Friday, October 31, 2014

Government and the Fallacy of Composition

A successful society perpetuates itself.  It first of all must balance its internal functions. Since a society is made up of people, this means it must balance the interests of its members. Second it must be able to unify and make coherent its collective action.  It must act effectively in its environment, both to secure resources for itself, and to act against threats to itself. 

Every successful society has a government.  This implies that governments are necessary for successful societies.  What functions do governments fulfill, and which are necessary? The Constitution of the United States, the founding document of its government, lists several functions in its preamble:” …to form a more prefect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity.”  (And we already come up against a defect in the Constitution in the preamble: the only coherent purpose it authorizes for society in its environment is for the common defense. There is no explicit purpose expressed for taking coherent action to secure resources, or assure an economic future, although this might be inferred from ‘promote the general welfare.’)

As may be, for a society to perpetuate itself, its government must act against the forces, both internal and external to that society, which will debilitate and cripple that society. 

One of the most important sources of internal socially disruptive forces is a result of the fallacy of composition:  When one person may do a thing it may be good for himself, but when many, or all, do it, the result is bad for society, that is, bad for all individuals.  Therefore one of the most important functions of government is the prevention, or if prevention is impossible, the countering, of situations where the failure of composition pertains. 

These are many.  And of these many fall under the general category of externalization of costs.  Pollution, for instance, is externalizing the cost of producing a good or service.  Costs are also externalized when a company pays less than subsistence, forcing its employees to go elsewhere, often to charity of governmental assistance, to supplement their earnings.  These can be phrased in terms of a tragedy of a commons:  Pollution consuming the commons of the air we breath and the water we drink.  Low pay to workers is abusing the market.  Clearly, each company can make more profit by paying its workers less.  But if all companies pay their workers less, all companies will make less money,   Just as clearly, if all companies pay their workers more, the workers will have more to spend, and all companies will make more money. 

Another is the ‘Paradox of Thrift,’ brought to the attention of economists by John Maynard Keynes.  If one person saves, he may be better off, but if all people save, there is a shortage of spending, the economy contracts, people become unemployed, and in general, everyone is worse off.   The government can counteract this by lowering interest rates, increasing inflation, or increasing its own spending, either by deficit spending or increasing tax and spend. 

Consider the fact that Americans work harder than people in any other developed country, yet our society is the most unequal among them.  Cynics have the people believing that by working harder, they can each of them get ahead.  But it is like a race:  Even if everybody runs faster, still only a few will get the prizes.  Even if everybody works harder, still only a few will advance.  The efforts of workers are increasingly devalued.  This is becoming increasingly obvious as growth stagnates, and increases in income and wealth are becoming more and more concentrated among the few percentages at the top.  See my last post. But the top percentages promote this myth, because all the benefits of all that harder work, all that greater productivity, by the workers, accrue to the wealthy.

So this is a failure of government. The government is already failing in its purpose to promote the general welfare, promoting instead the welfare of a few at the expense of the many, and by allowing increasing segments of population to become indentured by debt to a few, failing to secure the blessings of liberty for them.  Indeed, as the government increasingly becomes a creature of the wealthy, its failures may be expected to increase, as it becomes less and less capable of defending against fallacies of composition.  Already economic crimes among the wealthy, taking from society, from the commonwealth, without return, go unpunished. As regulations are weakened, as more and more costs or production are externalized, as the unfettered free market succumbs to the tragedy of the commons, not just the worker, but the wealthy, will be the poorer. 

The commonwealth is also the wealth of the wealthy.  They already control it, but in the obsession of each to ‘own’ an ever greater share of  it, they will destroy the world, and the wealth of us all.

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