Fallacy of Composition: Overview

For a starter, we quote from two geo-famed macroeconomists.

             Paul Samuelson: “…one single confusion or fallacy, called by logicians the ‘fallacy of composition. What is true for each is not necessarily true for all; and conversely, what is true for all might be quite false for each individual” (Economics, 1948 p.9)

             Ben Bernanke: “Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation.” (“Deflation: Making Sure ‘It’ Doesn't Happen Here,” a speech in 2002)

             Alas, none other than Bernanke, a student of Samuelson, commits the fallacy of composition. He forgets that there is yin for every yang. Accordingly, there cannot be such a thing as the “zero bound.” Put it different, any “significant problem” would not only to borrowers but also to lenders, so as for the two parties jointly to get rid in the shortest run of any “zero bound on nominal interest rates.” This is very true with or without the Fed and the governors: The economy is much more than the Fed.

             Amazingly to some alarmingly to others, we can find numerous examples where macroeconomists fall in the solidity trap of “fallacy of composition.” Ben Bernanke as above is merely a drop in the bucket. We start off with a typical Keynesian concept:

The Paradox of Thrift. Master preaches as follows (p.84):      

Apostle seconds as the following (p.271):   

  

According to the two most classic of classical conjectures, each can save more but all would never and nowhere so. Yes, “fallacy of composition,” sort of!

Fly in the Ointment. Alas, the two of them get both “each” and “all” wrong. They certainly are “confused” between finance and economy. We come back to this critical issue in fine.

In the Meantime. We go over “extraordinary popular” fallacies of composition in Cambridge macroeconomics as follows.   

1)     The ZLB and the liquidity trap 2)     Hand vs hands 3)     Nonentity vs entity vs infinity 4)     Moment vs period vs eternity 5)     A price, the price and the price level 6)     Macroeconomic indicators 7)     The real variable of quantity 8)     The “money market” 9)     The “product market” 10)  The IS-LM model 11)  The AS-AD model 12)  Stickiness of wages 13)  Stickiness of prices 14)  The production function 15)  The Cobb-Douglas function

16)  The general equilibrium model 17)  The substitutive good 18)  The complementary good 19)  The indifference curve 20)  The production possibility frontier 21)  The income-good model 22)  The income-leisure model 23)  The backward bending demand 24)  The backward bending supply 25)  The marginal propensity to consume 26)  The fiscal multiplier 27)  The Keynesian cross 28)  The law of diminishing returns 29)  The Solow growth model 30)  The paradox of thrift in fine