Why You Shouldn’t Fret When The Rich Get Richer: The Fixed-Pie Fallacy

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Fixed Pie FallacyThe belief that there exists a finite amount of wealth in the world. An increase in the wealth of one party necessitates an equal reduction in another’s. 

The Fixed Pie Fallacy is one of the most pervasive myths in the world today.

We cringe when we hear statements like “the wealthiest 5% of Americans control 80% of the wealth”, implying that there’s some sort of inequity with such an uneven distribution.

There is a difference between “wealth” and money”.

Once we acknowledge this separation, we can clear up this misconception.

“Wealth” can be defined as anything of value to members of a society. In other countries, it might be cattle. Elsewhere, it might be crops. Money is just the most common medium for transferring wealth.

Every time someone devises a new way of doing something, alters an existing product for the better, or facilitates the transfer of desired resources wealth is created.

Some examples:

An artist takes an old tire, some coffee cans and paint. She constructs a statue. Someone buys it because they think it looks beautiful.

Wealth was just created.

A college student spends a weekend fixing up his 15-year old car. With a new paint job, reupholstered seats and a new hood ornament, he sells it to a local car enthusiast. What was once valued at $500 is now sold for $2000.

Wealth was just created.

A local musician records a new rendition of the Star Spangled Banner. He sells 1000 copies of it on iTunes.

Wealth was just created.

Robber Barons

Clever cartoon, but somewhat inaccurate. These titans did much more for society than they get credit for.

There’s a reason star performers get paid seven figures to do what they do. Boards of Directors understand that top-tier producers create more value. Their talents are leveraged to carry organizations to new heights.

Google’s famed “20% free-time policy” for its employees is a manifestation of this. Google knows that intellectual and physical resources are engendered every day by people of all ages around the world. It behooves them to encourage employees to innovate on company time.

Take a closer look at the belief that we live in a fixed-pie society and you’ll see just how silly it is.

If there was no way to create new resources than we’d never enjoy new products and services. To be compensated for their efforts, new companies would have to forcibly seize funds from other entities already in existence. New companies and organizations can’t be sustained on well-wishes and good feelings—they need cold, hard cash to stay afloat. Remove the incentive to get rich by creating value for others and invention will grind to a halt.

The Fixed-Pie Fallacy wreaks havoc on negotiations and impairs ability to reach settlement. There are very few negotiations that are strictly distributive negotiations (i.e. If I gain $50 dollars, you lose $50). Most bargaining sessions provide opportunity for “win-win” settlements and mutually beneficial trade-offs. Zero-sum mentalities (i.e. “if he wins, I lose”) make this extremely difficult to accomplish.

Open minds beget satisfactory solutions. Focus on expanding the pie as much as possible, then claim value for yourself.

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