Chapter 7: The Fallacy of Composition
The fallacy of composition occurs when one incorrectly attempts to generalize from a relationship that is true for each individual, but is not true for the whole. (Oswego, 2006: 3) INTRODUCTION: FROM MICRO TO MACRO IN A HISTORICAL PERSPECTIVE1 It is the ambition of the neoclassical schools that the methodological point of departure should be methodological individualism. This is based on the assumption that the stable building blocks for the economic system are the individual preference structures that are assumed to be independent of the economic environment. The individual has integrity in relation to his or her own economic dispositions. Rational choices are made with the goal of optimizing the individual utility based on existing knowledge. With this methodological point of departure, the aim of neoclassical macroeconomics is to develop a theory that can detect important phenomena for the aggregated economy. Since individual behaviour is assumed to be the stable primary element, the neoclassical methodological demand is for macroeconomic models to have an explicit and consistent microeconomic foundation (see for example Andersen, 2000). This demand for an explicit microeconomic foundation was formulated after the failed attempts to explain the economic development throughout the 1970s with the large, so-called Keynesian, macro-econometric models (Harcourt, 1977). This model tradition was internationally represented by, among others, Franco Modigliani and Lawrence Klein. In Denmark, this empirical and ‘Keynesian’ model tradition was from the early 1970s represented by the model in the Ministry of Finance (ADAM) and the model in the Danish Economic Council (SMEC) respectively...
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