Economic Inequality Is a Red Herring

“There’s nothing wrong with working for minimum wage, just as there’s nothing wrong with being unable to touch your toes— but if you wish to make more money, you must gain valuable skills, experience, and perhaps start stretching.”

Economic inequality has become an axiomatic issue in many circles, often invoked by the current Democratic presidential candidates. It’s self-evident, apparently, that for some people to be wealthy while others are poor is inherently objectionable. The argument is as follows: Money is a finite resource in a zero-sum game (beneficial to one at the cost of the other). Therefore, those who capture a larger share do so at the cost of others. Thus, vast wealth is responsible for vast poverty. Put another way, economic inequality is a problem because the rich are wealthy at the cost of the poor—the richer the rich, the poorer the poor. In this framework, having wealth is not only unjustifiable; it is immoral.

The assumption that money is a finite resource in a zero-sum game is simply incorrect, though it’s easy to conceptualize it as such. We often think of the economy like our personal bank accounts, which are finite indeed. But instead of a bank account, the economy should be thought of as an expanding network of mutually beneficial transactions. Being a part of the economy makes you a shareholder, and when it grows, we all benefit.

Economic inequality is a red herring because it distracts from not only the real problem, but the real solution.

In a free market, a business makes money by fulfilling market demands. A consumer will purchase a product or service if the value it provides is equal to or greater than the cost. A business will sell a product or service if the value it brings to the consumer is greater than the cost to produce. Both the consumer and the business gain from this transaction. With the revenue made from these exchanges, the business pays workers for their time and expertise in helping to create and manage newer and better products and services. These individuals become customers for other businesses, and the cycle repeats. Clearly, money is not gained at the cost of others. Rather, such an economic system is a universally beneficial positive-sum game. In fact, in a free market, the business will fail if the relationships are not mutually beneficial. Since money is a generative resource in a positive-sum game, the rich are not benefiting at the cost of the poor. In fact, it’s the opposite: The rich are earning money by giving everyone what they want.

It should be noted, however, that consumer-business relationships are not always positive-sum games. This would be the case if the consumer didn’t have the freedom to choose from competitive options, like in a monopoly or nationalized industry. If there is only one seller of the product, or if it’s produced and mandated by the government, the price may very well exceed the value that it provides, and therefore the sale will benefit one party at the cost of the other. Similarly, if corporations are supported by taxpayers through excessive subsidies, preferential licensure, or bailouts, businesses no longer have to innovate and compete, thereby keeping prices artificially higher. Crony-capitalism of this sort weakens the capacity of an otherwise free market to provide economic opportunity to everyone.