- ABC News Economic fallacy is a term used to describe a false belief in the power of the free market to solve economic problems. The idea is that if the government leaves the market to its own devices, it will naturally result in the optimal outcome. This ignores the fact that the market is not a perfect system, and is instead shaped by a variety of factors, including the decisions of governments, businesses, and consumers. Economic fallacies are often used to support policies that may not be in the best interests of the economy or society. They are also used to justify policies that may benefit certain groups at the expense of others.