There is no such thing as an ‘economic pie’ favourably granted to mankind by Mother Earth with the admonition that we should play nicely together and divide it up equally between ourselves, taking utmost care to ensure that nobody has a bigger slice than the others. But if there were an economic pie, would you rather have:
Option 1: Growth and Prosperity
A giant pie that is constantly growing but comes in unequal slices, and you don’t mind if you end up with a smaller slice than your neighbour because there will always be more and more pie available for everyone; the rich will get richer, and the poor will also get richer; or
Option 2: Equality of income and wealth
A smaller pie that is constantly shrinking but comes carefully divided into precisely equal tiny little sizes so that nobody has a bigger slice than anybody else and you have a guarantee that although your slice may be tiny at least you can take comfort in knowing that your neighbour’s slice is the exact same piddling size. The rich will get poorer, and the poor will also get poorer, but everyone won't mind being poor because at least they're all equally poor. Being poor sucks, but it's better than the ignominy of being poorer than your neighbour which is scarcely to be tolerated.
Choose an option. Consider carefully. Take your time. This is a genuine question, because smart people (well, credentialled people anyway) have different opinions about this. Now, here's an analysis of your results.
Option 2 folks
If you chose Option 2, you are someone who can’t bear to think that someone out there has more stuff than you do, because you'd consider that massively unfair not to mention unjust. Accordingly you spend all your time keeping tabs on how much other people have, obsessively measuring everyone’s slices and forming lobby groups to complain that yours is smaller than your neighbour's. You favour mandatory disclosure of pay ratios, so that you can discover exactly how many multiples of your own salary other people are earning, and then figure out a way to cut the over-earners down to size. Ideally you would prefer that everyone should be levelled up, but if that won't work then you'll settle for having everyone levelled down. If everyone has nothing, then at least that way it's equal and you'll be able to sleep well at night comforted by all the equality that you are achieving in the world. Good times, good times.
This is not known as Envy, oh no. It is known as Equality, Justice and Fairness. Of course it is. Naturally, if anybody goes out and tries to amass wealth, alas, they will have to be subjected to various equalization measures to restore equilibrium and you'll spend a vast amount of your time and energy campaigning to achieve that. Good luck! You'll never be happy, but at least you'll be able to be smug and feel morally superior to everyone else and that's more important to you if you're honest.
Option 1 folks
You guys are fine and dandy. You mind your own business, focus on your own affairs, and really don’t care about the fact that your neighbours or people in other countries like, say, Qatar, have more money than you do. You go happily about your life. You are not going to go out and riot just because you heard on the news that actually, your neighbour’s slice of pie is 150 times the size of your own slice. The truth is that you have better things to do with your time, usually in the pursuit of fun things to do. It's surprising how many fun things there are to do that are completely free or close to free, like buying cheap books off Amazon, sitting by the river, maybe under a tree if it’s a very hot day, and reading a nice book. You don't spend even a scintilla of a second worrying about what the boss at Amazon earned last year (Editor: a quick look on google assures me that he is 'crazy wealthy') or whether Amazon paid the correct amount of taxes. Life before Amazon was nasty, brutish and short, and nobody could afford books unless they were a millionaire. For that matter everyone was pig ignorant before Google came down fully formed from the sky, offering a free search engine so you can find out anything without even having to pay.
Simple pleasures, cheap and cheerful. Now you've discovered that this pure joy is achievable without actually having to pass a raft of new laws ensuring that bankers earn less money or lobbying the UN to abolish tax havens. There's actually nothing to campaign about, when you think about it. Yes, shocking. Enjoy.
Law and regulation
From a regulatory perspective the key issue is not whether markets perfectly set fair wages so that everybody gets the pay they deserve, but whether proposed regulatory intervention designed to produce fairer outcomes would indeed succeed in offering an effective improvement without introducing costs that will have a negative impact on productivity and wealth creation. This is precisely the issue that has hamstrung the debates about executive pay – do we want to bring down executive pay at the cost of slowing down economic growth? Obviously Option 1 folks would say emphatically no, and Option 2 folks would say hell yes.
If higher average wages across the board are associated with rising inequality, would it really be wise to depress wages, shrink the size of the economic pie, and end up with a poorer world, simply in order to achieve greater equality of pay? Anthony Atkinson argues that ‘a smaller cake more fairly distributed may be preferable to a larger one with present levels of inequality’ because in his opinion fair distribution is as much a priority as economic growth. He argues that the two go hand in hand as there must be ‘an acceptable trade-off between efficiency and equity.’ So rich people should definitely pay more tax, and if that introduces inefficiencies with a smaller cake in the end, so be it. Less for the rich, more for the poor.
Not everyone would agree that equal distribution is so important that a smaller cake equally distributed would be preferable to a larger and ever-growing cake unevenly distributed. To understand what is at stake in this debate, and why it is important to grow the size of the cake, it is worth paying further attention to the growth, productivity and value creation that have raised standards of living across the world since the advent of the industrial revolution. The potential to achieve even higher standards for everyone depends upon continued growth. As argued by Robert Lucas:
From that perspective, labour law plays a role in ensuring that the legal framework strikes the right balance in encouraging productivity and growth alongside responding to the growing concerns about inequality. Ideally, both goals would be prioritized, but there is no consensus on which of the two goals takes priority in contested situations. The scholarly debates have canvassed a wide range of concerns relating to both fairness and efficiency. While fairness and efficiency are not mutually exclusive, as societies which promote justice and fairness among their citizens tend also to exhibit strong economic growth, nevertheless it is also true that these goals are often thrown into sharp conflict with each other in situations where priorities must be set concerning scarce resources.
Some researchers depict wage disparity as a corollary of rising prosperity across the board, emphasizing that an increase in corporate productivity yields rising incomes for both the high and low waged. This is particularly evident in the digital economy and the nascent artificial intelligence revolution, where leading employers like Amazon and Google have a reputation for offering better jobs for higher wages. From that perspective corporations are to be encouraged to do more of what they do best: innovation and profit-making. If everybody is better off, there is little reason to be concerned about the incidental fact that some people earn more than others.