Saturday, January 03, 2009

FoC (1) Fallacy of Composition

During difficult economic times, economists usually start talking about the Fallacy of Composition. This concept is actually a principle of logic.

The Fallacy of Composition is committed when it is concluded that what is true of the parts of a whole must be true of the whole, without there being adequate justification for the claim.
Here is an example from mathematics. One and three are odd numbers, so four is and odd number, because one and three are part of four (1+3=4). This statement is untrue, because four is an even number.

In economics, the fallacy of composition takes on a special meaning. The fallacy occurs when economists treatsthe economy as if it were a family or business. This leads to the assumption that a policy that will work for a business will work for the economy as a whole. When an economist just assumes without proof that what is good for a family is good for the economy, the fallacy of composition has occurred.

The principle is that that theories and practices that apply to a family may not be relevant to an economy containing numerous families. Economies work according to rules of economies and not according to the rules that apply to businesses. Something that is good for a business or family may be bad for the entire economy. When economic decision makers interact with each other, the outcome for the whole economy may be different from what was intended by the individual decision makers.

The complete series on the Fallacy of Composition is here.

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