Much of the Thinking Around Economic Inequality is Flawed: Here’s Why

The pie fallacy is often an assumption most people begin with when researching economic inequality, not an evidence-based conclusion. On a subconscious level, much of the thinking going around goes, “the rich and their allies are grabbing a mammoth portion of the global or national income. Therefore, what is left is not enough to go around”.

Now the pie fallacy has its provable side. At least decades of studies show that it is true to some extent. But to the average Nigerian, wealth is a static pie that is shared around. If one person gets more, it’s most likely at the expense of another person.

It takes concerted reorientation to remind ourselves that this is not the real-world scenario. In the real world, anyone can create massive wealth by creating value.

For instance, a chef creates wealth when she makes sumptuous meals that quench your hunger. And you willingly hand her your money in return. On the other hand, a high-frequency FX trader does not create wealth in that manner. She earns money only when someone on the other end of a trade loses. The more losses the other person makes, the wider her smile to the bank.

When a select few get rich by taking from the majority poor, then we have a serious case of economic inequality. In this case, the cause of wealth is the same as the cause of poverty. However, most cases of economic inequality don’t work this way.

If one chef serves 100 customers/day and another serves 10, the second chef will earn less. Provided that their earning per customer is the same.

Even the most educated segments of our population fall for the trap of the pie fallacy when they explain economic inequality by comparing wealth from one quantile or percentile to another. The supercharged discourse on economic inequality makes it easy for us to slide from talking about these quantiles and percentiles as a metaphor into believing it to be the reality.

Except in cases of outright illicit transfer of wealth (over a period), economic inequality cannot be explained by curves or ratios. In its “realest” form, it involves multiple ways people get rich or poor. To grasp economic inequality, we must study both rich and poor individuals. And why they wound up the way they do.

There will always be people who get rich by making others poor. However, there are those who are getting rich by creating wealth for themselves and others. People’s wealth creation capacities will always depend on their level of understanding, skill level, patience to go through the process and the tools and opportunities available to them. This will not only influence how they create wealth but also how fast they create it.