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September 20, 2018 

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ALLOCATIVE EFFICIENCY: Obtaining the most consumer satisfaction from available resources. Allocative efficiency means that our economy is doing the best job possible of satisfying unlimited wants and needs with limited resources -- that is, of addressing the problem of scarcity.

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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.

<= FALLACIESFALLACY OF DIVISION =>


Recommended Citation:

FALLACY OF COMPOSITION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: September 20, 2018].


Check Out These Related Terms...

     | fallacies | fallacy of false cause | fallacy of personal attack | fallacy of mass appeal | fallacy of false authority | fallacy of division |


Or For A Little Background...

     | scientific method | economic thinking | political views | government functions |


And For Further Study...

     | seven economic rules | four estates | macroeconomics | microeconomics | sixth rule of ignorance | seventh rule of complexity | normative economics | economic science |


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