Tag Archives: economy

Fallacy of Composition

Between 2008-2010, during the depths and aftermath of the financial crisis, pundits envisioned that the ‘old’ status quo would be replaced by a more egalitarian ‘new’ one of less wealth inequality, as well as slower economic growth and asset price stagnation, which some called ‘the new normal’. With the U.S. stock market and and U.S. economy in its eighth strait year of expansion, how wrong they were. All pre-2008 trends are not only intact, but have accelerated, as I predicted in 2011 they would. Had you asked pundits in 2009 that seven years later we would still be in an economic expansion and bull market, the answer would have been a unanimous ‘no’, save for myself and maybe one or two others out of hundreds. But the expansion, already in its eight year, is actually accelerating right now, prompting the fed to raise rates and boost the rate hike outlook for 2017-2019. The fed foresees three rate hikes for 2017 alone, although I doubt more than two will materialize.

The biggest and most common pitfall in predicting the economy, and why so many people got the 2009-2016 bull market wrong, is the fallacy of composition, in which one assumes that a singe single piece of data is indicative or representative the entire economy, when it’s really just predictive of the single data point and not necessarily more. Or in the words of Freud, sometimes a cigar is just a cigar.

The fallacy of composition arises when one infers that something is true of the whole from the fact that it is true of some part of the whole (or even of every proper part). For example: “This fragment of metal cannot be fractured with a hammer, therefore the machine of which it is a part cannot be fractured with a hammer.” This is clearly fallacious, because many machines can be broken apart, without any of those parts being able to be fractured.

Weak job data and a low labor force participation rate is evidence of a weak labor market but not necessarily a weak economy, nor does weakness in one area (labor)mean weakness in another (profits and earnings). The United States economy is bigger than the labor market, although the labor market is an important component of it.

Culture, states, politicians, and national and local governments, too, are just components of a bigger conglomeration. The fallacy is invoked again in the assumption that the failure of one component means failure of the entire system. So the question is, how many components must fail before the entire system fails, and when. That is harder to answer.

Related: The Overton Bubble

The Trajectory of America

From Social Matter: SWPLs, Amerikaners, The Alt-Right, And The Coming State

This passage stood out:

The system is decaying and unsustainable. It is increasingly liquidating a limited pool of capital to keep the economic charade going, while all the real productivity, and the culture of hardworking self-reliance that goes with it, goes overseas.

See one of three outcomes:

1. A continuation of what we have now, as the contributions of America’s smartest, most productive are sufficient to offset the decay, or as some call ‘entropy’ vs. ‘order’. In the tug-of-war between productivity vs. decay and parasitism, the former is still winning, although the gap may be narrowing. There is evidence of it narrowing (rising rates of out of wedlock births, growing entitlement spending, etc., for example), but also evidence it isn’t (technological progress, steady GDP growth, etc.).

I predict this will be the most likely ‘trajectory’ – a continuation of what we have now. Although there will more internecine strife and racial division in America, the general economy will remain intact, thanks mainly to the contributions of America’s most economically productive and America’s overall global economic dominance and strength, particularity for intellectual property.

This mistake is some assume that because there is some evidence of decay, that the whole system must fail.

America’s Protestant work ethic, punitive justice system, and culture of individualism that prizes merit, are probably contributing factors for America’s stability and economic success, compared to its peers that seem to constantly struggle with corruption, high inflation, and economic stagnation. Although East Asian countries score well on achievement tests and have high national IQs, their culture is a more collectivist one. Same for Northern Europe, which is also more collectivist than America.

Anatoly Karlin has done extensive research on this.

Related: Explaining America’s Economic and Social Stability

2. Figurative collapse – ‘entropy’ gradually wins, and the American economic and cultural hegemony is significantly weakened. The stock market may crash and fail to ever recover. There may be high inflation due to capital flight out of the US dollar and treasuries, as well as ‘cognitive flight’ of America’s smartest and most productive. In the process, America becomes more like Europe or Japan, as possibly China fills the power vacuum. I don’t see this happening – it could happen but seems improbable. Some argue that America is already in this state, but the actual economic data and other trends suggests otherwise.

3. Literal collapse, possibly due to nuclear war, terrorism, or civil war, resulting in substantial devastation, economic disruption, and loss of life. The Civil War is probably the closest America has come to this.