The Nirvana fallacy

The Nirvana fallacy is a logical error committed by people who compare the actual world with ‘perfect’ alternatives. People who commit the fallacy often present a false dichotomy by suggesting unrealistic or even impossible ‘alternatives’.

These days it is common to see people who say that more regulation is needed to combat the problem of imperfect markets. By having increased government regulation it is claimed that somehow the government bureaucrat will have the knowledge to see the problem ahead of time and know exactly what is going on. The problem with this is that having such perfect information is impossible. The way the market works is such that people who believe the company is not solvent should be inclined to take an action such as sell stocks, short sell stocks or purchase put options (these actions generally have the effect of depressing the stock price). So short selling regulations and restrictions are not a good idea, because they are effectively blocking the signals that markets give.

We can’t even assume that the government is omnibenevolent, since it is very often open to corruption within, as well as being subject to undue influence from special interest groups. Individual departments can easily request more funds than they genuinely need, the best solution may be shunned in favour of political expediency, and government employment can be susceptible to nepotism. Insiders can often game the system anyway. Look at Bernard Madoff, who worked with the SEC, and managed to evade detection by the SEC for years and years – and he was running a multi billion dollar scam!

We don’t have the option of government that is omniscient, omnipotent and omnibenevolent, we only have the option of real world solutions.