Fallacies of Composition Challenge America

Written by Roger Erickson, a version also posted at Mike Norman Economics

A fallacy of composition is defined as an illogical projection to an aggregate, based upon the assumption that a local relationship projects unchanged to the whole. One example heard from Randy Wray:

“If you stand up at a sports stadium, you’ll get a better view.  Therefore, if everyone stands up, they’ll ALL get better views!”

It’s often useful to call it instead a fallacy of scaling.  An aggregate falling for a fallacy of scale is diverting it’s tremendous capabilities into mistakes and dead-ends on a culture-wide scale.  Nothing is more costly to us.  Fallacies of composition are employed broadly in American society and have, unfortunately, become accepted truths by many.  Even worse, this logical pitfall can occur even in the work of professionals.  Examination of case studies would be a worthwhile activity, but that will be postponed here, for the most part, as this discussion will proceed more generally.

A most important task is to train citizens to parse emerging fallacies of scale. New fallacies are continuously presented simply because of our own expanding options.

Once examined, it’s clear that fallacies of scale permeate much of the isolated field of orthodox economics. A good example came up in a comment-discussion at Warren Mosler’s blog.

Monica Smith: What do you do about people, who accumulate currency and hoard it?

Roger Erickson: There are nested layers of hoarding. Individuals in an aggregate will ALWAYS display a broad spectrum of hoarding instincts.

Point I’ve understood from talking with Warren is that the aggregate – by definition – can EASILY afford any laughable form of hoarding that an individual, or even a small subgroup, can imagine. That’s obvious, but we tend to gloss over the obvious in our individual projections, and thereby generate colossal aggregate fallacies of composition, like in orthodox economics.

The most damaging form of hoarding – by far – is when the aggregate hoards … response options, [unused].

(Statisticians & system-theorists call this ignoring the return-on-coordination, or foregoing auto-catalysis.) [ps: these terms & concepts are common in ecology & biology, but unfortunately this very useful jargon is still foreign to overly-isolated economists, even those in the MMT camp]

This conclusion comes from the simple statistics of networked aggregates. The return-on-coordination in an aggregate is so freaking unbounded that the imagination of individuals never matters … IF … the aggregate will just explore it’s options to scale up aggregate Output.

That’s the history of evolution, in a nutshell. There’s infinite room to expand options. Apparently, we don’t teach it well enough in elementary school, nor let citizens get enough practice at it. If more of HP only knew what HP was capable of, they’d all be a lot less paranoid about individual hoarding.

The future really is so bright that we can’t see it. A rudimentarily crude calculation, however, concludes that that’s a HUGE source emitting that blinding light. Given the magnitude of the source, logic says to invest in sunglasses & wade in to the smorgasbord, not go back into the dark.

Remember that old quote? “If HP only knew what HP knows, we’d never have to worry about our stock price?” The same is even more true of an aggregate. If we would only take account in our policy discussions of what ALL PROFESSIONS know (instead of over-weighting the opinions of orthodox economists still stuck in fallacies of scale), then our nation wouldn’t have to worry about it’s fiat currency budget.

To carry on the analogy, how do we “invest in sunglasses,” so we’re not blinded by the future?

One suggestion is that the MOST IMPORTANT OPTION may be to teach emerging members of a rapidly growing population HOW TO PARSE CONSTANTLY EMERGING FALLACIES OF SCALE.  Developing that skill should be the primary goal of Economics 101, and it should be well practiced by all students by the 8th grade, so that it is the reflex, fall-back habit they are most comfortable with.

When surprised or stressed, winning aggregates fall back to a habit of finding those aggregate options with the highest return-on-coordination.  Through aggregate coordination,they quickly leave clumsier aggregates in the dust. For human cultures, that’s the key mechanism that generates what Darwin called Adaptive Rate.

It really is true that every process is too important to be left to the presumed process owners. The ultimate proof is the adverse outcomes of aggregates that don’t adequately scout the diversity of knowledge held by their own members. Adaptive parsing is what democracies supposedly excel at, but at our present population scale, the democratic methods we once used simply aren’t propagating adequate outcomes. Every outmoded method demonstrates yet another fallacy of scale.  Simple conclusion is that we need to reorganize, and do so faster.

Open Source crowd-sourcing may be what saves us.  To rapidly scale up exploration of our own options, we must first scale up self-sampling of our own knowledge.  We need collaboration, open source & innovation on a much greater scale and faster tempo.

Only with continuously improving cultural sunglasses can we discern new patterns in the emerging future. Once we can see ’em, we can then invest in those with a hiagher return-on-coordination – and in the process avoid the staggeringly high lost Output that we’re seeing now. Those Output losses coincide with endorsement of dead-end fallacies of scale.