Fallacy of Composition: Fiscal Austerity

Modern Money Mechanics

One of the most important concepts we teach in economics, and most importantly in macroeconomics, is the notion of the fallacy of composition.

Students and others who haven’t been exposed to macroeconomics naturally extrapolate from their own individual situation to society and the economy as a whole.

This often leads to the problem of the fallacy of composition. Of course, that isn’t just restricted to economics. While a few people could exit the doors of a crowded movie theatre, all of us could not.

The macroeconomics example of the fallacy of composition most often used is the paradox of thrift. Any individual can increase her saving by reducing her spending—on consumption goods. So long as her decision does not affect her income—and there is no reason to assume that it would—she ends up with less consumption and more saving.

The example I always use involves Mary who usually eats a…

View original post 2,106 more words

Advertisements

One thought on “Fallacy of Composition: Fiscal Austerity

  1. “While it is commonly believed that continual budget deficits will bankrupt the nation, in reality, those budget deficits are the only way that our private sector can save and accumulate net financial wealth.”

    My brain hurts 🙂

    Like

Comments are closed.