American politics—especially the people with a redistributive penchant who work the left side of the aisle—is fascinated with the metaphor of the economy as a big pie. Like any static, physical object, pies can be cut into pieces, and those pieces can be measured out equally or unequally. The pieces can also be subtracted from the pie and handed out on separate plates. This is a metaphor that seems to drive the American political psyche.
And it’s totally bogus, of course. A national economy isn’t static. It isn’t a physical object. And if you could somehow cut it into pieces and give it away, it would cease to exist entirely.
So what is the economy? Like many other complex things, it’s a process. A national economy is a vast web of transactions mediated by money. The proper metaphor would be an ecology, and money is the energy that drives it, as sunlight—converted by photosynthesis into carbohydrates and then by DNA into proteins—drives a forest community or the ocean ecosystem.
There’s another metaphor of the American economy, supporting the pie theory. Think of the Monopoly mascot, the fellow with a top hat hauling bags of coins, the original robber baron. I also think of an old Disney cartoon, where Scrooge McDuck keeps a bank vault in his back yard, and inside the vault is a swimming pool filled with gold coins. Every day, Scrooge puts on his swimming trunks and dives into this pool. Think of Bill Gates or Warren Buffett splashing about in piles of gold coins.
That’s bogus, too. People with great wealth don’t lock it away in vaults—not if they want to keep it. Piles of money erode in any dynamic economy, primarily through inflation and the loss of what economists call “opportunity costs.” Instead, rich people put their money into stocks, bonds, and other investments that become the capital that other people use to make the economy run. Gates or Buffet may have their name on the paper certificates, but the energy value of their money is working for someone else. Those others are creating goods and services, and in the process creating jobs and income for still more people, who eventually spend their money on other goods and services.1
This is exactly the process of an active and healthy ecology. The forest canopy, for example, locks sunlight, carbon dioxide, and minerals into fresh green leaves and seeds—carbohydrates, which are the most portable form of that solar energy. Eating them supports the insects and herbivores, who in turn make proteins and other energy-rich molecules that provide a living for the carnivores, who in turn concentrate more proteins, living and dying to feed the worms and grubs in the forest floor, who release those compounds into the environment for the tree to absorb and grow again.
But don’t some rich people also waste their money—locking it away in actual gold coins, yachts, artworks, and bits of jewelry? There’s not much spreading of the wealth in the making and selling of such frivolous baubles, aside from the incomes of boat builders and diamond cutters.
True, but think of these non-dynamic investments as the wood of the tree, locked away from the current generation of eaters and diggers for years at a time. Eventually, however, the tree falls, and then the fungi and beetles on the forest floor turn it back into nutrients. The tree cannot own its carbon, merely hold it for a while. Similarly, Warren Buffett might buy the Hope diamond, locking away part of his wealth for a generation. But eventually he or his heirs will sell it and release the money he gets in exchange into other, more profitable investments.
And if Gates and Buffett want to give part of their wealth to charity, that’s just another kind of investment, another way of returning energy to the economy. People who work in charitable foundations support artists or educators or scientific researchers or others creating value for society. And they also buy food and housing and cars and refrigerators, just like the people who work at Microsoft and other capitalized companies.
So, too, do the people who work in government and take part of Gates’ and Buffett’s wealth in taxes. The question is whether what those government employees directly produce has value for society. Yes, in the case of roads and bridges, schools and parks. Not so much, in the case of complex rulemaking that requires an army of lawyers to understand and an army of paper pushers for compliance. Government employment is simply a way of sopping up excess energy in an overly productive society. Think of Egyptian pyramid building or Nazca line painting—they keep the peasants busy while you distribute wealth from the public granaries.2
How do I know the pie metaphor is bogus? Because when you cut down all the trees—removing the wealth of the forest canopy for immediate consumption—the forest dies. When you cut down a rainforest, the result is a desert. Life still exists there, of course, but without all the niches of the forest canopy, that life functions at a much lower level of energy.
Every purely redistributive economy ends up creating an economic desert. Think of the Soviet Union, Maoist China, and North Korea. It isn’t fair, but it’s the way ecologies work.
1. As a mental check on this, consider passing the Bill Gates Special Tax. Do you think he’s unfairly compensated and inadequately taxed, even at 39.5% or 50% or even 90% of income? Okay, pass a law that by Monday morning he has to pay a special $64 billion tax on his reputed $65 billion net worth. Let him keep just $1 billion for personal use, like any honest millionaire. The result, as he scrambled to divest his shares of Microsoft stock and other assets, would be a collapse of value in the technology sector and anywhere else his money was at work. No piles of gold coins there.
2. What a difference from the human experience forged by 100,000 years of the hunter-gatherer lifestyle! There, bringing down a mastodon or finding a whole field of ripe berries, where we could fill our stomachs to overflowing, purge and gorge again, was considered to be the good times. But in an organized society, where the product of the fields flows to the bakeries and out to store shelves, having too much productive capacity and insufficient demand means recession or depression: work stops, people lose their incomes, bad times descend.