Economic Pie War: Rich vs. Poor

Profit is not a bad word. The rich are not evil. Government’s job is not to take from the rich and give to the poor. Similarly, the rich did not get rich by taking from the poor. The rich are rich because they provide a valuable service that somebody is willing to pay for. Yes, people give their money to the rich. Too often, this is the only side of the equation that gets reported by liberal politicians and the media. The other side is that people give their money to the rich in return for a service. It is a mutually beneficial transaction that makes both parties better off. Nobody is stealing from anybody else. The rich are not becoming rich at the expense of the poor. Rather, both parties are becoming richer.

If the government tries to redistribute wealth, the moral hazard is twofold: First, the poor come to expect to be given things, thus removing their incentive to work hard and create wealth. Second, the rich become disinclined to produce extra because the money they make from their extra work will just be taken from them anyway. This removes their incentive to work hard and create wealth.

Nobody is made better off if we villianize the rich and take from them to give to the poor. If you remove the incentive to produce, wealth will not grow. Just because money was taken from a rich person and given to a poor person does not make the poor person better off.

In economics, we refer to the economy as a pie. There are two problems economics tries to solve: How to maximize the size of the pie, and to understand how that pie gets divided up. If we focus on wealth redistribution, we are solely focusing on the second aspect: how the pie gets divided. We can cut the pie so one person gets 90% and the other person gets 10%, or we can divide the pie 50/50. One person wins, but one person loses. No matter how the pie is divided, you must take from one person to give to another and the pie never gets any larger.

In fact, if we continually take from the rich – the producers - as mentioned before we remove their incentive to produce in the first place. We know that the poor won’t step up and produce because either they don’t know how or they have been “conditioned” to expect things to be given to them. Thus, by focusing only on how to divide the pie, not only does it not get bigger, it very well could actually shrink because nobody wants to produce.

If instead we focus on how to make the pie larger, even if the original distribution is 90/10, the real number making up that 10% is greater. Economics is no longer a zero-sum game but becomes a nonzero-sum game. We can enrich the poor not by taking from the rich, but by encouraging the rich to produce and sell and hire, thus creating and providing valuable services and products that people are willing to pay for.

This can be accomplished by keeping taxes low, keeping the bureaucratic red tape to a minimum and making sure entrepreneurship is encouraged and rewarded.

Let me illustrate it another way. In economics, we often play a game to illustrate the lunacy of class jealousy. Imagine you were given $100. The $100 is yours. The only catch is that you must split the $100 with another person. Since the money is yours, you can split it in any way you want (50/50, 60/40, 90/10 etc.), but if the other person doesn’t agree to the split, you both lose everything.

How do you split it? Do you split it 50/50 because that’s “fair”? Do you even care about fairness and only split it 50/50 because you think the other person cares about fairness, and might reject the deal if he doesn’t get half? Remember, the money is yours and the other person is entitled to nothing – anything they get is nothing short of a gift.

How would you split it? Or better yet, pretend you’re the other person. What deal would you reject? Would you reject it if it’s less than 50/50? Why? What if it were 99/1, would you reject it then? Why?

Unfortunately it seems a lot of people would reject the offer if they were only offered $1. Does this make any sense? Why would you willingly make yourself worse off (if you accept, you’re better off by $1) and deprive the other person of their gains too? Do we really resent the person that has $99 so much just because they have more, even though we were never entitled to anything and we’ve improved our own situation? Do we resent that person that has gained more than us so much that we’re willing to forgo our own gains and take away their gains? Are we really willing to turn a win-win situation into a lose-lose simply because of some false sense of class warfare? How does that make sense?

We must rid ourselves of this idea that the rich steal from us and they don’t pay their “fair share”. Such simplistic ideology might make us feel good, but who is really happy wallowing in self-misery and blaming others while preventing mutually beneficial positive gains? Can a class-warfare mentality really make us feel that good? Impossible!

Once we stop and analyze these beliefs for what they really are, it quickly becomes apparent that they are illogical, irrational, self-defeating and destructive. How ironic that these same people, who by their attitudes create so much damage, blame the rich for destroying the economy. Unfortunately a lot of people would rather sit around and blame others rather than take responsibility and truly examine issues for what they are.

Remember, we all win when we strive to increase the size of the pie rather than quibbling about how it’s divided.