I commented yesterday on Nick Clegg’s absurd claim that running the UK economy was like managing a household.
A regular, and welcome commentator here suggested an alternative analogy is needed and then offered this explanation of Clegg’s error from something called AmosWeb, which is good, so I quote it with credit given:
The fallacy of composition:
The logical fallacy of arguing that what is true for the parts is also true for the whole. In the study of economics, this takes the form of assuming that what works for parts of the economy, such as households or businesses, also works for the aggregate, or macroeconomy. The contrasting fallacy is the fallacy of division.
The fallacy of composition is important to the study of macroeconomics. Many, otherwise intelligent-looking folks, commit this fallacy when the subject of macroeconomic policies arise. The macroeconomy, for instance, is not a business, it is not a household, it is not a family, it is NOT a microeconomic entity. It is THE ECONOMY. It has its own set of principles, its own set of rules, its own theories. Treating the macroeconomy like a business or household commonly leads to the fallacy of composition.
A common macroeconomic argument that makes use of the fallacy of composition is to treat the economy as if it were a household or a profit-minded business. An offshoot of this argument is to operate the Federal government (the "caretaker" of the aggregate economy) as a household or a profit-minded business. Some folks are prone to argue that economic ailments would vanish if only government operated like a business.
For example, during economic bad times (recession), the appropriate action of a profit-minded business is to lay off workers and reduce production. The reasonable action by a household is to reduce spending and set aside, or save, some income for the turbulence to come. Both of these actions, if undertaken by the macroeconomy, or promoted by government policies, would likely turn a modest recession into a devastating depression.
The macroeconomy is a complex system comprised of smaller components. An analogy is the human body. Individuals and firms make up the macroeconomy like cells and molecules make up the human body. Rules that apply to cells do not apply to the entire body. Rules that apply to firms do not apply to the entire macroeconomy.
What is true at the microeconomic level is not necessarily true at the macroeconomic level. What is true for the parts is not necessarily true for the whole.
Note and absorb Nick.
They got it right.
You did not.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Another fallacy of composition in economics is the fact that it is in the interests of the individual firm to pay its workers the minimum whilst it is also in the interests of that firm that other firms pay their workers much more so they can afford to purchase the goods produced by the individual firm.
The trouble is that a relatively small and open “economy” like the UK is not “THE ECONOMY” it is only a small component of the whole global economy. Classic Keynesian economic rules cannot apply in this case, although they would apply to a much larger and less open economy such as the USA. Left leaning economists in Britain have not got over the fact that the UK is no longer a vast imperial power but now has much more in common with a large commercial corporation.
@Forlornehope
Excuses excuses
We issue our own currency
And can demand to be paid in it
We write our own law
We have substantial control over our revenue
That’s not and never will be a like a corporation
Stop lying
It doesn’t help your cause to resort to untruths
ForlornHope, you are now using the fallacy to compare the UK to a corporation. I respectfully suggest you re-read the piece.
A country has its own resources, and its own limitations. We have vast unused resources in our 2 million unemployed, and also in the energy that is wasted everyday, and in the energy brought to us every day in our wind, sun, waves and tides. We have homeless people and empty properties.
If something is physically possible and desirable, it is the job of economists and politicians to make it financially possible.
@Richard Lawson
Agreed!