The Economic Pie Metaphor

Too many people think of the economy as being a pie. If the economy is a pie, then the socialists are right that it is unfair that the rich have more, because they had to take it from someone else. This would mean that every economic transaction would result in one person being better off, the other person being worse off. But the pie metaphor is simply incorrect. Economies grow, and it is the element of growth that is completely ignored in the pie metaphor.

In a true economic exchange, party A has something of value (object 1) to party B. Now, if party B wants to get object 1 from party A, they have to offer something to party A that is more valuable to party A than object 1 is to them. Naturally, party B will choose something that is also of less value to him than is object 1. As a result, party A will get something of more value to him than was object 1, and party B will get object 1, which he considered to be more valuable than what he exchanged for it. This economic exchange boils down to : “If you do something good for me, I’ll do something good for you.” Both parties are better off after the exchange. Wealthy people in a free market are wealthy precisely because they engage in more of these exchanges than do other people. They dedicate more of their time to making economic exchanges.

One problem I oftentimes see when people make anti-economic arguments is an objection to certain kinds of exchange. There is the assumption that they know more than the two engaging in the economic exchange what has what value. The assumption is that things have an inherent value, making economic exchanges absurd. This would mean that you are either exchanging things of equal value, in which case nobody is better or worse off, or something of high value is exchanged for something of low value, in which case someone is better off. The assumption here, then, is that the rich are good at tricking people into exchanging something of high value for something of low value. But things do not have inherent values — we give things value. And it is arrogant of someone to decide that they know better if something is of value to you or not. Such people are elitists — those who favor free markets are in this case the true egalitarian thinkers.

The pie metaphor implies another kind of exchange: “Unless you do something good for me, I’ll do something bad to you.” This is the kind of exchange government engage in — and those who support government intervention do recognize this, only they assume that all exchanges are like the government’s form of exchange. The presumption then is that since all exchanges are of this sort, we might as well put the government in charge of them. This kind of exchange has the effect of enforcing the pie metaphor, since inevitably one is exchanging something of more value for something of less — this results in “negative growth”. If we balance out growth with negative growth, we end up with a non-growing economy, and then we do indeed have a pie that gets divided up.

Fortunately the U.S. economy is not quite in that situation. Thus, the rich get richer by making everyone else better off as well. A free market economy is not a pie–it is not a zero sum game–rather, it is a positive sum game. That’s the only way we could have created the incredible amount of wealth we see in the world out of a world where aboject poverty dominated almost all of human history.

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