The lies of (some) economists

Let’s start with five:

1. Believe in comparative statics, the income effects will wash out in the aggregate.  (Larry Summers once taught me: "Economics is a theory of substitution effects but we live in a world of income effects.")

2. The model predicts well, don’t worry about the assumptions.  (As Paul Samuelson pointed out, don’t false assumptions, by their nature, involve a very large number of (sometimes implicit) false predictions?)

3. People may make mistakes when the stakes are small, but as they become more decisive over larger prizes, the irrationality goes away.  (Name any major politician or how about Tom Cruise on Oprah?)

4. IS-LM models make sense.

5. There are many firms in the sector, they must be price-takers.  (Does demand go to zero when your local Chinese restaurant raises prices by a penny?  Or for that matter by a dollar?)

Do you wish to suggest other lies in the comments?

Here is Guy Kawasaki with The Top Ten Lies of EngineersThe Top Ten Lies of EntrepreneursThe Top Ten Lies of Venture Capitalists.  Thanks to Chris F. Masse for the idea and the pointer to Kawasaki.


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