2022 Volume 34 Issue 2 Pages 38-78
The aim of the present paper is to reveal that there exist five “fallacies of composition” in Kalecki’s principle of effective demand that establishes “the fundamental prerequisites to macroeconomics,” which demonstrate that investments determine savings and that savings are equalized by investments in relation to income. It is the five “fallacies of composition” that are to be found in his theories of investment. Concerning the fundamental prerequisites, the first fallacy of composition deals with financing investment, the second one is discovered in his theory of multiplier, and the third one, which is identified by Kalecki himself, is involved in investment expenditure. The fourth fallacy of composition is turned up in investment decisions that are an increasing function of gross profitability as the product of the gross profit margin and the degree of utilization of capital equipment. The fifth one is searched out in the degree of utilization of capital equipment in relation to investment decisions, which reflects the level of production and then influences on the level of employment. It is the fallacy of composition that makes it possible to analyze macroeconomy, which, however, is not simply identified with the sum of individual agents, so that provides raison d'être for macroeconomics and shows the significance of holism in contrast to reductionism from methodological individualism.
