Last week, I wrote about Lawrence Reed’s classic “7 Fallacies of Economics,” which appeared in the April 1981 Freeman. As I noted before, there really is no better commentary on the current scene of political economy than this article, which deserves another reading, especially given the latest government proposals to “stimulate” our moribund economy. This week, I examine the first fallacy, the “fallacy of collective terms.”
Reed explains:
Examples of collective terms are “society,” “community,” “nation,” “class,” and “us.” The important thing to remember is that they are abstractions, figments of the imagination, not living, breathing, thinking, and acting entities. The fallacy involved here is presuming that a collective is, in fact, a living, breathing, thinking, and acting entity.
The good economist recognizes that the only living, breathing, thinking, and acting entity is the individual. The source of all human action is the individual. Others may acquiesce in one’s action or even participate, but everything which occurs as a consequence can be traced to particular, identifiable individuals.
Consider this: could there even be an abstraction called “society” if all individuals disappeared? Obviously not. A collective term, in other words, has no existence in reality independent of the specific persons which comprise it.
It is absolutely essential to determine origins and responsibility and even cause and effect that economists avoid the fallacy of collective terms. One who does not will bog down in horrendous generalizations. He will assign credit or blame to non-existent entities. He will ignore the very real actions (individual actions) going on in the dynamic world around him. He may even speak of “the economy” almost as if it were a big man who plays tennis and eats corn flakes for breakfast.
A corollary to this is “in the public interest.” People like Ralph Nader demand that government regulate every aspect of our lives “in the public interest,” yet they are demanding that government engage in activities which will make it more difficult for firms to produce goods, thus making millions of people poorer.
Indeed, when we hear the pundits demanding certain policies are “in the public interest,” what they really are saying is that such policies serve the interests of people in certain politically-connected groups. For example, politicians and editorial writers tell us that the “nation’s economic security” depends upon “energy independence.”
What they mean is that unless all fuel consumed in this country is produced domestically, most Americans face economic disaster. This is most interesting, since Americans have imported fuel for many decades, and even during the short-lived Arab oil embargo in 1973 and 1974, the American economy did not “collapse.” (The “energy independence” scam really is nothing more than attempts by politicians and politically-connected producers of “alternative” energy sources, like corn-based ethanol, to raid taxpayers’ wallets because people would not purchase these “alternatives” unless forced to do so by government.)
Reed stresses the point about “collective terms” noting that economic analysis by its very nature must begin with the individual. Socialists view human beings simply as a collective, be they “workers” or “capitalists” or “proletariat.” The good economists know that one cannot understand markets without understanding the behavior and preferences of individuals. There is no such thing as “social utility,” even though some economists – not the good ones – attempt to “construct” the fraudulent apparatus known as the “social utility function.”
When individuals are left out of the picture, then human beings are seen by those in power as little more than putty to manipulate. The mass murders by totalitarian governments over the last century took place only because the powers that be decided to define people solely in collective terms.
Therefore, one cannot understand “good” economic thought unless one realizes that collective terms like “country” or “the economy” are useful only in the informal setting, as they are words of convenience. However, they are useless and even harmful when government agents attempt to foist policies upon people in the name of “helping society.”
Next week: The fallacy of composition
