Several seemingly unrelated current policy debates, such as college admission policies, diversity in the workplace, income inequality, and tax reform, are aspects of the same underlying issue. Because we do not fully understand the issues involved, we often get policies wrong.
In the public debate, these issues are framed in terms of “fairness” or “equity” or “equality.” This is because the natural human way of considering these questions is in terms of zero-sum thinking. We tend to think that, since the number of freshmen at Harvard or the number of engineers at Google is fixed and constant, then the only policy question is, who will get these admission letters, or job offers.
Similarly, if the CEO earns more money, then zero-sum thinking leads us to believe that workers must get less. The same kind of thinking will pervade discussion of tax policies when Congress takes up this issue.
Zero-sum thinking is natural to humans. This may be because our minds evolved in a largely zero-sum world, with little economic growth or technological evolution. It may also be because for most day to day decisions, a zero-sum description is adequate: There really are only so many freshmen at Harvard, and Google really does hire only a certain number of engineers in each year.
Think of an analogy to flat-earth theory. For most decisions (unless you are an international airplane pilot) flat earth thinking is adequate. Similarly, zero-sum does describe many short run decisions.
But it really does matter who gets into Harvard, because in the long term the world is not zero-sum. If Harvard has an admissions policy based on pure merit (as does CalTech) then the human capital created by a Harvard education is going to be maximized. That is, if the students admitted to Harvard are those who can best use the education, then the value of the education will be as large as possible, and the graduates will be as productive as possible.
Since more productive people create more social value, everyone benefits if the right people are admitted. Of course, Harvard is a private school and should be able to do what it wants, but it should not get away with fallacious assertions about the benefits of its policies.
Similarly, if Google hires the best engineers, then its products will be as good as they can be, and we will all benefit. If the company hires less productive engineers in the interests of some sort of “diversity”, then the products and services will not be as good. Even the now-famous memo by James Damore, the recently-fired engineer at Google, did not discuss the productivity aspect of diversity.
How about income inequality? Economic theory tells us that people are paid based on their contribution – their “marginal product.” Some people will earn more because they have larger marginal products than others (perhaps by several orders of magnitude). The money available for incomes is not a fixed pool to be divided up; it depends on the total productivity of the economy. Large earnings differences mean that more productive people are being allocated to those activities where their productivity is greatest, and this creates the largest pie for us to share.
Similar issues will pervade the coming debate on tax policy. Policy alternatives will be framed as “fairness” – do the rich pay their “fair share.” But this is zero-sum thinking. Different tax schemes have different implications for the size of the pie, and the goal of tax policy should be to raise government revenue with the minimum effect on the size of incomes. If we lose sight of this goal in seeking fairness, then we will all be poorer.
In general, zero-sum thinking, a result of “folk economics” (the economic beliefs of untrained people), is probably the source of most errors in economic understanding, such as a preference for tariffs or immigration restrictions. If we economists could teach people that the world is not zero sum, we would perform a great service.
Paul H. Rubin, a former Reagan administration official, is Dobbs Professor of Economics at Emory University.
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