Jonathan B. Wight
Paul Krugman criticized President Obama for “pretending to be stupid” in the State of the Union address last night. President Obama said:
“[F]amilies across the country are tightening their belts and making tough decisions. The federal government should do the same.” (emphasis added)
By contrast, the Keynesian revolution discovered that federal authorities should use counter-cyclical policies, not pro-cyclical policies. Since Obama and his administration know that, Krugman argues they are only pretending to be stupid.
Adam Smith may be guilty of the same fallacy of composition when he wrote, “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom” (Wealth of Nations, Glasgow edition, 456-7).
Herein lies a great question in ethics: Is virtue at the family level also virtuous at the national level?
Families generally allocate resources like good communists: from each according to ability, to each according to need. Hence, if son Peter needs braces, daughter Emily may have to forego going to summer camp. A family makes substantive welfare evaluations when assessing claims on resources. By contrast, economists generally make instrumental welfare claims about the overall economy; these dollar claims cannot distinguish between Peter’s “need” for braces and Emily’s “need” for camp. Both are treated simply as preferences.
Those who favor markets must avoid the fallacy of composition. The economy does not need to be run like a family, nor would the federal government necessarily need to act like a family in times of recession.