Why Wealth Isn’t A Pie

Often we hear the problems of “wealth inequality” described as who has the most money, or the largest piece of the pie. We’ve all seen the videos showing pie graphs of the “nation’s” wealth, or stacks of dollar bills representing how the rich have all of the money.

This might be terrible, if this is how capitalism worked. Fortunately for us, capitalism works differently.

Resources are finite. There are only so many gold atoms in the universe. There are only so many copper atoms in the universe. Someone could potentially own all of the gold or all of the copper. That might be bad, right? After all, every penny you have must be one you took from someone less fortunate, or so the theory goes.

An individual person could own all of the gold atoms, but he would not own all of the wealth. Unlike gold atoms, wealth can be created, and it can be destroyed. Wealth reflects the level of comfort in each individual’s life.

In free-market capitalism, value is traded for value- where the amount of each is set by each individual participating in the trade. I once knew a church pastor who said that everything he had was for sale- not because he was having a giant liquidation of a yard sale, but because he knew that every possession he owned could be traded, provided someone offered him enough value (money).

As long as no party is being forced to either sell or purchase against their will, money will be exchanged and BOTH PARTIES WIN. When you purchase a loaf of bread, you say that you would rather have that loaf of bread than the cost of the bread at the grocery store. You win, you traded something of lesser value (to you) for something of greater value (to you). Likewise, the grocer sets his prices such that the money he requests for a loaf bread (for him) is of greater value than a loaf of bread (for him). BOTH PARTIES WIN, and thus both have increased their individual wealth. Wealth has been created, even though the amount of gold atoms in the world has not been changed.

Wealth can also be destroyed. If trade is done by compulsion rather than an exchange of values, at least one party has lost wealth. If you are forced to buy something at a higher price than you would freely exchange, or are forced to sell something at a lower price than you would freely exchange, you lose.

Back to the popular pie-money analogy. The solution to this “inequality” is to move the money from the top to the bottom through means of compulsion; either through higher taxes for the top tier, or increased subsidies for the bottom tier, or some combination of both. The top tier loses wealth, which was the intended effect. However, the bottom tier ultimately has nothing to gain, so as long as their is ANY wealth sinks (people who refuse to work, can’t manage money, drunk, whatever).

This is not to say that all members of the lower tier are bums- far from it. And they have a lot to lose from this system as well. But as long as some exist, there will always be a wealth inequality. The pie chart comes out again, showing how some folks have and others have not. Take more from the rich. Rinse and repeat. Pretty soon, there is no more rich; the business that made them rich is gone. After a while the gold atoms are evenly distributed, but the people who run the bakery are gone- and all of the gold atoms in the world cannot replace the missing bread.

This is how you destroy wealth.

How does this mentality come about? It’s easy to see. Everyone understands that a pie can be divided lots of ways- but it can only be eaten once. The fallacy is that wealth is not static; more pie can be baked or we can gobble it all up at once. And, where did this pie come from in the first place? It’s always been there, just like the gold atoms in the ground.

Yet someone had to discover the gold atoms. Someone had to develop the concept of a pie. Someone had to develop the mine to pull gold atoms out of the ground. Someone had to raise the cherry tree and grind the wheat for pie crust. Someone developed better mining technology so that more gold atoms could be mined faster. Someone had to make pies faster.

Free-market capitalism rewards those who figure out how to make a bigger pie. Your share of the pie depends on what you can trade to the baker.

Advertisements

Tags: , , , , ,

One Response to “Why Wealth Isn’t A Pie”

  1. On the Income Gap | The Philosophy of Patriots Says:

    […] 1. Break down the social barriers: Hey! This sounds fun, a rich person and a poor person can be friends. That sounds great! Nothing that can be legislated- just a common assumption that the average human being is moral and just, and that all moral, logical people can associate. Cool. I’m okay with this. Then we read a little farther, “If they talked more, they might support policies to help each other.” Woah. What policies? Will the poor finally vote to do away with taxes and punishing wealth and success? Unlikely. We know which policies. This author hopes that by rich people and poor people talking, the rich will feel guilty for their wealth and agree to be taxed at a higher rate. I already addressed “wealth guilt” in a previous post. […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: