Part IV will be longish. Obviously, it won’t be as long as “War and Peace”, but I assure you that it will fail to be brief. Ok, not too long, but long enough. I wish to pack as much into this section as is practical, so that we don’t end up with a Part MMMCCXLVIII. So, let’s crack on.
The fallacy of composition
The Fallacy of Composition, or “Faulty Induction”, is the assumption that something which is true for some part, or parts of the whole, is also true for the whole itself. The logical process always flows to a faulty conclusion:
1. A is a part of B
2. A exhibits X behaviour
3. Therefore, B exhibits X behaviour
There are many examples of the fallacy. Here are a few:
“I’ve noticed that if I stand up at a football match I can see better. Therefore, if everyone stood up at a football match, everyone could see better.”
“Bob is human. Bob is 6’2”. Therefore, all humans are 6’2”.”
“Broccoli is a vegetable. Broccoli is green. Therefore, all vegetables are green.”
“There are lots of rocks on railway tracks. Therefore, rocks come from railway tracks.”
“Dick got rich by working hard and playing by the rules. Therefore, if everyone works hard and plays by the rules, everyone can be rich.”
Yes. Mainstream Economics. Though it might seem impossible to the unwitting public, the entirety of mainstream economics, both theory and practice, commits the fallacy of composition. If you’ve ever wondered why the forecasts and predictions of economists never seem to be right, now you know. This is the reason why. The whole of mainstream economics is built on the faulty conclusion that what is true of some parts of the economy are also true for the whole economy, not to mention the wild, bizarre assumption that prehistoric humans ran a barter economy.
Faulty assumptions made by mainstream economists
Prehistoric means “before the written record”. So, without any evidence, economists assume that prehistoric humans bartered. They also assume that prehistoric humans were stupid, so as humans became smarter, money was created by markets for efficiency reasons. Therefore, the economy that we see today is just a continuation of prehistoric barter, and money is merely a “veil over the economy”, hiding its true barter nature.
Another way this “money is a veil over the economy” nonsense is expressed is that money is an intermediary commodity; a medium of exchange that makes barter more efficient.
However you choose to slice it, they’re wrong about everything, including what money is and its origins. Money isn’t a commodity, a medium of exchange, nor is it a creation of markets.
So, mainstream economists assume that the economy is a natural thing which all humans must serve, that markets are the economy, and they focus on market behaviour to understand the entire economy, and as a result, mainstream economics commits the fallacy of composition.
Of course, there is a reliance on very old, false notions such as Say’s Law, etc. And, quite obviously, politics, money, and status play a crucial role in motivating the top echelon of mainstream economists like Larry Summers and Paul Krugman to promote nonsensical policies, and to make ridiculous excuses which defend the interests of the rich and powerful. But, having said that, the whole of economics is still tainted and 100% incorrect because it is based on the fallacy of composition.
Markets are a creation of central government
Every policy coming from a central bank, every fiscal policy measure coming from the central government begins with the fallacy of composition, and then it is deliberately promoted as a “fact”. Mainstream economics assumes that what takes place on the micro-level of the economy translates directly to the macro-level of the economy.
This should come as no surprise, given the fact that economists view business and markets as the central point around which everything revolves. They shun the central government as either a sometimes helpful, but mostly interfering entity, or an irresponsible, blackened monolith of pure evil, and so, the private-sector is the place to be looking at if we wish to understand the economy as a whole. They have things exactly upside-down.
The central point of any economy is the central government itself. Because the central government is the currency-issuing and regulatory authority, it creates the conditions that gives rise to markets which operate based on its currency. So, markets are a creation of the central government. All things “private-sector” are the end result of the decisions and actions of the central government, whether directly or indirectly. In other words, macro-level decisions create, manipulate, and modify micro-level activity.
So what has this to do with the UBI? How nice of you to ask. Well, let me tell you.
The UBI, like any other mainstream economic policy, is entirely based on the fallacy of composition, and it blatantly assumes that what is true for some individuals and their local economies, will be true for the whole of society and the entire economy. Returning now to the basic income to be trialled in England, we can easily see the logical process flow to its faulty conclusion:
1. A person is an individual member of society.
2. If a person receives £1,600 a month, he/she is doing well.
3. Therefore, if we gave everyone £1,600 a month, everyone would be doing well.
Wrong. Here’s why.
If you give thirty people £1,600 a month, then of course their lives will be better off. Also, some might choose not to work, and focus more on quality of life, or starting a business. Others might continue to work and enjoy the benefits of a larger income. The sample is too small to reveal the impact of consumer spending on local business. But, we do know that as consumer spending increases, business tends to hire more workers to help meet new demand. So, it is safe to assume that were the sample much larger, we could see a positive impact on the local unemployment rate.
That being said…
No positive results of the England basic income trial will translate as positive results for the whole of the nation itself. In fact, it will have the opposite effect. It is the exact same mistake as thinking that if everyone stood up at a football match, everyone would see better.
1.) A UBI of £1,600, $2,034.24 US, and 3,486.18 AUS per month will immediately send aggregate demand soaring upwards precisely because this is what the UBI is designed to do. Initially, supply chains might be able to absorb that spending. However,
2.) If just 10% of the population decided not to work anymore, the labour supply would fall by 10%, but consumer demand would continue. The reduced labour supply would make it harder for business to hire workers to meet the demand. Over time, if more people decided to stop working because of age, injury, mental illness, or because they simply wanted to enjoy life, or if people reduced their hours, the labour supply would contract further. Bottlenecks in supply chains would occur, similar to those of the pandemic and the War in Ukraine, and as a result, prices would begin to rise.
3.) Given the shrinking labour force, business would need to make work attractive to people in order to keep them working. The most popular method would be offering high wages to ensure retention. This will exacerbate the inflation problem, as it will increase worker income, and thus, increase worker spending power.
4.) We must also keep in mind that the central government is also spending for many other things besides the UBI, and that new money will eventually make its way into the hands of millions of consumers. The fiscal position of the UK government would go from billions to trillions; meaning, that since the UK government creates money when it spends, it would be flooding the UK with spending power. At this point, if the UK government does not immediately end the UBI, and take drastic fiscal measures to tax away the UBI’s effects, a demand-pull inflationary episode will be all but guaranteed.
Demand-Pull Inflation: Inflation as a consequence of too much spending which exceeds the economy’s real ability to increase output, rather than a result of an initial supply problem.
We will assume that the government doesn’t act and continues with the UBI
5.) Those who thought they’d just quit their jobs and start a business of their own would soon discover that with the shrinking labour supply, and the high wages, they can’t hire enough workers to meet demand. This being due to wages that a small business simply cannot afford to pay, which large corporations are offering to protect their own market share. Further, with supply bottlenecks occurring, they soon find that they cannot obtain what they need to do business. Rising inflationary pressures will make the cost of doing business for small firms unaffordable. Most of these start-ups will inevitably fail.
6.) As inflation accelerates, the central government will have four choices:
a. Do nothing and hope for the best.
b. Increase the size of the UBI payment to compensate for the rising cost of living, therefore making the inflationary episode far worse.
c. Tax the UBI heavily, or only give payments to certain people but not all, which means that, either way, you will no longer have a UBI, but a BIG.
d. End the UBI programme, and immediately impose large tax rises to eliminate the spending power created by the UBI. Eventually, a recession will occur as consumer spending collapses, business loses income and sacks workers, and mass unemployment ensues.
If you refer back to Part II in this series on the concept of automatic stabilisers, you will now understand why a UBI of this size is inherently inflationary. Because it has no price stability feature.
So, no, not everyone will be doing better. Quite the opposite. Poverty will not end either. When the UK government is forced to end the UBI and tax away much of the spending power created by it, and mass unemployment and deep recession unfolds, something quite nasty lies in wait for all of those people who were lifted out of poverty at the start of the UBI.
Not only is it hard to find a job during a recession, there are no benefits, tax credits, or welfare of any kind for them to fall back on. Why?
The UBI will be an excuse to eliminate welfare entirely
Let’s refer back to The Guardian article where we read:
“Cleo Goodman, a co-founder of the initiative Basic Income Conversation, said: ‘We’re hopeful that this plan will result in the first ever basic income pilots in England. No one should ever be facing poverty, having to choose between heating and eating, in one of the wealthiest countries in the world. Basic income has the potential to simplify the welfare system and tackle poverty in Britain’.”
“Basic income has the potential to simplify the welfare system”
Meaning, the UBI will be an excuse to eliminate welfare entirely. Unbeknownst to most of the general public, the UBI was envisioned by certain far right-wing elements as a means to justify the end of the welfare system. Look, if everyone is receiving £1,600 per month, why on earth would you need unemployment benefits, or tax credits to top up your income, or benefits in general? You don’t. So, they will be scrapped.
Once the entire UBI affair is done and dusted, you will most likely have greater poverty levels than you did prior to the UBI, without even so much as a worthless programme like Universal Credit to help people. And given the long-running Tory love affair with austerity, good luck getting any benefits programmes reinstated, because “the government’s finances must be put back in order”.
Humans as consumption units
Also, the effects of the UBI turning human beings into consumption units means that consumer spending will quickly drive large amounts money to capital, thus, increasing its power base significantly. The only true beneficiaries of a UBI will be corporations, the financial sector, and the rich. When the UBI is forced to end, the financial position of corporations, the financial sector, and the rich will be immense whilst you will be left struggling.
In the next instalment, I will deal with the automation question.
Up Next: Part V – Automation Arguments Are Puerile Nonsense