Zero-sum fallacy

November 4, 2013

Damien Grant says inequality isn’t the fault of the rich:

A recent book edited by Max Rashbrooke, Inequality; a New Zealand Crisis, portrays an alarmist view of an unfolding dystopian disaster. However, Rashbrooke and many of those concerned at rising inequality fall for the zero-sum fallacy; the idea that there is a set amount of cash in the economy.

The fallacy goes that if Bob has made an extra dollar then he must have taken it off someone else; the rich get richer and the poor get poorer.

The easiest way to dismantle this illusion is to imagine two farmers. The first is content with his lot but the second works extra hours to build himself a new cow shed, making his farm more valuable. He has become richer but not at the expense of his neighbour. . . .

Not only has the farmer not become richer at the expense of his (or her) neighbour, s/he may well have helped increase someone else’s income by using more goods and services and/or employing more people.

Economic growth is driven by innovative entrepreneurs adding to the total economy. They sometimes become rich by retaining some of the extra wealth they created. Equally, a surgeon who works long hours will derive a large income, but only as a result of repairing the lives of his patients; both benefit from the transaction. We can reduce inequality by restricting the amount of operations he performs, and rising income tax has that effect.

However, that will not reduce poverty, it will exacerbate it. The rich will buy the reduced number of operations and the poor will miss out. . .

The focus on inequality is driven by the belief that life isn’t fair; that those with more have taken advantage of those with less and that there’s little or nothing those with less can do about it without state intervention – higher and more taxes and more redistribution.

Life isn’t fair but the easiest way to reduce inequality is to make the rich poorer which doesn’t help anyone.

The problem isn’t that some people have more than others, it’s that some people don’t have enough.

The causes for that are many. The state has a role in helping address some of those including poor education and health either directly through its own programmes or indirectly in funding other groups to help.

It also has an obligation to do so in a way that tackles the real problem of poverty, not one that merely addresses the symptom of inequality.

#gigatownoamaru is seeking to provide opportunities for entrepreneurs by becoming the fastest town in the Southern Hemisphere.


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