Fallacy of composition
Topic: Schools of Economic Thought and Economic Laws · NCERT: Beyond NCERT
Meaning
The fallacy of composition is the mistake of assuming that what is true for one part must be true for the whole. A choice that is sensible for one person can have a very different result when everyone makes it together. Keynes stressed this, and it is one reason macroeconomics (the study of the economy as a whole) is not just microeconomics added up.
Example
One household that saves more becomes better off. Now suppose every household in India saves more at the same time. Spending falls, so shops sell less, firms cut output and incomes drop. Total saving may not rise at all. This case is called the paradox of thrift.
Don't confuse with
- Paradox of thrift: this is one particular example of the fallacy of composition, applied to saving. The fallacy is the general error of reasoning.
- Broken window fallacy: this error counts only the work you can see, such as repair jobs after destruction, and ignores the spending that was given up. It has nothing to do with the part-versus-whole mistake.