The Two Fundamentally Flawed Assumptions at the Heart of the Inequality Crusade
Don Watkins and Yaron Brook
Why should we care about economic inequality? That’s a question that deserves to be debated, but one of the frustrating features of today’s discussion is that the inequality critics have smuggled into the discussion a perspective on wealth that tacitly assumes that economic inequality is unjust.
The “fixed pie” assumption. The inequality critics often speak of economic success as if it was a fixed-sum game. There is only so much wealth to go around, and so inequality amounts to proof that someone has gained at someone else’s expense. Arguing that “the riches accruing to the top have come at the expense of those down below,” Nobel Prize-winning economist Joseph Stiglitz writes: “One can think of what’s been happening in terms of slices of a pie. If the pie were equally divided, everyone would get a slice of the same size, so the top 1 percent would get 1 percent of the pie. In fact, they get a very big slice, about a fifth of the entire pie. But that means everyone gets a smaller slice.”
What this ignores is the fact of production. If the pie is constantly expanding, because people are constantly creating more wealth, then one person’s gain doesn’t have to come at anyone else’s expense. That doesn’t mean you can’t get richer at other people’s expense — say by lobbying politicians to give you part of someone else’s pie — but a rise in inequality per se doesn’t give us any reason to suspect that someone has been robbed or exploited or is even worse off.
Inequality, we have to keep in mind, is not the same thing as poverty. When inequality critics like Timothy Noah complain that “income distribution in the United States is now more unequal than in Uruguay, Nicaragua, Guyana, and Venezuela,” they act as if it’s irrelevant that almost all Americans are rich compared to the citizens of those countries. Economic inequality is perfectly compatible with widespread affluence, and rising inequality is perfectly compatible with a society in which the vast majority of citizens are getting richer. If the incomes of the poorest Americans doubled while the incomes of the richest Americans tripled, that would dramatically increase inequality even though every single person would be better off. Inequality refers not to deprivation but difference, and there is nothing suspicious or objectionable about differences per se.
The “group pie” assumption. In his speech on inequality, President Obama said, “The top 10 percent no longer takes in one-third of our income — it now takes half.” This sort of phraseology, which is endemic in discussions of inequality, assumes that wealth is, in effect, a social pie that is created by “society as a whole,” which then has to be divided up fairly. What’s fair? In their book The Winner Take All Society, economists Robert Frank and Philip Cook begin their discussion of inequality with a simple thought experiment. “Imagine that you and two friends have been told that an anonymous benefactor has donated three hundred thousand dollars to divide among you. How would you split it? If you are like most people, you would immediately propose an equal division — one hundred thousand dollars per person.” In their view, if the pie belongs to “all of us,” then absent other considerations, fairness demands we divide it up equally — not allow a small group to arbitrarily take an outsized share of “our” income.
But although we can speak loosely about how much wealth a society has, wealth is not actually a pie belonging to the nation as a whole. It consists of particular values created by particular individuals (often working together in groups) and belonging to those particular individuals. Wealth is not distributed by society: it is produced and traded by the people who create it. To distribute it, society would first have to seize it from the people who created it.
This changes the equation dramatically. When individuals create something, there is no presumption that they should end up with equal shares. If Robinson Crusoe and Friday are on an island, and Crusoe grows seven pumpkins and Friday grows three pumpkins, Crusoe hasn’t grabbed a bigger piece of (pumpkin?) pie. He has simply created more wealth than Friday, leaving Friday no worse off. It is dishonest to say Crusoe has taken 70 percent of the island’s wealth.
It’s obvious why the fixed pie and group pie assumptions about wealth would lead us to view economic inequality with a skeptical eye. If wealth is a fixed pie or a pie cooked up by society as a whole, then it follows that economic equality is the ideal, and departures from this ideal are prima facie unjust and need to be defended.
But if wealth is something that individuals create, then there’s no reason to expect that we should be anything close to equal economically. If we look at the actual individuals who make up society, it is self-evident that human beings are unequal in almost every respect: in size, strength, intelligence, beauty, frugality, ambition, work ethic, moral character. These differences will necessarily entail huge differences in economic condition — and there is no reason why these differences should be viewed with skepticism, let alone alarm.
What should concern us is not whether incomes are unequal but how they are achieved: through production and voluntary trade, or through theft, fraud, or special favors from Washington? But such a debate would not serve the agenda of those who are out to smear the successful.
Don Watkins and Yaron Brook are the authors of Equal Is Unfair: America’s Misguided Fight Against Income Inequality.