Avoid Errors in Economic Thinking
Economic thinking is an effective mindset for gauging the fluctuations of the ever-changing economy. Applied correctly, the economic theory can be the most valuable of concepts. However, there are some common misconceptions about economics that should be avoided when thinking economically. The four following pitfalls are the most destructively incorrect views that interfere with successful economic thinking. These errors should be avoided at all costs.
Violation of Ceteris Paribus leads to drawing the wrong conclusion. Ceteris paribus is a Latin term that means “other things constant“. Economists use ceteris paribus when describing the effect of one change and what the results of that change would be granted that all other variables remained the same and did not change. An example of a ceteris paribus statement would be the following: Ceteris paribus, a decrease in the price of automobiles will cause buyers to purchase more automobiles. However, we live in a dynamic world where most likely other variables will change as well, so it is, therefore, incorrect to assume ceteris paribus in economic decision making.
Good Intentions Do Not Equal Success
Simply because a policy is formed with good intentions in mind and is expected to have favorable outcomes doesn’t mean that that will be the case. Sometimes proponents of a policy fail to foresee the negative secondary effects of a policy even though it may be founded with good intentions. This is why, in thinking economically, it is important to always consider the side effects of a proposal. Failure to do so can sometimes prove fatal to the economy.
Association Is Not Causation
Because one element is associated with another does not necessarily mean it is the cause of the outcome. For instance, if it has not rained for a month but then a group of people performs a rain dance and it suddenly rains, it does not necessarily mean that the rain dance ritual is what caused the rain. Just because two events appear to happen in conjunction with one another does not mean that they hold a cause-and-effect relationship. This is also known as the post hoc propter ergo hoc error.
What’s True For One May Not Be True For All
Also known as the fallacy of composition, this rule states that what is true for the whole may not be true for the part. This is where economics breaks into two categories: microeconomics and macroeconomics. Simply defined, microeconomics focuses on the individual, whereas macroeconomics focuses on the aggregation of many individuals. What is true for the microeconomic policy may not be true for macroeconomic policy.
Economics Can Sometimes Seem Difficult To Master
Yet, with the memorization and application of a few highly effective concepts, it can be done. If you do your homework, you’ll see that adhering to these four rules will reduce errors in economic thinking significantly and promote more successful economic practices.