For the topic of the first lecture I’ve picked a small “one-shot”. It’s called the fallacy of composition.
The fallacy of composition is one of the most common mistakes within the modern economy and there isn’t a day, when it can’t be heard on the TV or radio. It’s based on the assumption, that what is right for an individual or one subject, is right for a society, or a system (country) as a whole respectively. However this can, but doesn’t have to be true.
The most commonly given example, for a better understanding of this problem, is the example of an individual, who stands up during a football match to see better. If only one person stands up, it will work- this person will really see better. However if everyone stands up, the view of nearly everyone will be worse.
A second example that can help to explain this phenomenon can be seen on fishing. If more fisherman fish in the same lake and one of them wants to increase the effectiveness, it will help to buy more fishing rods or ship. However if everyone in this lake behaved this way, there would soon be no more fish left. This phenomenon in the economy is called the Tragedy of the Commons.
And the third situation, when a football fan wants to evade the crowd at the exit from the stadium. If he leaves five minutes before the end of the meeting, he will succeed. However again if everyone gets up to leave five minutes before the end, everyone will end up in the crowd and not one will be able to succeed.
In order to understand what’s happening around us we need a systematic thinking that analyses the system as a whole not only the individual parts, or divided from the context of the system where these parts belong respectively.
The fallacy of composition is an important part of macroeconomy. Because it is here where it’s important to remember that the base of macroeconomic thinking isn’t a household or business, but the whole economy (so the whole country, or international system respectively). People commenting on the economic course of events – mainly managers or businessmen – sometimes come from the concept that the decisions that would bring positive results when it comes to individual businesses or to one family will bring a positive effect if they will be applied to the whole society or international system. It is the fact that in the economy (country or international system) there are multiple co-existing families and businesses and it’s necessary to take into account the common effect, which will be caused by the activity of these many subjects within this whole system. That’s why, compared to the individual parts, the economy has its own principles and rules, on the basis of which it functions. That’s why the rules we would apply to households or business will have completely different effects within the whole national or regional economy.
The most common example of the fallacy of composition within the economic discussion is the paradox of thrift. An individual can increase its own savings and wealth by saving up and limiting the spending for consumed goods. An example can be a person (let’s call him Peter), who buys a hot dog every day. One day Peter decides to buy a hot dog only six times a week in order to increase his savings. If he keeps this commitment, he will increase his overall savings and with it his wealth. The question is: if everyone behaved like Peter and decreased their expenses, would the overall national savings increase? The answer is no, since these savings will have an effect on the employees, who will lose their job due to less demand and providers, who will logically have a decreased demand after provisions (meat, pastries, etc.). These people, who lose their job will have a lower income and so not only the whole efficiency of the economy will decrease, but the savings too.
Naturally, this doesn’t prove that everyone should spend as much as they want. The effects of how the private and public subjects unsustainably spend we can see today in many countries from Hungary to Greece. It points to the fact that the effects of such steps have to be considered wholly.
The next time you see a politician or an economcal analyst in TV and they say “The country is like a family” or “The country is like a business”, stay alert. They could be right, but they don’t have to. The simple reference to the experience of households or of employers isn’t sufficient as a proof. Individually, if we’re dealing with macroeconomic questions.
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Vidim ze diskutujuci maju dobre znalosti rakuskej ekonomickej školy.Smiem sa spytat ktoru hayekovu knihu mi odporučíte prečítať si ako prvú.Ďakujem za odpoveď
Dobrý deň pán Beblavý, omyl kompozície, aké pekné pomenovanie na to, čo sa deje dnes v tejto malej krajine. Ano, ak kradne jeden, nieje to ani poznať, ak však….., ak berie úplatok jeden, ani si to nikto nevšimne, ak však….., ak má jeden príjem zo štátnej pokladnice 35000 €, ešte by sa to dalo prehliadnúť, ak takých bude viac….., všetko je to na úkor tých ostatných.
Prečo sa tak ťažko prehĺta taký rozdiel, minimálna mzda v čistom 280 € a na druhej strane príspevok k platu suma, ktorú som už spomenul vyššie, prečo je tak jednoduché v ,,právnom štáte” odsúdiť malého zlodejíčka na dva roky za krádež troch kláskov kukurice a na druhej strane nieje možné potrestať množstvo veľkej zlodejiny ? Omyl kompozície…páči sa mi toto pomenovanie. Slovensku to akosi v tejto dobe až príliš pristane, alebo je to iba moje naivné zdanie…...?
Prajem všetko dobré. Ďakujem.
Pre mňa jedna z najzaujímavejších prednášok v 2. ročníku. Omyl kompozície pekne ukazuje, prečo sú ciele masy občanov väčšinou v rozpore s víziou vlády. Vďaka.
Dobry den pan Till,
z pohladu laika mi vsak pripada paradox uspor ako zaciatok deflacnej spiraly, ktoru sledujeme niekolko rokov v Japonsku a vidime, ze hoci bol teda vyvrateny Hayekom, plati svojim sposobom dodnes.
Co sa tyka prednasky, palec hore.
A este jeden nazor k panu Gajanovi a ludom, ktori organizuju protesty- nekricte uz tolko a zacnite konat, ked si myslite, ze dokazete robit lepsie:)
Pekny den prajem:)
PROTEST GORILA
http://www.protestgorila.sk
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