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 effort required from us than to divide it up equally between ourselves, taking utmost care to ensure that nobody has a bigger slice than the others. There is no fixed size of wealth, so you don't have to worry about fighting for the biggest portion or at least ensuring that nobody has a bigger portion than you. The world is big enough and varied enough for each of us to pursue our economic dreams and see them come to pass regardless of what other people are achieving. There is no fixed quota of those who are allowed to be successful, so there's no need to be afraid if you see other people succeeding - it doesn't mean that they've used up all the available success and now there's none left for you. 

There are two ways to understand the world:

Equal Slice of Pie, Please
If this is your worldview, you are someone who finds it painful to know that someone out there has more stuff than you do, because you'd consider that massively unfair not to mention unjust.

Accordingly it seems that it would be a worthwhile use of time to keep 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 or Bitterness, oh no. 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.

I don't care 
If this is your worldview, then you're wondering what all the fuss is about and you can't believe that people have entire blogs about inequality.

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 because of all that oil they're sitting on.

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 350 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 and probably royalty (or at least clergy) to boot. It's a good thing Google came down fully formed from the sky, offering a free search engine so you can find out anything without even having to pay. Free information: nirvana.

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.

Analysis: Law and regulation
From a regulatory perspective the key issue is not whether markets perfectly set fair wages so that everybody gets equal wages, but whether proposed regulatory intervention designed to produce more equal 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 featured most strongly in the debates about executive pay – do we want to bring down executive pay at the cost of slowing down economic growth? 

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. 

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, 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:

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, nevertheless it is also true that these goals often conflict with each other in situations where priorities must be set concerning scarce resources.

Some researchers emphasize that an increase in productivity means rising incomes for everyone, both the high and low waged. This is particularly clear in the digital economy and the artificial intelligence revolution, where employers like Google have a reputation for offering better jobs for higher wages. If that is true then successful corporations are to be encouraged to do more of what they do best: innovation and profit-making, and we should be less worried about what the executive is earning. Who cares what the CEO earns - will that affect your actual life in any way? Yet if everybody is better off, you will also be better off which is brilliant. And in that case there is little reason to be concerned about the incidental fact that some people are earning more than others.
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