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Economic Fallacies There are a number of misconceptions about the economy. Two of the main ones are: The economy is like a pie, and if the government spends money on defence (or education, social services, bailing out companies or anything else that the speaker doesn't like), it's less money that it can spend on education (or defence etc). By spending money the government can stimulate the economy and reverse a recession (or depression). Let's look at the first point first. The obvious question, to me, is not how we should be divide the pie up but how do we make the pie bigger? The assumption in viewing the economy like a pie is that the size of the pie is independent of how we divide the pie up. Which begs the question: How do we make the pie bigger? I'll answer this later. The second misconception, that a government spending money can stimulate the economy, seems on the surface to make a certain amount of sense. Let's say the money is spent on road building. The workers who work on the roads are paid and spend the money on food etc which stimulates shops, which then employ more people etc. To understand this process we have to understand why it stops working. If this is so wonderful, what causes it to go wrong? Why do good economies go bad? In one sense, these two assumptions about how the economy works contradict each other. If the government can stimulate the economy by spending money, which makes the pie bigger, does spending money on, say, education stimulate the economy more than spending it on social services or arms? A point to consider when looking at government spending is where the government gets its money. If the government has money stashed away from the rich years and spends it during the lean years, this is quite different from simply printing money, which is what is happening today. It's usually accepted that printing money causes inflation because the value of the money in circulation goes down. However, recessions cause deflation, as with fewer people working there is less money and therefore less demand for goods, which means that shops have to lower their prices to sell their products. The result is that, to an extent, a government can put more money in circulation and not suffer inflation. This only happens up to a point then another factor comes in, what mathematicians call catastrophe theory. I'll continue this later.