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ECONOMIC MYTHOLOGY: SOURCES AND CONSEQUENCES OF ILLUSIONS
Harmful economic myths underpin entire country strategies implemented by governments and ultimately lead to financial crises, rampant inflation, and the long-term impoverishment of entire nations. Ukraine is an example. But is there an antidote?
21 August, 2025
Governance and Regulations
Austrian economic school
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A harrowing question for every person who cares about the fate of Ukraine today is why a country with the world's richest natural resources and skilled people is the poorest in Europe, losing its population at a frantic pace and suffering from external aggression?
To comprehend the depth of the Ukrainian economic crisis, it is sufficient to examine key indicators, particularly GDP per capita.
Dynamics of GDP at purchasing power parity per capita in some countries of the former USSR, USD
Comparisons of the dynamics of Ukrainian GDP per capita with other former Soviet republics show that we are chronically lagging in creating conditions for economic growth. We still have not managed to create better conditions for economic development than in other former Soviet republics.
Compared to more developed countries, the situation is even worse. The average Ukrainian is almost five times poorer than their Polish counterpart: a Ukrainian earns $ 4,300 a year, while the average Pole earns $22,100. At the same time, the average Ukrainian is 20 times poorer than a U.S. resident ($82.7 thousand per year is earned by an average U.S. resident).
Source: Statistical data of the World Bank (worldbank.org) in current prices at the end of 2023.
Uncompetitive economic conditions cause chronic poverty: In Ukraine, poverty has reached catastrophic proportions. According to the UN, approximately 7.3 million Ukrainians face moderate or severe food insecurity, including 1.2 million children and 2 million elderly people.
Source: O. Palikot. Nine million Ukrainians live in poverty: how the war widens the gap between rich and poor, September 05, 2024, radiosvoboda.org
The Ukrainian state has failed to organize decent social security: the minimum pension in Ukraine is 2361 UAH/month (approximately 56 USD), which is an outrage to human dignity.
Poor business conditions and the spread of poverty led to a steady decline in the population, which, with its feet, were against such anti-economic policies of the Ukrainian authorities. At the same time, the massive flight of people from the state is not the result of a full-scale invasion by Russia. Data show that in just 10 months of 2021, more than 600,000 Ukrainians left Ukraine and have not yet returned, the highest number in the last 11 years. According to preliminary estimates, a total of almost 3.3 million citizens left the country between 2011 and 2021.
Source: https://suspilne.media/190641-za-11-rokiv-z-ukraini-viihali-majze-33-miljona-gromadan-opendatabot/
Population dynamics in Ukraine in 1990-2024, million people (according to Worldbank.org)
The primary reasons for Ukraine's current economic and demographic decline can be seen in its 150th place in the Economic Freedom Index for 2024, which is compiled annually by the Fraser Institute (Canada). This index summarizes the level of government intervention in the economy, categorizing countries into four groups, ranging from economically free to economically unfree. In recent years, Ukraine has not left the last group - the least economically free countries in the world.
Source: An overview of Ukrainian economic unfreedom in the article by Y. Romanchuk, The country of no freedom
The level of corruption perception in Ukraine also remains high, despite the statements of officials: Ukraine received 36 points out of 100 in the Corruption Perceptions Index (CPI) for 2023, and now our country ranks 104th out of 180 countries.
The size of the Ukrainian state and its level of intervention in the economy are evidenced by the ratio of public spending to GDP: in 2023, total public spending increased by $27.48 billion to $132.68 billion, or 74.4% of GDP. The size of the public sector is unprecedented, but it also cannot be entirely attributed to the war — in 2021, the level of public spending in Ukraine was about 45% of GDP, while in economically free countries it is less than 25%.
Source: On the problem of taxation and public spending in Ukraine, Yaroslav Romanchuk, Ukraine's fiscal transformation is inevitable
Despite the terrible economic conditions in Ukraine, the majority of Ukrainians are still strong supporters of state interventionism and socialism: 23.5% of Ukrainians support broad nationalization of companies and their transfer to state management, while 18.3% support the idea of completely abandoning existing state-owned enterprises. While the broadest possible privatization is supported by only 9.9% of Ukrainians.
Data from the Institute of Sociology of the National Academy of Sciences of Ukraine for 2023.
https://isnasu.org.ua/assets/files/monitoring/Maket_Ukr_suspilstvo_2023.pdf
Summarizing the review of these statistics, it can be argued that the Ukrainian state elite managed a much less effective transition from a command to a market economy compared to most countries of the former USSR and the entire "socialist camp”.
The catastrophic economic and demographic situation in Ukraine is the result of the economic policy that has remained unchanged over the past decades, characterized not by movement towards market reforms but by following etatism: a high level of taxation and government regulation, extremely low level of economic freedom.
In other words, we have wrong goals, wrong methods, and corresponding results in economic management. The slogans about the need for “market transformation” that were popular in the 1990s have almost completely disappeared from the program documents and statements of Ukrainian politicians and government officials — they consider this process completed, contrary to the facts.
The nature of economic myths
The economic policy of the Ukrainian authorities, which has remained unchanged in its principles for decades and has led to economic and demographic decline, continues to be generally approved by Ukrainian society despite its obviously destructive results. This raises several questions:
- Why do people approve of the government's actions or see no worthy alternatives if the state's economic policy constantly brings them problems, impoverishment, and war?
- Why did Ukrainian and foreign economists, consultants, and public administration experts fail to develop and implement an effective state economic policy?
- Why are economists with academic degrees and positions of responsibility not ready to put forward and defend conceptual alternatives to destructive government programs?
- Why has no representative of any Ukrainian government ever commented on Ukraine's recent placement in economic freedom rankings?
These and other fundamental questions remain largely unanswered. And as a result, we have, on the one hand, support for the government's destructive actions by economists and public administration experts, and, on the other hand, general approval and misunderstanding of the profound error of such actions by the general public.
One of the main reasons for the illogical support of the government's actions by the public and the lack of productive ideas to overcome the crisis is the persistent misconceptions in the public consciousness about the nature and consequences of economic phenomena — economic myths — a set of which can be called economic mythology. Mythologized ideas about the economy that are widespread in society are the main reason for supporting anti-economic activities of the state.Share
The main sources of economic myths:
- people's everyday views on economic phenomena, which are characterized by superficiality and lack of systematicity, are only “visible” according to Frédéric Bastiat;
- opinions of authoritative authors and spokespersons — representatives of government, politics, science, culture — disseminated by the media;
- the body of ideas of the social sciences, especially, of economic theory, which was learned through social education at all levels.
It should be noted that the economic myth for its adherents looks quite plausible and reliable, the confirmation of which can be easily found in public opinion and in authoritative sources of various kinds. Therefore, when considering the manifestations of economic mythology, the question of the measure of truth is fundamental.
The provider of the measure of truth for recognizing certain views as mythical or correct should be economic theory as the core of the system of social sciences, social theory. However, it is necessary to make certain reservations, since not all provisions of modern economic theory are true for certain reasons, which are outlined below.
Why contemporary social theory has become a creator rather than a debunker of myths
Answers to the question of the causes of Ukraine's current troubles should be sought in our history: the national cultural tradition, the historical experience of national self-assertion, and state-building. But it is worth emphasizing that among the variety of diverse factors that have determined our current shameful economic situation, a special role is played by the history of development and the current state of social theory — a set of paradigms of social phenomena developed by the social sciences, among which history, sociology, jurisprudence, and economic theory are the most important.
Social theory as a whole can be described as one whose objectivity always suffers from the personal preferences and views of its advocates (sometimes fanatical or mentally ill), and is equally influenced by the prevailing state ideology and the general mood of the era. In addition, social theory in the appropriate interpretation becomes a tool for imposing state ideology by dictatorial regimes: the enlightened scholars are forced to fulfill the orders of politicians and state officials, inventing and "scientifically" justifying the necessary "laws" and entire social disciplines.
A clear example of the social theory used to meet the ideological needs of the party dictatorship is the existence in Soviet times of departments of higher education institutions that taught such subjects as "scientific communism," "history of the CPSU," and other similar pseudo-scientific disciplines. At the same time, the central component of this complex of pseudoscience was the political economy of socialism, based on the labor theory of value and the book “Capital” by Karl Marx. To certify its "scientific" nature and thus ensure the credibility of its conclusions, it was presented as a logical development of classical economic theory, in which the labor theory of value played a systemic role.
All other theories and approaches were declared unscientific, vulgar, and bourgeois (i.e., violating the "class character" of Marxist political economy). The theory of subjective value, which was developed shortly after the publication of the first volume of Capital (1863), and which led to the marginalist revolution, which resulted in the birth of neoclassical economic theory, Marx himself ignored it, and his ideological followers classified it as barren, bourgeois, and harmful.
The resounding collapse of the economies of socialist countries proved the absurdity and unscientific nature of social concepts legitimized by the state but unsuitable for practical implementation. If, instead of discovering the laws of human cooperation, we invent them in political interests, then no amount of official approval of their "scientific" nature will save us from the destructive consequences of using them as a basis for economic policy. Millions of victims of political repression wasted resources, moral degradation of society due to the interrupted tradition of private ownership and investment, helplessness and corruption of the post-Soviet system of government, total mythologization of economic views — these are all terrible consequences of a large-scale social experiment organized according to false concepts.
However, the problem with supplying a measure of truth — the provisions of economic theory — is that economic theory itself, even in its non-Marxist presentation, is not conceptually homogeneous and cannot be considered as finally formed, since it is still one of the young, evolving social sciences.
In the modern sense, economic science was developed by Adam Smith and his seminal work The Wealth of Nations. Before that, economic issues were considered by scholars within the framework of moral philosophy.
The main body of ideas supported by the majority of economists and outlined in relevant works and textbooks ― mainstream economic theory ― today is in a deep ideological crisis.
Source: On the crisis of modern economic theory, see the article by Yaroslav Romanchuk Four terminators that kill the economy.
The results of these concepts' application in the development of economic policy in most countries of the world prove their imperfection and inconsistency with expectations. Successful examples of economic reforms, the essence of which is to minimize state intervention in the economy, i.e., de facto, they are a refusal to follow the prescriptions of mainstream economists, are viewed by these economists and the public as something extraordinary and fall into the category of almost divine "miracles." It is the "economic miracles" sung in popular science publications, which should in fact be common practice rather than exceptions, that demonstrate the imperfection of mainstream economic theory and expose the true level of mythologization of economic views of most economists.
In other words, "economic miracles" indicate that modern economic theory is mostly a supplier of false ideas that not only do not refute economic myths but also contribute to their consolidation in public opinion as true statements.
It is from the pages of economic theory textbooks that false concepts penetrate the minds of future specialists in various social sciences, forming a worldview full of myths and support for harmful political programs.
Established traditions, the weight of the authority of eminent economists, and the ignoring of the still weak voice of opposition economists have been driving this mainstream of incorrect but convenient concepts — mainstream economics — along the familiar, well-trodden path of interventionist apologetics for centuries, as noted by Ludwig von Mises, a prominent economist of the Austrian school:
L"What is taught nowadays at most of the universities under the label of economics is practically a denial of it."L
Source: Ludwig von Mises. Human Activity: A Treatise on Economic Theory, Chapter XIV (translation of the author's quote).
Due to the adherence to false concepts, the essence of which is to deny the efficiency and non-alternative nature of voluntary exchange between private owners, the current economic theory has largely turned into a pseudo-scientific justification of unnatural and anti-economic phenomena, among which the key ones are:
- interventionism― the state regulates markets and violates the rights of private owners through various forms of taxation;
- stimulating aggregate demand ― active countercyclical policy through borrowing and accumulation of public debt, justified by Keynesianism;
- Inflationism ― the state issues unsecured money to cover its ever-increasing expenditures, which are included in deficit state budgets, causing chronic inflation;
- welfare state ― the state is engaged in comprehensive social welfare, collecting more and more taxes from the working population;
- protectionism ― the state sets protective tariffs, participating in endless international trade wars.
All of these phenomena, which are destructive to long-term welfare, have become the norm thanks to their "scientific" justification by eminent economists and their presentation in Economics textbooks richly decorated with formulas and beautifully illustrated with graphical models, the study of which lays the foundation for a mythologized economic worldview, misleading millions of people around the world.
Thus, the modern economistic and econometric mainstream doctrine is not about the values of freedom of choice and free enterprise, but about justifying the confiscation of a significant part of the private sector's income in favor of the whims of the state apparatus.
The experience of most "developed" European countries, where taxes reach 50% of GDP, proves that the use of the concept of forced redistribution in economic policy is a deterrent to economic growth, which has rarely exceeded 2% per year in these countries for many years. Overburdened by years of state intervention, "developed" economies are still afloat thanks to the achievements of free capitalism at a time of minimal state intervention in the economy, showing increasing signs of losing competitiveness in international markets, a decline in the spirit of entrepreneurship, and a degradation of public morality.
All of this has created a breeding ground for economic mythology in the modern world. Examples of the most common and harmful myths include the following:
- State-owned enterprises are good for society.
- High taxes ensure a high standard of living
- Without the state, there will be no social protection, defense, education, or science.
- Without government regulation, the economy will not work.
- Capitalism is a shameful, exploitative system.
- The myth of mainstream economic theory.
This list is not exhaustive. In the next article on the International Liberty Institute website, I will debunk in detail each of these myths that have been formed in our minds precisely because of the above-mentioned economic trends.
But it is worth emphasizing that for modern Ukraine, in the midst of a full-scale war, such restraining prescriptions of total state intervention in the economy cannot satisfy the Ukrainian nation, which is mired in a state of transit from the Soviet directive to the Western "free" economy in the modern sense, and is striving to escape from the long-standing regime of chronic poverty, demographic catastrophe, and external aggression. That is why we need productive economic concepts that could ensure rapid economic growth - a "Ukrainian economic miracle" in the terms of modern economic and journalistic terminology.
The Austrian School of Economics and Praxeology as the Main Destroyers of Economic Myths
However, there is a powerful and well-founded opposition to the modern economic mainstream at the conceptual level — the economic theory of the Austrian School of Economics and praxeology. Their basic concepts are fundamentally opposed to the previously outlined mainstream ones:
- Non-interference of the state in the economy, economic freedom, private property, low taxes, and no regulation of markets (vs. interventionism and stimulation of aggregate demand).
- use of commodity money based on the gold standard and other metals, and digital decentralized money as a means of exchange (instead of centralized issuance of fiat money);
- individual economic responsibility for providing for old age, health care, education, etc., with market-based insurance mechanisms for such provision (versus the welfare state);
- free trade (against protectionism).
These basic concepts of the Austrian School of Economics and their logical development pose a serious challenge to the orthodox economic worldview thoroughly indoctrinated by the etatism, often shocking its carriers and raising suspicions of being unscientific, superficial, and inadequate to the realities of life.
It should be noted that the personal choice between the concept of etatism and economic freedom, when an unburned conscience, common sense, and an uncluttered mind will eventually choose the side of economic freedom, is a fundamental worldview choice, in particular for a scientist. To make such a choice means to choose the intellectual opposition and the minority side in economic science, which in itself is a courageous act with the whole range of possible negative consequences. At the same time, the position of economic freedom, private property, and the logic of spontaneous order becomes the key that opens the door to understanding the true nature of social phenomena and realizing the level of their mythologization in the public consciousness.
In fact, the Austrian School of Economics (ASE) is not some esoteric or marginal manifestation of economic thought. Its contribution to economic science could not be ignored even by official government circles - its prominent representative Friedrich Hayek was awarded the Nobel Prize in Economics (1974); Milton Friedman, Nobel Prize winner and advisor to the governments of Margaret Thatcher and Ronald Reagan, although he belonged to the Chicago School, shared many of the key postulates of the Austrians - especially criticism of excessive government intervention and inflationary monetary policy.
In the post-Soviet space, a prominent example of the implementation of reforms similar to the ASE was the Georgian reformer Kakha Bendukidze, who in 2004-2008 initiated large-scale deregulation, privatization, and simplification of the tax system, making the country an example of rapid economic liberalization.
In contemporary Latin America, the loudest voice of the Austrian tradition has become the current president of Argentina, Javier Milei, who openly calls himself an ‘anti-etatist,’ quotes Ludwig von Mises, and proposes radical measures — from shutting down the central bank to adopting the dollar as the official currency.
As an intellectual tradition, the ASE dates back to the work of Karl Menger, «Principles of economic science» (1871), which is considered the primary source of neoclassical economic theory along with the works of Walras and Jevons. It was this trio — Menger, Walras, and Jevons — who, with their work in the 1870s, gave rise to the so-called «marginalist revolution», the essence of which is to recognize subjective utility as a source of value of goods. This approach profoundly reformed the theory of prices and choice, consigning to the archives of the history of economic thought the labor theory of value along with important provisions of classical economic theory разом з важливим положеннями класичної економічної теорії and Marxism, which were built on the foundation of labor theory.
Despite the common historical roots of the ASE and neoclassical economics (or rather, the ASE was a variant of neoclassicism in its time), their paths diverged in the first third of the twentieth century - Austrians Böhm-Bawerk, Mises, and Hayek continued the tradition of individualism and economic freedom, while economists of other schools, in particular, the Cambridge school, chose to advocate collectivism, centralization, and state intervention: Marshall, Pigou, and Keynes chose to defend collectivism, centralization, and justify the need for state intervention in the economy through the so-called «market failures», which in fact do not exist, there are only failures of the state apparatus (this widespread and harmful myth requires a separate study in the next article).
Naturally, it was precisely the collectivist–etatist strand of economic theory that was eagerly taken up by the economics departments of state universities, by politicians and public administrators, and that found approval in public opinion.
The political elites and the academic community of that time chose the economic doctrine most advantageous to them (which they continue to adhere to today), despite its hostility to the ideas of classical liberalism, the practical implementation of which in the nineteenth century ensured the unprecedented explosive growth of Western civilization. Having flourished on the principles of liberalism and capitalism and becoming the crown of civilization, Western society was paradoxically seduced by the illusory benefits of collectivism, centralization, socialization, and state domination in all spheres of life, i.e., etatism. Friedrich Hayek argues that this happened because people were convinced of the positive consequences of socialism.
Source: Friedrich Hayek The Road to Serfdom, section 2.
The deeper reasons for such a choice still await systematic research and reflection in economic, philosophical, historical, political, psychological, and other contexts. Yet one of the significant consequences of this course of history is that today we are left with a biased economic theory—one that ignores and seeks to refute the fundamental laws of social cooperation, laws that were discovered (not invented!) by Menger’s Austrian School of Economics and by Mises’s praxeology.
The concept of praxeology became the further logical development of the ideas of subjective utility and individualism—the concept of man as an acting being, homo agens — which received a systematic exposition in Ludwig von Mises’s seminal work Human Action: A Treatise on Economics (1949).
Praxeology has extended the study of acts of individual choice beyond economic relations to the entire spectrum of human interaction. Mises explains the relationship between economic theory and praxeology as follows:
L"«…economic theory has become a part of, and today remains the most fully developed branch of, the more general science of praxeology.»"L
Source: Ludwig von Mises. Human Action: A Treatise on Economics, introduction.
This state of affairs allows us to consider praxeology as a conceptual basis for a new social theory.
Conclusions
The Austrian School of Economics and praxeology are a true continuation of the tradition of classical economic theory, whose representatives considered economic freedom, laissez-faire, “the invisible hand of the market”, free trade, non-interference of the state in the economy and individual interests of people — all of which are declared imperfect by the modern mainstream and pushed to the background -as the main prerequisites for the economic efficiency of society.
Guided by the ideas of economic freedom, natural order, and the non-alternative nature of voluntary market exchange between private owners — the basic principles of an effective society according to ASE and praxeology — in the following post, the author will focus on the most common economic myths and present their refutation from the point of view of common sense economics.
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Governance and Regulations
Austrian economic school
Dmytro Dusheiko
A specialist in finance and business processes, business trainer with 15 years of experience in teaching economic theory, Doctor of Economics, supporter of AES, translator of articles and books from the English language, contributor to Wikipedia.
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