FEB 9: The best way to measure a tax system is in terms of its “fairness.”

As I write this, the U.S. Congress has just passed a massive tax bill. In the media, most of the discussion of the bill has been in terms of “winners and losers,” and whether too much of the bill goes to the rich. This is zero-sum analysis. The relevant economic issue is the long-term effect of the bill – will it lead to more investment and to more growth of the economy, which will also benefit lower-income citizens? While economists have addressed this issue, most of the debate has ignored it or treated it as secondary. If we are to have a large and efficient economy, long-term effects must be considered, but zero-sum thinking tends to ignore these effects and assume that the immediate effects are the total effects

FEB 10: Labor market regulations, such as minimum wages, have no impact on levels of employment

The zero-sum thinking behind this assumption is immediately obvious. In a zero-sum world, the number of jobs is fixed, and an increase in the minimum wage has the immediate effect of increasing the incomes of low-wage workers. In reality, a firm may respond in several ways to an increase in the minimum wage. For some examples: The firm can substitute capital for labor (electronic kiosks and burger machines at fast food outlets); reduce worker training and other aspects of job quality; and increase prices of products, which will lead to reduced sales and so reduced employment. Since many products produced by minimum-wage workers are purchased by lower-income consumers, this increase in prices will harm the intended beneficiary of the increase, in addition to the loss of jobs.

FEB 11: A society can reduce or eliminate inequality in the income distribution with no adverse impacts

Dislike of inequality in income distribution is ultimately based on zero-sum thinking. There is an assumption that the total income of society is fixed, and if some get more, then others get less. But incomes are not “distributed”; they are earned. Inequality is caused by differential productivity of workers and ownership of capital. Low-productivity workers earn lower incomes, and more-productive workers, or those who own capital, earn higher incomes. The best way to reduce long-term inequality is to increase productivity, for instance, by increasing and improving education. Any effort to increase short-term equality will have unfortunate incentive effects. A society may still decide to reduce inequality (e.g., by having a social safety net), but we must be clear that there are trade-offs, and increasing equality (division of the pie) will have incentive effects (reducing the size of the pie.) For example, higher-income workers may choose to work fewer hours or to retire earlier or take less-productive but more pleasant jobs in response to increased taxation. Capital owners may decide to invest in lower-expected-value but less-risky endeavors in response to capital taxation.

FEB 12: A desirable economic policy can be based on “From each according to his ability, to each according to his needs.”

This slogan was used by Karl Marx in Critique of the Gotha Program (Marx Reference Marx1875–1970), but it had been used by Communists and Socialists since about 1755. Both halves of the proposition are clearly based on zero-sum thinking. The amount that someone produces is based not only on his ability, but also on incentives. Indeed, ability itself is based on incentives for creation of human capital. Similarly, needs are not well defined, and they are subject to the law of demand. For example, we commonly err in calculating costs of medical programs by ignoring the elasticity of demand for medical care as prices change.

Other aspects of Marxism are also based on erroneous folk-economic beliefs. These include the labor theory of value, which applied to our nomadic ancestors but is no longer valid; the theory that a complex economy needs central direction to work well; and the notion of conflict between labor and capital (or between race, class, and gender) when in fact factors work cooperatively together to produce output. It is ironic but also tragic that Marx called his theory “scientific socialism” when in fact it is based on primitive folk-economic beliefs. The deep nature of these beliefs may explain the popularity of Marxist or strong socialist beliefs even though Communism has failed whenever it has been tried, with the best current example being Venezuela.