The National Economy

During the Great Depression of the ‘30s, as many as one fourth of all workers were unemployed and American corporations as a whole operated at a loss for two years in a row. GM’s stock, which peaked at 72 3/4 in 1929, hit bottom at 7 5/8 in 1932. US Steel stock went from 261 3/4 to 21 1/4 and GE fell from 396 1/4 to 70 1/4. For the entire decade of the 30s, unemployment averaged more than 18%. It was the greatest economic catastrophe in the history the United States. The fears, policies, and institutions it generated were still evident more than half a century later.

In thinking about the national economy, the most fundamental challenge is to avoid what philosophers call “the fallacy of composition” – the mistaken assumption that what applies to a part applies to the whole.

What was true of the various sectors of the economy that made news in the media was not true of the economy as a whole.

The fallacy of composition is not peculiar to economics. In a sports stadium, any given individual can see the game better by standing up, but, if everybody stands up, everybody will not see better. In a burning building, any given individual can get out faster by running than by walking. But, if everybody runs, the stampede is likely to create bottlenecks at doors, trampled people, etc.

Any given firm or industry can always be saved by a sufficiently large government intervention, whether in the form of subsidies, purchase of the firm’s or industry’s products by government agencies, or by other such means.

We need only imagine what would have happened if the government decided to “save jobs” in the typewriter industry when personal computers first began to appear and started taking customers away from typewriters.