Everyone is talking about income inequality again and the argument is the same as it’s ever been: the rich are taking all the money from everyone else and we need to take it back in order to make things fair. More recently, Paul Graham tried to help by arguing that we should differentiate WHICH rich people we should take money away from (Wall Street, not Silicon Valley). Ezra Klein replied by saying “duh, that’s what we’ve saying all along, what else is new?”. We have candidates on both sides of the presidential campaign making this a central issue in their platforms, and it goes on and on...
This sort of debate is known as the “pie fallacy”, a term usually attributed to this quote by the renowned economist Milton Friedman:
“Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another”
Friedman is basically implying that our obsession over “fairly” slicing up the existing “economic pie” overlooks a much more important question: How can we make the pie bigger for everyone? Another way to look at it is to consider whether you'd rather live in 1950s USA, when inequality was at its lowest but we had racial segregation, a thermonuclear arms race and no internet or today's America? Sure, we had quite a few things get worse in the last 60 years, but life has gotten MUCH better overall. That, in a nutshell, explains the "pie fallacy".
Does this mean income inequality is not important? Absolutely not. As Paul Graham, Ezra Klein and others articulated, let’s solve inequality whenever it’s detrimental to making the pie bigger (e.g. high frequency trading, too big to fail, unfair lobbying, etc). However, once you do that, get back to work on making the pie bigger!
So, next time you hear a very politically charged discussion about income inequality, remember that it is actually just part of the puzzle. The more important question, for ourselves and our leaders, is and will always be: “How can I make the world a better place?” This question is open for everyone and doesn’t require permission to be solved. In fact, you can start solving inequality today by innovating around the areas that keep people in poverty. I and everyone else in the world hope you do!