The “fixed pie” fallacy in economic thinking, as expressed by writers such as Hilaire Belloc, has served the class warfare crowd well despite lacking any basis in reality. “The historical reality of entrepreneurs gives the lie to two of Belloc’s assumptions: that the wealthy can maintain luxurious living standards by sitting on their wealth, and that capitalism prevents the poor from working their way up the economic ladder,” writes Charles Kaupke in the latest Acton Commentary (published August 8). The full text of his essay follows. Subscribe to the free, weekly Acton News & Commentary and other publications here.

The Rich Don’t Make Us Poor

by Charles Kaupke

We’ve been hearing a lot lately about the need for the wealthy to “pay their fair share” so that the federal government can pay down its debts and continue to fund programs to provide basic human necessities for the poor, such as food, shelter, and prophylactics. Their argument is that the greedy rich have been stealing increasingly large percentages of the nation’s GDP, and have been hoarding their riches, rather than generously giving them to the federal government to be used for the common good. The only solution is to increase taxes on the rich, so that instead of letting billionaires covetously hold onto (and thus waste) their excess wealth, which they don’t really need, the government can take that cash and use it much more effectively, to give the rest of us free stuff. After all, it just isn’t fair that some Americans control billions of dollars’ worth of wealth, while others struggle to make ends meet.

Sounds plausible, right? Of course it does. Unfortunately for those who make a living out of inciting class warfare, it’s not true. There are a number of errors embedded in the above explanation of our nation’s woes, but let’s cut to the central one: the fallacy that there always has been and always will be a fixed amount of wealth in the world, and that wealth is merely shifted back and forth among people, but it is never really increased. Economists call this the “fixed pie” fallacy.

This is not a new fallacy. In fact, it’s been around for almost as long as economics has been a science. Let’s look at one relatively recent example: in his 1912 work The Servile State, English historian Hilaire Belloc presents his case against capitalism, arguing that by its very nature it is immoral. Belloc – who was not an economist – has become especially popular among some Catholics who decry capitalism as being antagonistic to Christian social and political virtues, and who pine for the idyllic days of subsistence farming and feudal lords. For many of these people, The Servile State is their only exposure to economic thought. This is a shame, because Belloc is a prime example of someone who fell for the fixed pie fallacy.

Belloc defines capitalism as a “society in which private property in land and capital, that is, the ownership and therefore the control of the means of production, is confined to some number of free citizens not large enough to determine the social mass of the state, while the rest have not such property and are therefore proletarian.” The definition Belloc offers is a sign of a deeper mistake on his part: the belief that economics is a stagnant business. His definition of capitalism paints a picture of the wealthy few hiding their money in mattresses, while the rest of us languish with no hope of ever acquiring wealth or living well.

I suppose there could be instances of that happening, but they certainly won’t continue for any sustained period of time. Think about it – if the wealthy hoard their money and don’t do anything with it, how do they support themselves? You don’t live well by having money; you live well by using money. In order to use it, you have to give it to someone else in exchange for goods or services that they give to you. Entrepreneurs get wealthy by using their resources to provide others with jobs. This increases their own well-being, as well as the lives of those they hire; both employer and employee benefit by being part of a useful business from which they can make a living. So the idea that the wealthy are able both to hoard their money and to live well, even affluently, is absurd.

Historical reality bears out the fact that in capitalism, people become rich by putting what capital they have to good, productive use, and that anyone, no matter how poor they start out, can become wealthy. Mitt Romney’s Bain Capital, which leftists love to hate, and other venture capital groups risk their own money to provide small entrepreneurs with the means of jump-starting their companies, providing jobs both for those working in venture capital firms, and those employed by entrepreneurs.

Many famous entrepreneurs, such as Henry Ford, Sam Walton and James Cash Penney became fabulously wealthy not by hiding their money in a mattress, inheriting it, or cheating on their taxes, but by delaying gratification, providing workers with decent paying jobs, and putting in long hours for years, to build and maintain successful companies that serve their employees and their customers well. The historical reality of entrepreneurs gives the lie to two of Belloc’s assumptions: that the wealthy can maintain luxurious living standards by sitting on their wealth, and that capitalism prevents the poor from working their way up the economic ladder.

Sadly, it seems that many Americans, including the Occupy crowd and even our own President, are not aware of the unique and amazing power of entrepreneurship: the ability to use our resources and God-given talent to better the lives of those we work with and those we serve. Only when we as a nation remember that the phenomenon of money can be used in a dynamic way to participate as co-creators with God, will we begin to work our way out of the economic mess we are in.

  • jpaYMCA

    I doubt this author actually read The Servile State, because Belloc is much more precise and well-armed with historical examples of the same reality: LAISSEZ-FAIRE Capitalism allows the richest of the rich to stifle competition, too, as did one of your exemplars, Henry Ford – I’m sure you know the history behind his “railroad venture”.
    True, Belloc did not obtain a degree in Economics, as if such a degree was offered at Balliol. Still, his History degree allowed him to make precise comparisons between the general state of the “proletariat” and those who serve – in some form or another – the beaurocracy FOR whom they work.
    As Fr. Sirico mentioned in his latest interview: the market is morally-neutral. I think Belloc would applaud that statement … but he would ask the follow-up: how does one prevent market-madness from becoming a Darwinian fight to the death. Historically (Belloc’s expertise) shows this to be most common.
    Finally, is there anyone at Acton who would be willing to do a serious and thorough study of Fr. McNabb, Belloc, Chesterton, et al.? Remember, they may not have specialised in economics at the University, but they studied in an era during which economics was part of history – obiter – and of philosophy, principally.

  • Roger McKinney

    Bastiat revealed the fallacies of McNabb, Belloc, and Chesterton before they were born.

    The rich have no power to stifle competition except that which they purchase from a politician, and that is not laissez-faire; it’s a flavor of socialism at its finest – fascism.

  • http://www.facebook.com/kfbjornbak Ken Bjornbak

    Charles, I love it
    when young people step up and comment about things which they are passionate. They usually make the same missteps you have
    taken in this essay. They forget all the
    lessons they paid so dearly to have presented (and did not learn) and run wild
    with their passion exposing their ignorance.

    Let us start at the
    top. You state “We’ve been
    hearing” you really should define those you are including in this group of
    “we”, Personally I have not been hearing this. You then include “the wealthy” in
    its own sub group without defining what “Wealth” is. Now you are thinking “this guy is just
    nit picking” ; no, I am pointing out that you have lost your audience
    before you have made your true point.
    The inclusion of the words. “human necessities for the poor, such
    as food, shelter, and prophylactics” is simply argumentative and you
    lost another group of potential readers
    and converts. All this in your first
    (run-on) sentence.

    Your second sentence
    reinforces the need to hit the rewind button.
    Who are the they in “Their argument”? It may seem to be clear to you, but your poor
    reader is left wondering what you are implying. Since no one of real
    consequence believes or even suggests the statement you follow with:

    “the greedy rich have been stealing
    increasingly large percentages of the nation’s GDP, and have been hoarding
    their riches, rather than generously giving them to the federal government to
    be used for the common good.”

    High income (over
    $250,000 taxable after legitimate deduction) should be taxed a larger
    percentage of earned income over $250,000 than earned income of say less than
    $50,000. We have a progressive tax
    system. Which means that as taxable
    income increases and entity is taxed more.

    Do you see you have
    not yet made a case for your central premise
    “the fallacy that there always has been and always will be a fixed
    amount of wealth in the world”. You
    have not debunked the current theory of “scarcity” nor established
    the idea of an economy based on “abundance”. You really need to
    establish your point before you expand your argument. Understand, you have not stated an economic
    premise but a moral argument to this point in your essay. You have jumped from the moral responsibility
    of a civil society to the economic realities of
    a damaged and hurting economy.

    How did you come to
    the conclusion that the “central error” embedded in “their argument” is the
    “fixed pie fallacy”, when you have not put forward for discussion any
    other possibility?

    We have adopted the
    concept of scarcity as if there was no other solution or explanation to our
    current state of economic affairs. But then this is your essay I am critiquing. Let’s explore your Belloc comments.

    You have chosen to
    fixate on one particular aspect of Belloc’s work his 1912 essay The Servile
    State: his definition of Capitalism as it was in 1911. In his introduction the forth paragraph
    Belloc states:

    “I shall not
    undertake to judge whether this
    approaching organization of our modern society is good or evil. I shall concern myself only with showing the
    necessary tendency toward it which has long existed and the recent social
    provisions which show that it has actually begun.” (Belloc, H. 1912 The
    Servile State, p.4 Neil and Co., Ltd Edinburgh, UK)

    In doing so you have
    fallen for the other aspect of your conversation. You are ignoring the reality of time and
    place in which Mr. Belloc , a historian, poet and statesman, was writing, the
    months just prior to the start of World War I.
    To take his work out of context is to lose the lessons and observations
    of a skilled writer and statesman in place as the history which formed our
    current views occurred.

    Had
    “Capitalism” continued on its then present course you likely would
    not have opportunity of the education you should have received from Thomas Aquinas College.

    It is nice you
    mention that “Historical reality bears out the fact that in capitalism,
    people become rich by putting what capital they have to good, productive use,
    and that anyone, no matter how poor they start out, can become wealthy.” Yes that is partly true it is also partly
    true that many “Capitalists” gained their wealth by steeling it. Others unregulated or deregulated obtained
    great wealth by legally or illegally defrauding the masses. You may chose your own heroes and villains.

    May I point out that
    Free Market Capitalism is so good a scheme even the Communist Chinese have
    adopted it as a working model.

    Now lets get back to
    Belloc. You make a lot of statements for
    which you offer no citations. Next time
    you publish lets hope you have the foresight to be kind to your reader and
    offer along with your observations the source pages and other significant
    information that will help a rationally thinking person to verify your
    observations.

    “You do not
    live well by having money you live well by using money”. You are absolutely right. While being guilty of being absolutely naive. Venture capital companies do not lend to get
    you started and then quietly go away.
    They are in it for the ownership and the sale of the improved product
    your company. Venture capitalist do not
    come into town to build a company and economic base for a thriving
    community. Venture capitalist build a profit center and develop a product,
    which as soon as they determine where they can move production to increase
    THEIR profit they out source and leave
    an empty building.

    J.C. Penny never did
    that, J.C. Penny gave away 90% of his earnings keeping only a tithe for himself
    and then paid the taxes on that tithe.
    Henry Ford kept his money in a safe in his Dearborn, Michigan office he
    did not trust banks or venture capitalists.
    Sam Walton refused to buy products form foreign production unless he
    could not find American manufactures. It
    was not until he died that Wal-Mart and Sam’s clubs turned away from that
    policy largely because of their huge presences around the world.

    When you build a
    business, birth it, make it work and provide many people in your
    community with livable family wages and opportunity to accumulate a bit, so
    when your child comes to you to barrow 100 grand for college you remember this,
    your child did not earn that money so what makes you think they will pay it
    back?

    You have mentioned
    three heroes on Capitalism. But you left
    out the villains the junk bonds and derivatives, deregulated trucking, deregulated
    mortgages, fixed market buying and claim jumpers, contract manipulators, purveyors of fine print and fancy words, drug and chemical companies and actuaries that says when people find
    out we will still have made billions more than the fines so go ahead. And of course the poster boys of capitalism’s
    ill-gotten gains Ponzi and Bernie
    Madoff.

    But hey this is your
    essay and right now you do not sound like a guy that has to worry too much
    about an extra percent or two above $250,000 of taxable income so relax.

    • http://www.acton.org/ John Couretas

      Mr. Bjornback: You “lost your audience” at the very beginning when you
      started in with this terribly condescending and smug tone. What’s more, you
      pretend to be deaf to what Charles is writing about and everyone else is hearing. Here’s a reference
      for you from one prominent speaker:

      Obama: Millionaires should pay ‘fair share’
      http://content.usatoday.com/communities/theoval/post/2012/04/obama-live-on-the-buffett-rule/1#.UCVeDqCQEa8

      President Obama promoted his “Buffett Rule” again today, saying
      millionaires and billionaires should pay their “fair share” to help
      reduce the federal debt and pay for necessary government investments
      like education.

      “One in four millionaires pays a lower tax rate than millions of
      hardworking middle-class households,” Obama told a group of business
      executives gathered at the White House.

      He later added, “it’s just plain wrong that middle-class Americans pay a
      higher share of their income in taxes than some millionaires and
      billionaires.”

      • http://www.facebook.com/kfbjornbak Ken Bjornbak

        Mr. Couretas: I am sure I did lose the majority of my audience and I thank you for your response. To you and to Mr Kaupke, I did it on purpose and I am sorry.
        I only had a few individuals in mind as I wrote, Mr. Kaupke being chief among them. Had Mr Kaupke took the time and effort to write his essay to persuade or to inform his public of a rather misunderstood position or to bring to light a fallacy to be avoided he would have received a more supportive comment. Yet, like so many young people starting out he chose to insult and goad the poor and in most cases defenseless in favor of scoring a few cheap shots, while advancing the class warfare he was feigning to eschew. I have lived the life on both sides of the financial curve and could really not help myself but to be smug and condescending.
        As you know, personal finance is not a matter of economic theory or necessarily policy. We also know government policy, government’s actions or lack of action, is only an excuse for those who shape the economy to act or not act. In our free unregulated (mostly) market, it is the capitalists who control the economy, the rich if you will. The study and the essay should be written concerning the lack of concern on the part of American business for the economy at home while the controllers (those who make the business plans and have a say) send millions of jobs, work being done by the proletariat, overseas and forcing those domestic proletariat to even more dependence on the public charity.The Wealthy Won’t Make Us Rich, nor can we tax our way out of debt but when we restore employment for those without a college education, which will go a long way to restore the economic base of our population, the need for deficit and the debt itself can be resolved. Write about that, after all there is no single magic bullet or pill to cure the economy, we have too many items to correct, it is time for work and less rhetoric.

        • Roger McKinney

          “In our free unregulated (mostly) market…”

          You have made a lot of errors in your post, but that is the most egregious. There is nothing free or unregulated about our economy. Since 1970, the Federal Register of new regulations (not total, but brand NEW regulations) has averaged 70,000 pages each year. The rate of new regulations was much higher under FDR and will be much higher under President Obama.

          In your previous post, you repeat that you have never heard people say the things that Kaupke claimed they said. Well I have and many times. You really should get out more and read the daily news.

          If you understood economics, you would know that only the wealthy, and no one else, can improve the living standards of the middle and lower classes. The most uncontroversial principle of economics is that wages increase only with increases in productivity; productivity increases only with better equipment; only the wealthy have the money to buy better equipment for workers to improve their productivity and increase their real wages.

          Neither charity not the state redistribution of wealth will accomplish that. In fact, both hinder wage increases for workers because they limit the funds available for investing in better equipment.

          • http://www.facebook.com/kfbjornbak Ken Bjornbak

            Roger McKinney, I am glad to see that you are open for conversation and that you seem to actually agree with several aspects of my post and you have the writing skills to articulate our thoughts without resorting to my regrettable transgression.
            If you would re-read Mr Kaupke’s first and second sentences I am sure you will understand that though he thinks he is being cute, he is being insulting to people who in the vast majority are down and out due to circumstances beyond their control. He is also making assumption that in the true balance do not accurately reflect the facts of our economy today. In fact I see this essay as a thin cover for a comment about personal finance rather than true economic theory.
            I would enjoy continuing this conversation but on a different channel perhaps facebook message you can find me there. Or if Acton has a solution I will be happy to use that. I just don’t wan to irritate the Moderator further than unnecessary.