Fallacy of Composition: Their So-called Budget Constraint

 

All the celebrated ideas of indifference curves, isoquants and production possibility frontiers are associated directly or indirectly with a “budget constraint.” The budget may in terms of a good, money or two production factors.

             Interestingly, however, the budget constraint is of no use either in the market or in the economy. More specifically, the constraint is irrelevant to the market while redundant, or “nominal” as used in macroeconomics, in the economy.

 

No Constraint to the Market. To begin, the market is imagined for a particular product traded in a bounded community over a defined period of accounting. Otherwise, we cannot think of the equilibrium price (p*) and the quantity traded (q*), much less naming them.

             By nature, the product is merely one of indefinitely many goods and services wanted by the households in the community in the given period. On the other hand, demand and supply of the product are limited: first on, individually due to the diminishing marginal benefit and the increasing marginal cost of production, respectively; secondly, due to the limited number each of demanding households and supplying households (“firms”) in the community.

             Now, we have “indefinite” on one hand while “limited” on the other. Naturally, there is no budget constraint for the product of interest, individually and collectively, inasmuch as the limited (n) divided by the indefinite (∞) is definitely naught (0). Again, indefiniteness and infinity are close cousins.

             Do when in the market not even think about the budget constraint. The only constraint therein is “Principle 3: Rational People Think at the Margin” (Gregory Mankiw, Ch. 1).

             Are you rational? Please be, if not.

 

Unbinding Constraint to the Economy. The first constraint to the macro-economy might well be the gross national income (P∙Y in macroeconomic). For instance, the US GDP was 25.43 trillion US dollars in 2024. How much would it be, in HK dollars, Aussie dollars or Sing dollars? Alternatively, in any other currency unit right now in Here on Earth?

             The key question: Are those numbers meaningful so as to be binding? If so, how much so? The expedient answer: Yes, it’s meaningful of course, subject to; it’s just as much meaningful as arbitrary.

             The second constraint can possibly be the money stock (M^s). Unfortunately, nobody can speculate a number for the constraint until defining the money. Well, few as a macroeconomist, a central bank or a “nobody” know what the “money” as in macroeconomics means. Even more unfortunately, whatever definition of money is not really binding the US economy, or any other economy for that matter. For instance, even 100 quintillion dollars of money has no substance all by itself. If unsure, go back to the future of Rhodesia.

             The third may be the labor force. Ditto. Worst, what really matters is not the labor force but the gross national working hours.  

             The fourth is the “capital stock,” so to speak. Ditto; Ditto. At any rate, Fool Yourself Once, if ever, either with Das Kaptial or Le Capital au XXIe siècle.

             Fortunately after all the negations: It’s the percentage change or gap, Sir! On the sidewalk of Republic, each and all the “macroeconomic indicators are of no use to us until” compared percentage-wise, intertemporal or interspatial.

My So-Called Life, Wunderbar or Misérable