The Fallacy of Composition

I have described 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.

 

Wikipedia quotes the Bible:

There is that scattereth, and yet increaseth; and there is that withholdeth more than is meet, but it tendeth to poverty.
 — Proverbs 11:24

J.S. Mill described the fallacy:

All funds from which the possessor derives an income … are to him equivalent to capital. But to transfer hastily and inconsiderately to the general point of view, propositions which are true of the individual, has been a source of innumerable errors in political economy.

 

Milton Friedman described it as

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.

Kurt Richebacher described it in terms of profits:

The widespread measures that individual firms take to improve their own profits have, in the aggregate, the opposite effect on the profits of other firms. Business spending is the key source of business revenues, not consumer spending. A retrenchment in business spending cuts business revenues. Higher profits and higher prosperity cannot possibly come out of general cost cutting.

John Maynard Keynes described it in terms of saving:

... the apparent “free-will” of the individual to save what he chooses irrespective of what he or others may be investing, essentially depends on saving being, like spending, a two-sided affair. For although the amount of his own saving is unlikely to have any significant influence on his own income, the reactions of the amount of his consumption on the incomes of others makes it impossible for all individuals simultaneously to save any given sums. Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself.

 

Note that Richebacher's last two sentences make the same argument regarding producers that Keynes makes regarding consumers: A retrenchment in spending cuts revenues. Richebacher agrees with Keynes that Say's law -- "Supply creates its own demand" -- does not apply without fail.