There Is No Pie: The Fallacy of Zero-Sum Economic Thinking

December 26, 2019

Even as the upcoming 2020 election exposes our deep divisions, most Americans remain united on one issue: Income inequality.

Frustrations with the wealthiest among us—the so-called “one percent”—are shared by Democrats, Republicans, and independents. According to the latest Pew research, nearly 70 percent of Americans believe the U.S. economy benefits “people who are wealthy” the most—at the expense of lower- and middle-class Americans. This is especially true for Millennials, most of whom report being open to supporting a socialist presidential candidate.

However, at the heart of today’s anti-elitism isn’t merely a skepticism of millionaires and billionaires; it’s the belief that the “one percent” is taking from the rest. Again, most Americans believe the wealthy prosper at the expense of others. Anti-elitism—the sort that leads people down the road to socialism—is predicated upon zero-sum economic theory, which sees the world through a “winner take all” lens.

Ask around and you’ll hear that America’s free-market economy is a “pie” with finite wealth inside of it. When Amazon founder Jeff Bezos accumulates a net worth of $110 billion, that $110 billion isn’t created; rather, it’s taken from others. When a C-suite executive earns a six-figure Christmas bonus, that bonus was awarded at the expense of employees further down the totem pole.

But this is a fallacy! In reality, wealth can be created. And it often is, producing numerous winners with no losers to speak of. Just because Chipotle’s market capitalization has surpassed $23 billion (as of December 2019) doesn’t necessarily mean hourly employees working there and high school students eating there aren’t benefitting from Chipotle’s presence.

Imagine a typical Chipotle transaction: John, the hourly employee, sells Molly, the high school student, a $10 burrito. In this scenario, John’s employer (Chipotle) values the $10 more than the burrito. The customer, Molly, values the burrito more than the $10. Both parties are made better off by the exchange—indeed, both parties are made “wealthier.” Molly gains something (the burrito) that she values more for something she values less, and the same is true for Chipotle.

Now, look at John. Would he be better off if Chipotle didn’t exist and he couldn’t find a job nearby? Of course not. He also becomes “wealthier” because exchanges like that pay his hourly wage and keep him employed. If people like Molly didn’t eat at Chipotle, career opportunities would dry up for people like John.

Now apply this logic on a broader scale. The millions and millions of free-market transactions that define America’s economic system produce millions and millions of winners on a daily basis. “Winning,” when you think about it, isn’t simply about money, it’s about value: Molly was a “winner” even after giving up $10.

Similarly, the sheer emergence of large corporations like Chipotle doesn’t prevent small businesses from existing and thriving. For example, businesses like Chipotle may retain other businesses—such as brand management firms and marketing agencies—to help them better serve customers and clients.

The business community creates a self-reinforcing cycle, whereby the emergence of one entity can provide the rocket fuel to grow others. Consider a digital advertising expert who leverages his knowledge of Facebook algorithms to help a flower shop reach more customers. Without Facebook, he wouldn’t even have a business.

Or take a local cleaning service, which found new customers because Airbnb hosts in the area needed to prepare their homes efficiently and effectively. Because Airbnb came about, that cleaning business was able to reach new heights. This happens every day in America.

Now, are the wealthiest Americans becoming wealthier over time? Yes.

But that isn’t inherently a problem. What would be a problem is if the “one percent” was increasing its net worth, while the net worth of all other Americans was stagnating and declining over time.

Yet that isn’t the case. The U.S. economy has ensured that all income groups (upper, middle, and lower) generally become wealthier as the decades pass. The numbers don’t lie: Since the 1960s, all quintiles of American income-earners have seen their real income rise over time.

Yes, the top five percent of Americans saw the most growth, with an almost 125 percent increase (due to a variety of factors). But the bottom quintile saw its real income grow by more than 30 percent since the 1960s. The bottom’s growth even outpaced the fourth quintile’s (27.6 percent). Meanwhile, the second quintile—far from the “one percent,” or even the five percent—experienced real income growth of nearly 56 percent in that time.

That’s right: All Americans are generally becoming wealthier over time—not just the wealthiest in our midst. Due to the mutually beneficial nature of free-market exchange, the U.S. economy has created countless winners, and it will continue to do so.

To suggest otherwise is simply a losing argument.

Luka Ladan is the President and CEO of Zenica Public Relations and a Catalyst Policy Fellow. Prior to founding Zenica, Ladan served as Communications Director at a leading public affairs firm in Washington, D.C.
Catalyst articles by Luka Ladan