Fallacy of Composition: A Keynesian Cross in the Consumer Choice
Come to think of it, there in the corner
of economics is a hidden cross, utile or useless.
The Cross in Consumer Choice. For
the purpose of giving some sense to the so-claimed “price” of x good (px) in the consumer choice model, certain economists put
the budget for “all the other goods” on the y
axis (e.g. Samuelson and Nordhaus 2010, p.88; Hal Varian 2010, p.114). In this
case, the total household income becomes
the budget constraint.
Alas,
they fall prey of fallacy of composition Paul Samuelson talked about as early
as in 1948 (Economics, p.9). Suppose
apples on the x Axis of John Doe’s
coordinate, and the weekly income on the Axis of y. Further suppose that the apple sells @ $0.5 and that Doe’s
income, or spending budget, for all purposes is $5,000.
Question
1: How many units of apples could Doe buy per week, the accounting period
for grocery shopping? It’s easy: 10,000 units. Question 2: At how many
units would the apple transform itself from a good to a bad in the week? It
depends, of course, but let’s say 21 units for instance. To paraphrase, the first
apple in eating is definitely awesome, the 20th so-so after gradual decline of
appetite. On the contrary, the 21st to 10,000th becomes somewhat
ugly to indefinitely awful.
As
usual, John Doe’s got mail with good news and bad news. Again as usual, bad
news first: John is inundated with 9,979 apples, unwanted to annoying to
disgusting to nasty to gruesome. Oh my! Save him of this Hell!
Good
news second: There he goes, the Golden Cross at the 21st unit of the
Axis of x and the Indifference curve.
Hurray!
Once Upon a Time in the West.
There was a Barking Puppy in the neighborhood.
Question: Is it a Good, a Bad or an Ugly?
1) That’s
awesome. I’m gonna make company with her
2) That’s
awful. I’m gonna get rid of him at any cost.
3) That’s
ugly, but I’m not sure whether to pay a price for the sake of removing it.
4) Well,
I’m an economist and know that “tranquility” (from J.S. Mill) never comes for
free.
Answer:
One or all of the following four.
1) Never
mind!
2) C’est la vie!
3) A quién le importa?
4) The
Good and the Bad are Friends. The Ugly is Nobody.
According
to J.S. Mill. We are pleased to pay
some money in return for the neighbor’s removal of the BP of his “property
right.” Déjà vu? You’re right, that’s the Coase theorem. Likewise, the Good of removing the
Bad of 9,979 apples makes company with a cost, or a negative benefit. At the
end of the day: “People Face Trade-offs” (to Gregory Mankiw).
By way of closing we quote from
John Stuart Mill (1861): “By happiness is intended pleasure, and the absence of
pain; by unhappiness, pain, and the privation of pleasure.”
The Good, the Bad and the Ugly
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