«The fallacy of composition misleads you into thinking that you can infer the property of the whole by the property you can observe in its parts considered individually. This fallacy leads you to think that what is true for the parts must be true for the whole.
In economics, one of the most popular examples of the fallacy of composition is the “paradox of thrift,” popularized by Keynesian economics. If thrift is good for an individual, it should be good for the economy as a whole. Wrong, because if everyone saves more, this will bring down consumption, cause aggregate demand to fall, hamper any economic growth and, paradoxically, a rise in individuals’ thrift would lead to less saving on the whole and harm the economy. Policymakers believing in the paradox of thrift, particularly in times of recession, would look in horror at people saving more while trying to find their way out of the hole.
Yet, despite what we can argue using curves that sometimes saving is equal to investment and sometimes is not, sound capital theory reminds us of the basic fact that an economy needs a boost in real saving for capital formation to bring about a real recovery (not a nominal or a statistical one).»
Yet, despite what we can argue using curves that sometimes saving is equal to investment and sometimes is not, sound capital theory reminds us of the basic fact that an economy needs a boost in real saving for capital formation to bring about a real recovery (not a nominal or a statistical one).»
in: The Cobden Centre
(via A Arte da Fuga.)
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