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So what you're saying is that because we've let our trade deficit run unchecked for many decades, eventually all our property will be owned by the foreign interests.

Is this an accurate summary?

The first part of this process is that the US gets all the wealth that China has produced, and China gets all the money the US has produced. This is obviously a better deal for the US.
The second part of the process is China buys US wealth with their US money. Naturally they will buy the good stuff, not the crap they sold before. So in the end the US has swapped its infrastructure and capital for trinkets. Not such a good deal.

I'm trying to identify the false assumptions made by standard economic theory

This will help: Debunking Economics

I've been reading a lot of economics the last few years, trying to figure out why it's so full of shit.
It seems mainstream (neoclassical/keynesian synthesis) economists believe in mathematics but don't believe in reality.
Their close kin the Austrians don't believe in mathematics either.
They both believe economies are in equilibrium, this is a fundamental assumption, and other nonsense like 'people behave rationally', 'people have perfect information' etc.
These are not a priori assumptions like a physicist might make but come out of their theories and without which they do not work. This does not phase them.

Along the way I have discovered System Dynamics, a way of modeling complex dynamic systems which seems well suited to studying economics. There is an economist using this, he has designed his own System Dynamics software called Minsky, and unlike Krugman, Rogoff et al. he makes a lot of sense.
His name is Steve Keen and you can get Minsky from here: Windows, Mac or here: Linux.
He has an excellent book: Debunking Economics and you will find him on YouTube too.

A simple rule of thumb is: The more a result relies on population studies, especially ones conducted with any kind of selection process or worse selection process plus the actual modification of the data according to some heuristic or correction process, where the study itself is conducted from the beginning to confirm some given hypothesis, the more likely it is that the result (when published) is bullshit that will eventually, possibly decades later, turn out to be completely wrong. If you have enough places for a thumb to be subtly placed on the scales and the owner of the thumb has any sort of vested or open interest in the outcome, it is even odds or better that a teensy bit of pressure will be applied, quite possibly without even the intention of the researcher. Confirmation bias is not necessarily "fraud" -- it is just bad science, science poorly done.

The more interesting aspect of this is how economic facts are so rooted, mainstream and rehashed, using this very same process, that they become political ideology... Sad world...

... through arguing over resource allocation. According to "Conceptual Guerilla", mainstream economics is just mainly a mythological cover story to justify elites:
"The Mythology of Wealth"
http://www.conceptualguerilla.com/?q=node/402

Example:
http://www.responsiblefinance.ch/appeal/
"The authors of this appeal are deeply concerned that more than three years since the outbreak of the financial and macroeconomic crisis that highlighted the pitfalls, limitations, dangers and responsibilities of main-stream thought in economics, finance and management, the quasi-monopolistic position of such thought within the academic world nevertheless remains largely unchallenged. This situation reflects the institutional power that the unconditional proponents of main-stream thought continue to exert on university teaching and research. This domination, propagated by the so-called top universities, dates back at least a quarter of a century and is effectively global. However, the very fact that this paradigm persists despite the current crisis, highlights the extent of its power and the dangerousness of its dogmatic character. Teachers and researchers, the signatories of the appeal, assert that this situation restricts the fecundity of research and teaching in economics, finance and management, diverting them as it does from issues critical to society."

Other ways to look at economics:
http://debunkingeconomics.com/

And also the similarly named:
http://www.amazon.com/Economics-Rest-Us-Debunking-Science/dp/1595581014
"Why do contemporary economists consider food subsidies in starving countries, rent control in rich cities, and health insurance everywhere "inefficient"? Why do they feel that corporate executives deserve no less than their multimillion-dollar "compensation" packages and workers no more than their meager wages? Here is a lively and accessible debunking of the two elements that make economics the "science" of the rich: the definition of what is efficient and the theory of how wages are determined. The first is used to justify the cruelest policies, the second grand larceny. Filled with lively examples--from food riots in Indonesia to eminent domain in Connecticut and everyone from Adam Smith to Jeremy Bentham to Larry Summers--Economics for the Rest of Us shows how today's dominant economic theories evolved, how they explicitly favor the rich over the poor, and why they're not the only or best options. Written for anyone with an interest in understanding contemporary economic thinking--and why it is dead wrong--Economics for the Rest of Us offers a foundation for a fundamentally more just economic system."

Thanks for the reply, even if the ad hominen part probably just weakens your argument. :-)

I actually like economists like Julian Simon, even if he ignores externalities and equitable distribution:
http://www.juliansimon.com/writings/Ultimate_Resource/

The fact is, most mainstream economics is based neither on facts, history, or human nature. :-) Most of it is abstract theoretical model with little connection to populist ethics or reality. See, for example:
http://www.theatlantic.com/magazine/archive/1999/03/the-market-as-god/6397/
http://www.responsiblefinance.ch/appeal/
http://debunkingeconomics.com/
http://www.nytimes.com/2010/07/04/business/economy/04econ.html

Or:
"Economics for the Rest of Us: Debunking the Science that Makes Life Dismal"
http://www.amazon.com/Economics-Rest-Us-Debunking-Science/dp/1595581014

Here is another thing to think about, by the way:
http://en.wikipedia.org/wiki/Paradox_of_toil
"The paradox of toil is the economic hypothesis that total employment will shrink if everybody wants to work more when "the short-term nominal interest rate is zero and there are deflationary pressures and output contraction".[1] The idea is that total employment will fall when wages, and therefore consumption, are pushed down by the simultanious efforts of everyone to work more in situations where interest rates are against the zero bound so that rates cannot drop more to increase demand for goods. This is a limited example of the fallacy of composition.[1] where assuming that the increase in production that normally occurs when total labor increases applies in all situations. Put simply, when a recessionary economy is up against the zero bound, having more people seeking work - at lower wages if necessary - can actually reduce the number of jobs due to reduced demand from lower wages."

Even in your defense of the concept, you started introducing qualifiers. You "introduce" a new worker into a "closed" economy. You are carefully avoiding what it means when an economy already has 20% or higher real unemployment, or what it means if the economy is open to imports or innovation, or what happens when the owners of capital take advantage of the situation of too many workers chasing too few jobs and apply the law of supply and demand to lower wages.

But since so much of mainstream economics is theory devoid of facts, let me play along, and show how, just theoretically, the "lump of labor" fallacy assumes both linearity in a relation of labor to output and also increasing demand, given whoever becomes a worker in a modern society with unemployment like the USA must already have been consuming a lot of products.

Consider an economy with one hundred people who consume one generalized product called "A". Imagine forty-five members out of the hundred "work" to produce product 10000 units of product A per day. The production of A has been greatly optimized for maximum production, ignoring any joy the workers get from their jobs:
http://web.archive.org/web/20110425153540/http://www.smallisbeautiful.org/buddhist_economics/english.html

Assume people only need about 1 unit of A to get by, but more is nice, up to about 7 units of A, and then more doesn't make people much happier (and at some point, people even become sick from too much).

The product is distributed in some fashion to everyone in the society, party based on

Already have another source, or two, for the backing of my first claim.

One being Steve Keen: http://debunkingeconomics.com/

The other being David Harvey: http://davidharvey.org/books/

There is the "supply/demand curve" and a few other general formulas, but you can't really predict anything other than general trends with those concepts.

And even those supply/demand curves, as presented by typical introductions to microeconomics, are full of bullshit. Steve Keen (Aussie econ prof and author of Debunking Economics) has uploaded some of his lectures to YouTube, and the first few installments here deal with those issues. Well worth the time to watch IMHO.

The banks and congress are being preached to by the same "neoclassical" economists. These economists have a model for capitalism that is *completely wrong*. Which leads them to encourage changes in the real economy that just end up destroying it; deregulation, tariff reduction, free trade, ....

We need to throw out most of the field of economics, certainly the parts that are *provably* false. And build models that actually work. Otherwise we'll never be able to work out how to fix this mess.

And that theory has been proven logically inconsistent by Steve Keen. He wrote a paper about it with Russel Standish in Physica A: http://www.debunkingeconomics.com/Papers/Micro/KeenStandish2006_CritiqueNeoclassicalTheoryOfFirm_PhysicaA370pp81-85.pdf

What it comes down to is that the classical argument is a wrong calculation of total derivative. And not only the classical reasoning is wrong, it is also wrong empirically, experimentally, and from the game theory point of view.