Fallacies, Hokum and Contradiction

Commenter breedm asked what I thought of this TED Talk presentation about job creators from Nick Hanauer.

I think it provides some good examples of fallacies, hokum and an argument that contradicts itself.

At the 42 second mark, Hanauer presents this straw man:

…a policymaker who believes that the rich are job creators and therefore should not be taxed will do equally terrible policy  [as an astronomer who believes the Earth is the center of universe] .

The straw man is in bold. I know of no one who believes the rich should not be taxed. Comparing these fictional policymakers to fictional astronomers (that’s hokum) doesn’t make either group any more real.

Right after that, Hanauer enters the wealth discussion “in the middle” by claiming that job creation comes from the people who can afford to buy products, consumers. Without them, “all of those jobs would have evaporated,” claims Hanauer.

David Mamet and Thomas Sowell explain here that the “a priori question left unasked and unanswered” by folks like Hanauer is, where did the wealth of these people who can afford to buy products come from?

Wealth was not “descended from the heavens, like manna, and spread evenly over the ground,” Sowell writes. “It was created by individual expenditure of effort and individual willingness to undertake risk.”

At about the 1:15 mark, Hanauer says something I agree with:

Jobs are a consequence of a circle of life-like feedback loop between customers and businesses.

Sure. Customers buy products they value. Those purchases send signals to businesses about what consumers value and businesses make more of that stuff.

But, as Sowell pointed out, customers had to first acquire enough wealth to purchase these things in the first place.

This was done in the same “circle of life-like feedback loop” that Hanauer mentioned. Consumers acquired their wealth as workers or business owners that produced something of value for others.

Or, they somehow got their hands on a piece of the wealth these folks created. For example, children who spend their parents’ money got their hands on some of the wealth their parents created. Recipients of charity or government transfer payments, get a piece of wealth — either voluntarily or forcefully — from someone else.

But, I disagree with Hanauer’s very next sentence. I also think this sentence contradicts his previous and is the fundamental lapse in Hanauer’s thinking.

And only consumers can set in motion this virtuous cycle of increasing demand and hiring.

It’s not much of a “virtuous cycle” if only one player in that cycle can set it in motion, is it? Again, Hanauer’s basic flaw is not tracing back where those consumers acquired their wealth.

The next few minutes of Hanauer’s speech is filled with hokum. For example, he argues that when business people take credit for creating jobs, it’s like squirrels taking credit for evolution.

I wonder what Nick would say about politicians taking credit for job creation. Either way, it’s a hokum comparison. It’s more like squirrels taking credit for finding a good place to store nuts for the winter. Evolution may have favored the squirrels who do that, but that doesn’t mean that those squirrels aren’t working hard to make sure their families have enough food for the winter.

Hanauer really stretches the straw man and hokum meter at the 4 minute mark, claiming that the word ‘creator’ is an attempt to deify job creators.

It’s a small jump from ‘job creator’ to ‘the Creator’. It was, like, not chosen by accident. When someone like me calls himself a job creator, we’re not just describing how the economy works…we’re making a claim on status and privileges we deserve.

Or, maybe not.

Next, Hanauer claims that the 15% tax rate paid by ‘capitalists’ on dividends and carried interest, compared with the 35% top rate on work, is a privilege and hard to justify without deification.

That’s only if you don’t understand the difference and neglect that the ‘capitalists’, for the most part, had to pay that ‘35% top rate’ on the income that was used to acquire the capital that is now producing dividends, as economist Steven Landsburg explains here. Landsburg’s conclusion:

Why is this so terribly hard for so many intelligent people to understand? Here, I think, is why. They see a guy with a million dollar capital gain on his investment, and they forget that in the absence of wage taxes, he’d have invested twice as much and earned a two million dollar capital gain. In that sense, the capital gain is taxed in advance.

Hanauer concludes that a strong middle class is the real driver of job creation and:

…that’s why taxing the rich to pay for investments that benefit all is such a fantastic deal.

Except that kills the consumer-business feedback loop ecosystem that Hanauer praised earlier in his speech, because the “investors” are no longer investors and consumer purchasing signals no longer matter.

That is, “investors” in Hanauer’s model do not have to respond to what consumers want. Investors in the “ecosystem” go out of business when they make something consumers are unwilling to buy, as they should. That’s the feedback part of his consumer-business feedback ecosystem.

When government “investors” (i.e. spenders) make something consumers are unwilling to buy, they don’t necessarily go out of business because the tax dollars are not directly dependent on whether their projects are consumers successes or not.

To sum up, Hanauer first argues that the economy is an emergent order, like evolution, that is not dependent on a centralized investment function. But, then argues that we should centralize it, which removes the emergent order aspect of it.

breedm, Does that help?

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5 thoughts on “Fallacies, Hokum and Contradiction

  1. Before I address the specific article, I thought our dinner table might be an appropriate venue to address the conclusions of this study (and when I saw that Seth had used “hokum” in the title of the post, it was “Game On!”:

    http://www.foxnews.com/health/2012/09/10/overweight-teens-dont-necessarily-consume-more-calories/

    The crux of their conclusion is that obese kids eat LESS than non-obese kids and that the only reason they’re so fat is because their caloric expenditure (their physical activity) is so much less.

    But it’s a faulty conclusion based on a faulty research method. Instead of factually determining each kid’s caloric intake, they used surveys, i.e. they had the kids report how much they “thought” they ate. So, what they really “discovered” – and what many of us already knew – is that fat kids don’t correctly report how much they eat. Whether that’s because they’re lying to the researchers or lying to themselves is anyone’s guess – perhaps they can do another study and figure that out.

    Now, on to Nick Hanauer’s foolishness:

    The “Robinson Crusoe” perspective espoused by Seth and Dr. Sowell is spot on not only in terms of consumers having to produce something of their own before they could demand (and trade) for some widget that someone else produced, but until the widget producer actually conceived of and produced the first widget, no consumer would have the idea in his brain, “Hey, let me go out and buy a widget.”

    The first guy that built an axe didn’t build it because his neighbors came up with the idea and asked him to build one. He probably used a little ingenuity and put the ideas of hitting things with a rock and the leverage on gained when hitting things with a long stick together and built it…..and only then was a demand created for the axe. Bill Gates didn’t build Microsoft because the average consumer had a demand for a personal computer or an operating system. Rather, the supply created the demand.

    Mr. Hanauer’s argument sounds strangely similar to the argument that those on the left have been using when they say that businesses were only able to be built because government were there first to supply them with the infrastructure. They have it bass ackwards. The desire and act of trading come first and then people form government for the purpose of advancing their ability to reliably trade with others and keep what they earn.

    As Seth points out, the free market is an efficient feedback loop signaling producers to produce more of what consumers desire and less of what they don’t desire. Producers do this because they have an incentive to behave in such a manner, i.e. they make money if they produce the “correct” amount and they lose money if they don’t. That’s the reason having government tax us so that the politicians can determine what and how much is made is a recipe for disaster – there’s no feedback loop, they can keep taxing us ’til the cows come home. In fact, that’s a big part of the reason we’re in the mess we’re in – rather than letting the market determine how much is spent and on what, Washington has spent based upon how many votes their particular entitlement programs and SIG handouts will buy. Well, at some level, I guess the politicians do understand the economics of it – if you spend more on votes, you’ll probably get more votes….that is until you run out of other people’s money.

    • Nice comment. Thanks! I agree on the study you linked to. It amazes me how little attention is given to possible alternative explanations for the study findings. There’s a nice Econtalk podcast on that this week. Apparently, only moderates could correctly identify shades of gray (literally), until the researchers tried to replicate the results.

  2. Hi Seth, I’ve been giving some thought to the ideas being rehashed by Mr. Hanauer and others about how great it would be if the government could extract (tax) more and more wealth away from the “rich” in order to pay for programs that they deem necessary. In the relatively brief time that capitalism has permitted and fostered the greatest improvements in human well-being ever known on our planet, grand ideas such as Mr. Hanauer proposes have always meant that the governing elite will want more and more control of the economy, that taxes (in whatever form) are nudged higher and higher and the definition of “rich” gets ratcheted down until the government effectively “owns” the nations wealth, that is the means of production.

    While this process has often occurred abruptly in other nations, e.g. Russia, Cuba, etc., this has been a more gradual – although recognizable and verifiable – process in the US during the past century. When government demands (taxes) more and more of the wealth of its private citizens so that government can determine how that wealth (the nation’s resources) are used, a point comes when it’s obvious to all but the most foolish of the “useful idiots” recognize that this is socialism.

    So, in light of the efforts by Mr. Obama and his friends on the left to tax more and more money from more and more people (and make no mistake that the “middle class” will be redefined and eventually taxed heavily as well once the ruling class seizes enough power – one could make an argument that ObamaCare has already placed them in that situation), those folks that call Mr. Obama a communist or a socialist are not conspiracy theory nut jobs, they’re simply aware of history and calling the big picture what it is. Unfortunately, we have a new generation of what Staling called “useful idiots” who are either to foolish or too enamored with being “cool” to see past the rhetoric and recognize things for what they are…….but that’s the history of how socialism infiltrates a nation.

  3. Ugh, someone sent me this talk on Facebook awhile back and it drives me nuts. Leftists claim that it was rejected because it was “too controversial.” As if this guy is the first person ever to criticize the wealthy and promote higher taxes. Right, what an unheard of and groundbreaking idea. It’s not as if the current President of the United States is actively campaigning on that very notion…

    I think the whole “It’s not a small jump from ‘job creator’ to ‘the creator'” is absolutely ridiculous, and I think that section is specifically why TED rejected this talk. Most of their talks, even if you disagree with the premises, are based on academics, logic, rational debate, etc. That sort of statement is based on none of those things. We may debate how big of a jump it is, but even the speaker admits it is a jump. It’s a leap of faith that is not supported by much of anything.

    Also, you’re exactly right on capital gains. Every single dollar in capital gains tax has ALREADY been taxed at the standard (35% if we’re talking about wealthy people here) rate.

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