If farmers don’t get extra subsidies, pretty soon no one will want to farm and we will all starve. If stopping illegal immigration raises wages for roofers, contractors will be forced out of business and our houses will rot away because of bad roofs.
Preposterous, you say, and you are right. Yet these sorts of arguments — perhaps in more subtle form — pop up all the time in economic news. They exemplify an error in logic that philosophers call “the fallacy of composition.” Don’t let such faulty thinking influence your take on public issues.
A fallacy of composition is the mistake of assuming that what is true for an individual is necessarily true for a larger group. For example, if you cannot see the action at a spectator sport, you will see more if you stand up. Therefore, all spectators could see better if everyone stood up.
This is clearly nonsense. But similar errors occur frequently.
In a recent interview, U.S. Rep. Tom Tancredo, R-Colo., a vocal critic of illegal immigration, acknowledged that business owners oppose limits by arguing, “You are going to kill my landscaping business, my drywall business, my roofing business.”
This argument makes sense because it seems true for an individual business. A drywall subcontractor knows her business is intensely competitive. Margins are thin. If she bids above the going rates, she won’t get contracts. From her point of view, she can’t increase wages without erasing her profits and risking the loss of her business.
That is true if labor costs go up for her but not for her competitors. If labor costs go up for all drywall businesses, then these businesses won’t go broke simultaneously. Instead, prices rise over time until good contractors are again making thin profits.
Look at the flip side. As cheap immigrant labor became available, contractors’ profits did not skyrocket. Instead, competition kept a lid on rates or pushed them down. Home buyers, rather than contractors, reaped benefits from cheap labor. If immigration limits push up costs of labor, new homes will cost more. But all subcontractors won’t liquidate their companies.
Similar arguments appeared in recent reports on the additional $4 billion in crop subsidies tucked into the latest “emergency” federal appropriations bill.
Fuel costs are up for farmers. One argued that without more federal dollars, he would go out of business.
The water is muddied here because the number of farmers continues to drop. Yet, despite any declines in farm numbers, all the land still gets farmed. Output continues to set new records.
In farming, adjustments come in the price of land — either for annual rental or for purchase. When higher costs squeeze farm profitability, rents and land prices sag. When costs drop or commodity prices rise, land prices increase. Tight margins for some farmers or even all won’t make everyone abandon the land.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.