Published Mensa Maryland Newsletter Dec 2020
The fallacy of composition (what is good for one is good for all) lies behind the failure of farmers to earn more income when each farmer increases their crop. In economics class, a discussion about wheat farmers exposed this conundrum. If one wheat farmer grows an additional bushel, he may expect more income. However, if all farmers grow additional bushels, the price of a bushel may drop so much that each farmer earns less, even though producing more.
The individual can profit if only a small portion of the industry follows their path, because then the pricing mechanism does not change system. Avoiding the Fallacy of Composition allows one to use the original price the free market originally arrived at.
However, if everyone follows the first, the system changes and one’s advantage is lost (the Fallacy of Composition kicks in).
This leads to an unexpected mathematics. Each individual sees a gain but eventually the group action affects the market and each earns less. Then a series of pluses results in a negative. Individual positive events combine to product a negative impact.
Positive + positive + positive + … = negative
Not like the old math, 1+1 = 2, is it?
A similar trap can lurk in personal decisions.
If you elect to not pay your taxes, the government will not grind to a halt. Its services will continue. National defense stays at the ready. The Federal Aviation board will continue to track down causes of airplane crashes and make regulations to avoid a similar disaster in the future. Skip your taxes and you will have more cash in your pocket.
If others see you prospering by tax avoidance, they may decide to do the same. However, when everybody does that, the government doesn’t have enough income to continue its services. The Food and Drug Administration may stop ensuring that food products are safe to eat and contain the ingredients claimed.
Public infrastructure—roads, bridges, airports, water, electricity, power supply, and so on—will be at risk if government doesn’t have sufficient funds for attend to them. That is certainly not to say that government should automatically be given all the funds it requests. Their worthiness and costs must be considered, but skimping on taxes—individually on April 15 or as a society by levying too low a rate to support the mandates put on the government—is a path to a failing society.
The price of a successful society is an individual’s payment of levied taxes and laws requiring a sufficient tax rate on all participants in the economy. Only in that way can government provide the services our representatives vote for and mandate.
Natural Resource Management
Limited resources be allocated by the free market; however, the market is the aggregation of individual wants and needs. As suppliers and consumers do, the free market deals with the present and near term. Future years are beyond its ken. An additional constraint is needed.
Consider seafood, from tuna and anchovies to shrimp and lobsters. There are quotas placed on the individual, boat and country. Quotas are enforced to stave off depletion which would occur if everyone took as much as they could. Regulators recognize that although one boat doing so might not cause much harm, all boats doing so would ruin replacement of future stocks resulting in the collapse of the industry.
Three other quick examples of limited resources are beneficial wildlife, minerals and forests. They need quota rationing so that future generations have their benefits.
The Invisible Hand holds that the free market aggregates individual needs into a balanced system. Yet considering the Fallacy of Composition, there are many cases where actions that benefit an individual lead to a negative consequence if the entire group follows along.
Quotas are a useful though not perfect tool.
A solution some people arrive at, of dubious ethics, is to keep secret any change that they think will benefit them, so everyone doesn’t do the same. That violates free market conditions.
Good for one is not always good for all.
But personal secrecy is not the most striking shortcoming of relying on free markets to allocate resources. The Invisible Hand’s biggest scar arises from a stronger violation of its required conditions.
Image of wheat combine. Public Domain Wikicommons.