Economics and The Fallacy of Composition
Here is a recent article by Bob McTeer former president of the Dallas Fed. The article was submitted to the NYT times and titled “Who’s Got My Money”. Click here to skip intro and read the article on economic fallacies
Article Introduction (Via NYT)
One of the common fallacies in economics is the fallacy of composition. What’s true for you and what’s true for me may not be true for all of us together. If I stand up at a football game, I can see better. If everyone follows my lead and stands up, we can’t all see better.
The value of money offers another example. If I get more money, I have more wealth because I can spend the money for other things — real things. For me paper wealth and tangible wealth amount to the same thing. But if we all get more money overnight, as in a shower of money from helicopters, only our paper wealth increases; our collective tangible wealth doesn’t change because there aren’t more things to buy with the additional money.
Article Excerpt (Via NYT)
“It also helps us think more clearly about our Social Security and Medicare problems. The cures can’t come from more money or financial schemes alone, without a comparable expansion of real economic growth in the future. Real growth must be fast enough to redeem the growth in financial claims on it in the future.”