Global Economy or The Fallacy of Composition? A threshold question.

Global Economy - the single closed economic domain that humanity inhabits

The Fallacy of Composition - the fallacy of inferring that a property of parts or members of a whole is also a property of the whole

When a university supervisor argued that my thinking was flawed because I had failed to take account of the fallacy of composition, she meant that an individual cannot act in a social way because what is ‘social’ for the individual is not ‘social’ for society. Individuals ‘economic’ acts do not add up to a functional economy because what is true for the part is not true for the whole. It is easy to see how she arrived at this reasoning. The individual takes account of his own circumstances but in order to reckon with wider circumstances, one needs to move a level ‘up’ and in so doing the logic by which events operate may change. Seen from the logic of an individual perspective, one course of action seems appropriate; seen from the logic of a  societal perspective a different course is needed.The argument is an old one in economics, going back to Mandeville’s Fable of the Bees and particularly emphasised by Keynes’ Paradox of Thrift.

The the fallacy of composition focuses on an interesting phenomenon. What is it that shifts when one changes ones perspective from a purely individual to a societal perspective and how in fact does one do this (if indeed one can), given that there is a threshold of some kind that the fallacy of composition identifies. The fallacy relies on the idea that the two perspectives are incommensurable.

It is probably obvious that I do not accept the assumptions of those who use the so-called fallacy to argue that individuals must necessarily behave in a way that is societally anti-social, though I understand that this is often used a stick with which to beat the marketeers.

But why mention it at all?
The rounds of ‘austerity’ which European states are seeking to impose and the arguments about their effectiveness are gradually bringing the point home that the consequence of everybody being ‘austere’ at the same time will not be a ‘saving’ for everybody. My saving will be your lost income and vice versa. Economically speaking it does not make sense to act according to oneself only, one needs to look at how one’s actions affect the larger picture and then think how those greater circumstances will, in turn, play back into one’s own.

The circumstances alluded to are primarily financial, that is to say they relate to our expectations of future events and there is a reflexive relationship at work here. George Soros, though he does not claim to be the originator of the idea, is the great proponent of reflexivity; you can hear him describing it here, for example. The essential point is that we are thinking participants in economic life and it is our thinking that will shape the economic landscape we are attempting to take hold of. The objectivity that one finds inherent in natural phenomena is found to be subjectively co-determined in the economic realm.

So who is on the other side of this reflexive relationship? With whom does one need to do metaphorical business. The simple answer is: everybody else! On the other side of each individuals economic activity is the global economy - not local or even national economy. The problem for proponents of the fallacy of composition in economic life is that between the two worlds is a knowledge threshold. The individual is held not to be able to do more than represent his own essentially ‘private’ perspective. The conventional solution is to bring in either the market or the state as the compensating element. In the first case, the selfishness of the individual is held in check by everybody else’s selfish activity and the whole result is, if not social, the best moderation of selfishness achievable. For those who deprecate the market and therefore champion the state, the selfish individual must be regulated by the oversight of those who can take a societal perspective because they represent, not their own interests, but a democratic mandate to socialise the individual. We are then left with two choices - global markets representing the aggregated myopia of individual selfishness or a global state (for such is concerted economic governance by treaties between states) representing the views of those who call themselves leaders and would regulate others.

But is the idea so far-fetched that an individual might choose to adopt a societal perspective, not instead of a purely individual one but as a complement to it? Do we not just need to step out of our own circumstances and see our actions from the perspective of the effects they will have on others too? Furthermore, can this be done alone or does it need to happen in association with others?

 That may sound like a moral injunction but one could also ask whether in fact that is not the conclusion that one is forced to come to when one begins to look at the world in terms of balance sheets. Balance sheets are meaningless until they are related to the wider circumstances in which they find their correspondences. But as soon as they are placed in such an interconnected context they afford the closest representation we can conceive of what constitutes economic reality, a reality that can be seen both from within one’s own point of view and looked at from outside, as it appears to others.

It may not be ‘rocket science’ but there is a little ‘magic’ in the way we touch on this ever shifting boundary that we experience between ourselves and economic life at large. It is not fairy dust or magic wands we need to reveal to ourselves how this threshold is to be negotiated, but the simple expedient of accounting, used as an instrument of economic perception and providing us with the possibility to perceive both individually and through a ‘social brain’.

 Yes we have the choice to act in isolation, but increasingly those who think in such terms will be challenged to maintain the reality of the world they think they live in.