Deficit Owls | Economic Myths and the Fallacy of Composition @deficitowls5296 | Uploaded April 2017 | Updated October 2024, 2 hours ago.
Frank Newman, former Deputy Secretary of the Treasury and author of the book Six Myths That Hold Back America, discussing myths and logical fallacies in economics. People like to imagine that the government works the same way as a household or a business, and that the economy as a whole works a lot like their household budget.
But they don't. It's called the fallacy of composition: it is a fallacy to assume that a group of things has the same properties as an individual thing. Or similarly, it's a fallacy to believe that something that's good for one person to do would be good if everybody did it. The conclusion does not follow from the premises.
A simple example is traffic: if there's a traffic jam from 8 to 9 am every day, one person can avoid it by leaving an hour earlier and driving at 7. But if everybody did this, they wouldn't reduce traffic at all, they would just move the traffic jam one hour earlier. Another example is standing up at a sports game. If one person stands up they will get a better view, but if everybody stands up, nobody's view improves.
In economics, one famous example of this is the "paradox of thrift." An individual can save more by reducing his spending today. But society as a whole cannot save more by reducing spending. The reason it's different is because while your income might not depend very much on your spending, at the societal level it does, because one person's income had to come from somebody else's spending. So reducing spending reduces income, and so attempts to spend less don't actually result in more saving, they just reduce income, output, and employment.
Another example would be the myth of "crowding out." This myth says that if the government tries to "borrow" more from the private sector by selling bonds and then spending, this will raise interest rates, "crowding out" private investment. At a simple level, it seems intuitive because if you buy a government bond then you won't have money to lend to a business to invest in a new factory. But it's wrong, because the money the government spends becomes income and savings for somebody else, so the savings is not "used up" in any way. In fact, savings has *increased* because you now hold your savings in the form of government bonds while somebody else holds new savings in the form of cash.
There are many other examples.
Watch the whole talk here: vimeo.com/41449585
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Frank Newman, former Deputy Secretary of the Treasury and author of the book Six Myths That Hold Back America, discussing myths and logical fallacies in economics. People like to imagine that the government works the same way as a household or a business, and that the economy as a whole works a lot like their household budget.
But they don't. It's called the fallacy of composition: it is a fallacy to assume that a group of things has the same properties as an individual thing. Or similarly, it's a fallacy to believe that something that's good for one person to do would be good if everybody did it. The conclusion does not follow from the premises.
A simple example is traffic: if there's a traffic jam from 8 to 9 am every day, one person can avoid it by leaving an hour earlier and driving at 7. But if everybody did this, they wouldn't reduce traffic at all, they would just move the traffic jam one hour earlier. Another example is standing up at a sports game. If one person stands up they will get a better view, but if everybody stands up, nobody's view improves.
In economics, one famous example of this is the "paradox of thrift." An individual can save more by reducing his spending today. But society as a whole cannot save more by reducing spending. The reason it's different is because while your income might not depend very much on your spending, at the societal level it does, because one person's income had to come from somebody else's spending. So reducing spending reduces income, and so attempts to spend less don't actually result in more saving, they just reduce income, output, and employment.
Another example would be the myth of "crowding out." This myth says that if the government tries to "borrow" more from the private sector by selling bonds and then spending, this will raise interest rates, "crowding out" private investment. At a simple level, it seems intuitive because if you buy a government bond then you won't have money to lend to a business to invest in a new factory. But it's wrong, because the money the government spends becomes income and savings for somebody else, so the savings is not "used up" in any way. In fact, savings has *increased* because you now hold your savings in the form of government bonds while somebody else holds new savings in the form of cash.
There are many other examples.
Watch the whole talk here: vimeo.com/41449585
Follow Deficit Owls on Facebook and Twitter:
facebook.com/DeficitOwls
twitter.com/DeficitOwls
And follow our sister page, Modern Money Memes:
facebook.com/ModernMoneyMeme
twitter.com/ModernMoneyMeme
