Shrinking Markets Fallacy
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Basic Information

The shrinking markets fallacy was a fringe economic theory which arose in early C20 Europe and was the driving force behind some radical socio-economic models, not least German National Socialism and its autarkic goals.

Broadly, the fallacy observed that a contemporary advanced economy derived the bulk of its wealth from manufacturing and exporting finished goods, which it traded for food, raw materials and money and that large quantities of these imports were required to pay for the exports. A nation which could not export could not employ its workers and would thus suffer unemployment and social collapse. It was also considered that the supply of imports was finite and dependant on the ability of an exporting nation to sell its products into the nations which generated them - exporting, industrialised nations were therefore in competition with one another for markets in the less developed world. Those who held to this worldview also observed that industrialisation in the undeveloped world would, over time, reduce the size of the market for exported goods (hence the name of the fallacy), leading to the inevitable collapse of the world's free market economy (such as it was) and that this problem demanded an alternative economic model.

This has obvious parallels with the fixed value fallacy underlying socialist economics and, for those already inclined to socialism, was simply grist to their mill. Other solutions included autarky and national socialism (as above).

The element of fallacy in the model derives from its posit of a fixed size of market and fixed economic activities requiring what is essentially a zero-sum solution - the idea of advanced economies handing off their (then) core industries to developing nations and moving ahead into an economic model mostly based on services, manufacturing new generations of technologies and things that were barely recognised as economic activity in that era1 (as happened historically) would have been baffling to most of its components.


1. full source reference

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