Hacker News Reader

Comment by javert | Hacker News Reader

This article is pretty interesting and well-written, but hypes up a major fallacy:

Just as the concentration of wealth at the very top reduces wealth at the bottom, the aggressive hoarding of intellectual capital in the most sought-after colleges and universities has curtailed our investment in less prestigious institutions.

This is just the the fallacy that the economy's wealth is a fixed pie; if I get a bigger slice, you must get a smaller one. But wealth and prosperity are not a limited resource. I think it's fitting that the author supports this fallacy with a quotation from the Bible.

By the way, I'm not just talking abstractly. The point made by the author is also just flat-out wrong. More and more people are going to college - now, you practically have to have a degree - because we've been spending tons of money on public higher education. Think of the California public schools; the North Carolina ones (we have 14 public universities!), etc.

View on HN

1) No fallacy, if the the Pie gets bigger, but a small percentage of people get an increasingly larger percentage of that pie, inequality is increasing. 2) The author did state that more and more people are going to college. Thus if you have a fixed size of "Ivy League schools" a smaller percentage of the total will get into the top schools.

But the passage I'm citing isn't about inequality increasing, as you're discussing. It's about people at lower levels getting less, in an absolute sense. Which is a fallacy.

I'm not sure I see how this is a fallacy. Can you explain even anecdotally?

“Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.” -Milton Friedman

I just googled "Fixed pie fallacy" - I was assuming (probably wrongly) that most people were familiar with it. I'm not even certain Friedman was the first to identify it.

The first thing I come up with on Google is [1]. It's a decent overview.

[1] http://mjperry.blogspot.com/2006/12/fixed-pie-fallacy.html

Harvard is not fungible.

Right, but top-quality education is fungible.

Not everybody needs to go to an Ivy League, just like not everybody needs to own a 75-ft yacht.

I'm OK with that.

If the quality we're interested in is "being Harvard," then no, Harvard is not fungible. But if the quality is "providing a college education," the Harvard is extremely fungible in many cases.

People don't seek Harvard for the education only. They seek it or lots of things: access to wealth, access to knowledge and network, increased status, increased reputation.

Otherwise why would there be exceptional demand (and price) for harvard?

Sure, there's no disputing that the fixed pie fallacy exists, but you have not made a convincing argument that this situation is an instance of the fallacy.

1. You're attacking a straw man, which actually is a fallacy.

2. Even if the passage you cited were about "getting less in an absolute sense", there's still no fallacy. zafka already pointed this out in his #1 above. What's so hard to comprehend?

Please stop.

Inequality is only bad inasmuch as populists use it to rile people up. Let's say I have $100 and you have $50. Then someone gives me another $100 and gives you $5. Inequality has increased, but is the situation worse? Is anyone worse off?

If that happens to everyone in the marketplace, then inflation just occurred. The market had a total of $100 + $50 and now has a total of $150 + $105. The cash in the market increased by 58% so all the price of all goods will also increase by 58%.

This means that the money I have is now worth less than before, and I am now poorer than before.

Actually the hypothetical actors will have $200 and $55 respectively. To reinforce your point, if price of goods does go up 58%, the actor that started out with $50 will be 30% poorer in real terms (now having $55 and his $50 basket of goods now costing $79), whereas the actor that started out with $100 will be 26% richer (now having $200 and his $100 basket of goods now costing $158).

Okay, I oversimplified - but you are doing so as well. Societies as a whole can become wealthier over time. The difference between the 90th percentile and the 10th might be higher today than it was 200 years ago, but the 10th percentile today is also probably better off than the 90th 200 years ago in absolute terms.

Edit: s/dollars/utilons/g

Yes, it is true that we are all much better off than we were 200 years ago. This is due to both economic and technical progress. For instance, I can light and heat my house economically.

However, the 90th percentile might be even better off today if there was more equality - we could more efficiently share the fruits of our technical progress.

PG makes an effective argument that such equality would reduce the benefit and thus the motivation to innovate and create the present level of comfort / economic success : http://www.paulgraham.com/inequality.html

Overall, equality is a complex beast. I think that we need some level of inequality to ensure that there is sufficient motivation to succeed. We also need to do our best to help those who 'fall behind'

As far as I can tell from skimming it, pg is arguing against optimizing for economic equality in that article.

Certainly true given the analogy as stated, but if the overall quality/quantity of goods available has gone up by a factor of 3, then both are better off than before.

Thank you so much for posting that. I stopped reading at that point and went to the comments specifically looking to see if that upset anyone else.

The size of the economic pie is not fixed. If a person works hard and builds a chair out of a lump of wood, the pie just grew. And if you build a factory that builds those chairs, and you get rich, the pie grew that much more. You stole nothing, and you created much. You could just sit on your butt and do nothing (or collect welfare?).

The fallacy that the rich steal every dollar from those below them is so often used to support socialist style wealth redistribution. It drives me batty.

I think you're overstating the fallacy. Money begets money. Yes, those at the bottom can, say, open hot dog stands and generate wealth on the side, but their take will be far lower than the wealthy capitalist who launches, say, a prestigious restaurant.

The economy can be a non-zero-sum game and still have wealth accumulation at the top effectively reduce wealth accumulation at the bottom.

I agree with the first two paragraphs, but I don't think the third follows.

If wealth were all relative, then people at the bottom could be "getting poorer compared to people at the top." But it's not the relative comparison that matters. The people at the top having more wealth does not cause the people at the bottom to have less wealth.

You're confusing two things. You are taking the fallacy, "the economy is zero sum" and attempting to lump, "wealth accumulation at the top reduces wealth accumulation at the bottom" in with it.

The former is demonstrably false. Simply open the aforementioned hot dog stand. The latter may or may not be false, depending on the circumstances.

A wealthy person opening a restaurant does not reduce wealth accumulation of a passerby. If, however, a wealthy person pays himself a fat bonus from his company, while cutting jobs in order to instill fear, increase production, and drive salaries down, has clearly increased his accumulation of wealth at the expense of those beneath him.

The point is, you can't take the statement, "economics is not a zero-sum game" and use it as a blanket counter argument to all statements about inequality of wealth accumulation.

Your post is a pretty thoughtful one, so thanks :-)

I don't think your analysis is right, though. Here's why.

You're equating

wealth accumulation at the top reduces wealth accumulation at the bottom

which is formulated as a principle (i.e., a "universal"), with

If, however, a wealthy person pays himself a fat bonus from his company, while cutting jobs in order to instill fear, increase production, and drive salaries down, has clearly increased his accumulation of wealth at the expense of those beneath him.,

which is just a particular instance.

Yes, of course you can imagine scenarios in which a particular wealthy person does something that causes a particular group of less-wealthy people to have less wealth at the time - like lowering their salaries.

In fact, I think that

wealth accumulation at the top reduces wealth accumulation at the bottom,

stated as a generalization, is the same as the statement "the economy is zero sum."

My take on it:

If both the rich individual and the poor individual are competing over the same scarce source material (eg Petrol, Rice, Real Estate) then the market will elevate the price of that material to the highest level that the rich will bear.

As the price of the scarce resource increases, the poor get driven from the market. If the rich were not so rich, the scarce resource wouldn't be priced so high.

This doesn't hold true for things which aren't really scarce, such as newspapers or software.

"If both the rich individual and the poor individual are competing over the same scarce source material (eg Petrol, Rice, Real Estate) then the market will elevate the price of that material to the highest level that the rich will bear."

This is actually not always the case. Food prices are a prime example. It turns out that the rich often pay less for food than the poor.

Take a look at some of the conclusions of this study:

"Do the Poor Pay More for Food? An Analysis of Grocery Store Availability and Food Price Disparities."

http://www.thefreelibrary.com/Do+the+Poor+Pay+More+for+Food%...

  The researchers conclude that the poor do indeed pay more in the Twin
  Cities grocery market... In part, the poor pay more for grocery
  products because the stores that charge the lowest prices are not
  located in their neighborhoods.

The study has overviews of a lot of other research that supports these findings. For example,

  In 1991, for example, New York's Consumer Affairs Department compiled
  a report on grocery store price-fixing in several neighborhoods
  (Freedman 1991). The report showed the poor paid more for groceries in
  inner-city neighborhoods, yet they received poorer quality foods and
  services. The report consisted of price surveys in sixty stores and
  140 interviews in various New York neighborhoods.

Real estate, on the other hand seems like a classic example of a case where the concentration of wealth really can make poor people poorer, by crowding them out of more and more of the real estate market through gentrification.

Of course, this depends on there being an actual scarcity of land. In areas where new land can easily be developed, it's much less of an issue.

There might be plenty of land, but I think there will always be more desirable land. Either it is more central - better transport, trade, jobs. Or it is near a natural resource, for instance water - which provides fresh air, views, transport.

The poor benefit as much (or more) than the rich do by having access to this better land.

I think in an Open economy, it's almost impossible to generalize things. Your claim may be true in some situations, and wrong in others.

Wealth and political power are intimately related even within the best institutions, and that is a zero-sum game. If the distribution of wealth is heavily skewed towards the top it will wipe out the political power of the poor and solidify the social and economic hierarchies. It will subvert democracy. That sucks.

I propose a new term in economic discussion: The Fallacy of the Fallacy of the Fixed-Size Pie. ;)

Reply on news.ycombinator.com