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
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.