Sizing up the economic pie

Life is not a zero sum game, which means that there is no such thing as an ‘economic pie’ that sprung fully formed from the Earth, with no further input required from us than to divide it up equally between ourselves. But for those who find it helpful to think about life as a giant pie, the point is that the pie is not of pre-fixed and immutable size. Sometimes it's bigger, and sometimes it's smaller. Size varies constantly according to inputs and outputs. The bigger the pie, the better off everyone is. With a fixed amount of wealth, everyone would have to worry about fighting for the biggest portion or at least ensuring that nobody has a bigger portion than others. When the size of the pie depends on economic activity, there is no fixed quota of success, so there's no need to be afraid that those who succeed will 'use up' all the success and leave none for others. 

There are two ways to understand the world: one is the 'cow udder' theory which holds that a cow has only one udder and only so much milk. This leads to FOMO (fear of missing out). The other is the 'build your own sandcastle' theory which holds that it's always possible to make your own way regardless of what others do - life is a glorious sandy beach, not a scrawny cow.

The cow udder theory
In this worldview, it is painful to know that someone out there has more stuff than you do, because of FOMO. Accordingly it seems that it would be a worthwhile use of time and resources to keep careful tabs on how much other people have, obsessively measuring everyone’s slice of the pie, and forming lobby groups to complain about equal opportunities.

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 looks remarkably like Envy or Bitterness, but in polite society it is known as Equality, Justice and Fairness. 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.

Build your own 
In this worldview, everyone focuses on their own affairs, and there's not much spare time to worry about the fact that the neighbours or people in other countries like, say, Qatar, have more money.

In this world, you go happily about your life. You do not go out and riot just because you heard on the news that your neighbour’s slice of pie is 350 times the size of your own. Everyone has better things to do with their 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 or whether Amazon paid the correct amount of taxes. The more relevant observation is that before Amazon nobody could afford books unless they were a millionaire, and now books are available for a penny.

How to make sure there's enough pie
The key issue is not whether everybody gets equal wages, but whether there's always enough pie resulting from productivity and wealth creation. 

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 he thinks rich people should definitely pay more tax, and if that introduces inefficiencies with a smaller cake in the end, so be it. Everyone will have less, but it will look more equal and thus people won't suffer from FOMO. 

With such a Rawlsian perspective (concern for the least advantaged), an increase in top taxes that generated additional revenue would represent an acceptable trade-off between efficiency and equity…

​There cannot, therefore, be a blanket rejection [to increasing taxes] on the grounds that the cake would become smaller. Rather we have to consider the way gains and losses are judged and the nature of the underlying trade-offs.

Atkinson, Inequality, p. 243, 244.

​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, consider 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:

Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution...The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.
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Ideally, both productivity and equality would be prioritized, but there is no consensus on which of the two goals takes priority in contested situations. 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, these goals often conflict with each other in situations where priorities must be set concerning scarce resources.

An increase in productivity means rising incomes for everyone, both the high and low waged. If innovation and profit-making increase the size of the pie, we should be less worried about what the executive is earning as a multiple of the other workers' wages.
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