Friday, February 24, 2012

Friedman did it with strawberries

The Fallacy of Composition

"Composition" is the notion that what's good for the goose is good for the whole damn flock. The "fallacy" is that it's not always true. Sometimes, what applies to the individual does not apply to society as a whole.

From the epilogue of Money Mischief, by Milton Friedman:

... the contrast between the way things appear to the individual and the way they are to the community. If you go to the market to buy some strawberries, you will be able to buy as many as you wish at the posted price, subject only to the dealer's stock. To you, the price is fixed, the quantity variable.

But suppose everyone suddenly got a yen for strawberries. For the community at large, the total amount of strawberries available at a given time is a fixed amount. A sudden increase in the quantity demanded at the initial price could be met only by a rise in price sufficient to reduce the quantity demanded to the amount available.

For the community at large, the quantity is fixed, the price variable -- just the opposite of what is true for the individual.


Jazzbumpa said...

The beginning of any understanding of macroeconomics is the realization that what’s good from a micro point of view can often be irrelevant or even harmful from a macro point of view when the economy is depressed. But that hard-won insight has now been willfully forgotten.


Jazzbumpa said...

Beckworth has an interesting post.

Lee Kelly's comment even more so.

I ask him a bunch of ignernt questions.