The Free Market Center
Fallacies of Averages and Aggregates
Given a fixed set of numbers, most people with a modest amount of education could calculate the mathematical average of the numbers in that set. The importance of knowing the limits of that set of numbers, however, seems to escape a lot of people in their common usage of the term “average.” Important limits have to do with time and population. When the proud parent states that their child receives “above average” grades, they generally don’t define the limits of that average. Did they calculate that average based on only the students in their child’s class or all students in the world? From that population, did they calculate that average based on the members of that population over a year, or over all time? Without defining those limits, the average becomes meaningless.
Discussions about economics contain many ill defined references to averages. Average wealth, average wages, average unemployment, average prices all have little or no meaning with out a clear delineation of the limits of time and population used in the calculation of that average.
If an economist compares average prices in 2006 with average prices in 1950, he may have dealt with the limits of time, but the population problem remains. If the average prices include all products sold during the respective years, how does this statistic deal with the prices of iPods in those averages?
Economists and the popular press frequently create fallacies of aggregation when referring to wealth and income. References to national income or wealth lose their meaning when you consider the variety of products used to generate income and the different assets counted as wealth. (See Carl Menger.)
Economic statisticians make a good living providing, among other things, mountains of data regarding debt. The implied and interpreted meaning of that data generally contains fallacies of aggregation. Seldom does that data include information about the different terms and conditions of the debt or about the sources of repayment. It frequently treats debt as if all persons share the liability.
One of the most common economic fallacies that I see relates to general price increases (commonly referred to as inflation.) Because most market transactions occur based on money, people mistakenly think that they can calculate some kind of average or general price. If you go to the grocery and buy 3 lbs. of Veal, 4 lbs. of Beans, 2 lbs. of Chips, 1 lb. of Candy Bars, and 3 lbs. of Milk all for $100, it makes little sense to say that each product had an average price of $7.69 per lb. Yet, economists use similar logic to calculate general price levels.
After calculating this questionable measure of a general price level, which frequently serves as proxy for the devastating effect of artificial monetary growth (inflation), economists and commentators treat this like an evenly distributed (or aggregated) effect. In fact, artificial monetary growth, and resulting increase prices, do not affect products, industries, regions, or individuals uniformly. Any aggregation of price data represents a fallacy.
Fallacies of averaging and aggregating can greatly confuse the understanding of economic concepts. One of the primary roles of economics, understanding the allocation of resources, loses meaning as people increasingly refer to averages and aggregates.
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