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Okay then, I think by now we’ve got the idea: There are a lot of ways government can intervene in the economy, but because these interventions can backfire in so many ways, we don’t want government trying to do more than it has to. Straightforward enough. So then how exactly does the alternative approach work? If the government doesn’t directly control the economy, then who does?

Well, of course, the answer is nobody – and everybody. In a free market, every individual makes their own decisions about what they want to buy and sell; and it’s the combined accumulation of all these individual decisions that determines the shape of the economy as a whole. There isn’t one single decision-maker overseeing everything – but there doesn’t need to be, because by and large, individuals are better at judging their own needs and interests than anyone else is. Goods and services naturally find their way into the hands of the people who want them (rather than those who don’t), not because they are being directed there by a government coordinator, but because the customers simply go out and buy them for themselves. And as it turns out, this is vastly easier and more efficient than trying to do everything through one central planner. Heath illustrates the basic concept with an analogy:

Suppose you are distributing candy to kids at a birthday party. Being inexperienced at this sort of thing, you do it all wrong: You divide it up evenly among them, forgetting that some of them are allergic to peanuts, some of them hate raisins, and some of them have weird food sensitivities you’ve never even heard of. As a result, half the kids wind up with candy that they can’t eat. This alone does not make the allocation inefficient. What does make it inefficient is the fact that others could eat it if you were to change the distribution. You could take the peanut brittle away from the anaphylactic kid and give it to some other without causing any harm to the first, while creating a certain measure of happiness in the second. The initial allocation was inefficient, in the sense that the peanut brittle was being wasted.

Of course, figuring out exactly who should get what would be a very complicated job. You might decide instead just to let the kids take care of it by themselves. Kids are really good at trading, and they tend to know their own preferences (and dietary restrictions) with respect to candy. So let them exchange. At first there will be a frenzy of activity, but eventually things will settle down, as the kids get rid of stuff they don’t want and pick up stuff they do. “Markets will clear,” as economists like to say. When there are no more beneficial trades that can occur, the outcome will be perfectly efficient. At this point, you can no longer take anything away from any one kid without making him unhappy, even if you try to compensate him with something taken from another. If it were possible to make both kids happier in this way, then they themselves would have already done it, through a voluntary exchange.

This little thumbnail sketch is pretty close to being a complete statement of the intuition underlying the Invisible Hand Theorem (also known, more grandiosely, as the First Fundamental Theorem of Welfare Economics). In order to get the ideal distribution of candy, perfectly adapted to everyone’s preferences, there is no need for any complicated exercise in planning. All you need to do is leave people free to trade. Furthermore, the people involved don’t need to be motivated by any concern for the common good. They will exchange items only if it is in their interest to do so. As long as they don’t go around stealing, this sort of self-interested behavior is all that is required to produce the most efficient outcome.

This mechanism of free exchange is, at its core, an incredibly simple one. But by organically aggregating every individual’s preferences, it manages to effortlessly accomplish the kinds of complex economic tasks that a central planner couldn’t even dream of. As Posner and Weyl write:

[An] argument against central planning was advanced by Nobel Laureate Friedrich Hayek in 1945. Hayek argued that no central planner could obtain information about people’s tastes and productivity necessary to allocate resources efficiently. The genius of the market was the way that the price system could, in disaggregated fashion, collect this information from everyone and supply it to those who needed to know it, without the involvement of a government planning board.

A related version of this argument, less well-known than Hayek’s but actually more compelling, was made a few decades earlier. The brilliant economist Ludwig von Mises argued that the fundamental problem facing socialism was not incentives or knowledge in the abstract but communication and computation. To see what Mises meant, consider an illustrative parable proposed by Leonard Read in his 1958 essay, “I, Pencil.”

Read tells the “life story” of a pencil. Such a simple thing, one would at first think. And yet as you begin to reflect, you realize the enormously complex layers of thought and planning it would require to make a pencil from scratch. The wood must be chopped, cut, shaped, polished, and honed. The graphite must be mined, chiseled, and shaped. The ferrule—the collar that connects the wood shaft and the eraser—is an alloy of dozens of metals, each of which must be mined, melted, combined, and reformed. And so forth.

Yet what is most remarkable about the pencil is not its complexity but the complete lack of understanding that anyone involved in the manufacture of the eventual pencil has about any of these steps in the process. The lumberjack knows only that there is a market for his wood and some price that induces her to buy the needed tools, cut down trees, and sell lumber down the line of production. The lumberjack may never even know that the wood is used for a pencil. The pencil factory owner knows only where to purchase the needed intermediate materials and how to run a line assembling them. The knowledge and planning of the pencil’s creation emerge organically from the process of market relations.

Now suppose that we were to try to replicate the market relationships with a central planning board. The board would determine how much wood to chop and when, the number of workers to employ at each stage of production, the correct places and times to produce, ship, and build. Yet, to do this effectively the board would have to understand a great many things. It would have to learn from each of these specialized producers the unique knowledge of her domain of expertise that allows her to earn a living—for example, whether the lumber would have a more valuable use elsewhere in the economy (to build houses or ships or children’s toys) than as an input for pencils. Absorbing all this information and constantly receiving and processing the necessary updates to keep abreast of evolving conditions in each of these steps of the process, would overwhelm the capacity of even the most skilled managers.

And even if the board somehow had an unlimited capacity to absorb this information, it would still have the unmanageable problem of trying to act on this sea of data. Prices, supply and demand, and production relations in markets arise through a complex interplay of individuals each helping to optimize a tiny part of a broad social process. If, instead, a single board had to plan this entire dance, it would force a small number of individuals to contemplate an endless sequence of choices and plans. Such elaborate calculations are beyond the capacity of even the most brilliant group of engineers.

Mises wrote decades before the rise of the fields of computer science and information theory and lacked any way to formalize these intuitive ideas. Many of Mises’s arguments were dismissed by mainstream economists, whose increasingly narrow mathematical approach to the field Mises disdained. Mises’s critics, including Oskar Lange, Fred Taylor, and Abba Lerner, argued that the market mechanism was but one of many ways (and far from the most efficient way) to organize an economy. They viewed the economy purely mathematically, rather than computationally, and saw no difficulty in principle with solving a (very large) system of equations relating the supply and demand of various goods, resources, and services.

In a simplified picture of the economy, ordinary people perform dual functions as producers (workers, suppliers of capital, etc.) and consumers. As consumers, people have preferences regarding different goods and services. Some people like chocolate, others like vanilla. As producers, they have different talents and capacities. Some people are good at doing math, others at mollifying angry customers. In principle, all we need to do is figure out people’s preferences and their talents, and assign jobs to people who do them best, while distributing the value created by production in the form of goods and services that people really want. Rewards and penalties need to be determined to give people incentives to reveal their preferences and talents, and to ensure that they actually do what they are supposed to do. All of this can be represented mathematically and solved. That’s why socialist economists viewed the economy as a math problem the solution of which only required a computer.

Yet the later development of the theory of computational and communication complexity vindicated Mises’s insights. What computational scientists later realized is that even if managing the economy were “merely” a problem of solving a large system of equations, finding such solutions is far from the easy task that socialist economists believed. In an incisive computational analysis of central planning, statistician and computer scientist Cosma Shalizi illustrates how utterly impossible “solving” a modern economy would be for a central planning board. As Shalizi notes in his essay, “In the Soviet Union, Optimization Problem Solves You,” the computer power it takes to solve an economic allocation problem increases more than proportionately in the number of commodities in the economy. In practical terms, this means that in any large economy, central planning by a single computer is impossible.

To make these abstract mathematical relationships concrete, Shalizi considers an estimate by Soviet planners that, at the height of Soviet economic power in the 1950s, there were about 12 million commodities tracked in Soviet economic plans. To make matters worse, this figure does not even account for the fact that a ripe banana in Moscow is not the same as a ripe banana in Leningrad, and moving it from one place to the other must also be part of the plan. But even were there “merely” 12 million commodities, the most efficient known algorithms for optimization, running on the most efficient computers available today, would take roughly a thousand years to solve such a problem exactly once. It can even be proven that a modern computer could not achieve even a reasonably “approximate” solution—and, of course, today there are far more goods, services, transport choices, and other factors that would go into the problem than there were in the Soviet Union in the 1950s. Yet somehow the market miraculously cuts through this computational nightmare.

What makes the market work so well is its ability to draw on the knowledge of everyone in the economy, not just those at the top. By empowering everyone in this way, it leads to a more efficient allocation of goods and services. More importantly, though, it also leads to a lot less coercion and oppression than what you see in a command economy. To quote Milton Friedman:

So long as effective freedom of exchange is maintained, the central feature of the market organization of economic activity is that it prevents one person from interfering with another in respect of most of his activities. The consumer is protected from coercion by the seller because of the presence of other sellers with whom he can deal. The seller is protected from coercion by the consumer because of other consumers to whom he can sell. The employee is protected from coercion by the employer because of other employers for whom he can work, and so on. And the market does this impersonally and without centralized authority.

Indeed, a major source of objection to a free economy is precisely that it does this task so well. It gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.

The existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the “rules of the game” and as an umpire to interpret and enforce the rules decided on. What the market does is to reduce greatly the range of issues that must be decided through political means, and thereby to minimize the extent to which government need participate directly in the game. The characteristic feature of action through political channels is that it tends to require or enforce substantial conformity. The great advantage of the market, on the other hand, is that it permits wide diversity. It is, in political terms, a system of proportional representation. Each man can vote, as it were, for the color of tie he wants and get it; he does not have to see what color the majority wants and then, if he is in the minority, submit.

It is this feature of the market that we refer to when we say that the market provides economic freedom. But this characteristic also has implications that go far beyond the narrowly economic. Political freedom means the absence of coercion of a man by his fellow men. The fundamental threat to freedom is power to coerce, be it in the hands of a monarch, a dictator, an oligarchy, or a momentary majority. The preservation of freedom requires the elimination of such concentration of power to the fullest possible extent and the dispersal and distribution of whatever power cannot be eliminated—a system of checks and balances. By removing the organization of economic activity from the control of political authority, the market eliminates this source of coercive power. It enables economic strength to be a check to political power rather than a reinforcement.

Of course, not everyone has such a favorable view of the market economy. Critics will sometimes argue that market transactions can only ever be exploitative – that the only way someone can benefit from free exchange is at the expense of someone else. But as Russ Roberts points out:

The world is not always zero-sum. There are places where the world is zero-sum. There are places where economic activity means some people gain and some people lose. […] But it’s really important to remember that that can’t be – that can not be – the most common phenomenon, because otherwise the world’s standard of living on average would be the same as it was a thousand years ago, 500 years ago, a hundred years ago. […] The only way in this zero-sum world that people would get wealthy would be by impoverishing others.

To be sure, there may have been a time in our history when things really were a lot closer to zero-sum – when the only real way to gain economically was by taking from someone else. But it’s because of the emergence of free exchange that this is no longer the dominant mode of human interaction. As Walter Williams memorably phrased it:

Prior to capitalism, the way people amassed great wealth was by looting, plundering and enslaving their fellow man. With the rise of capitalism, it became possible to amass great wealth by serving and pleasing your fellow man.

The key to this whole phenomenon – the reason why it’s possible at all – is that individuals in an economy, like hypothetical kids swapping candy at a birthday party, have different preferences. One person with a surplus of product X might prefer to have a little more of product Y, while another person with a surplus of product Y might prefer to have a little more of product X. What this means, then, is that if these two people come together and trade, it’s possible for both of them to be made better off by the transaction, and for nobody to be made worse off. As Katja Grace puts it:

[There is a] misunderstanding that trade must be exploitative, because employers gain and the gain must come from somewhere. This [misunderstanding] appears to stem from overlooking the possibility that people place different values on the same things, so extra value can be created by exchange.

What’s more, as Friedman and Friedman point out, this principle has an equally important corollary – if a given transaction doesn’t benefit both parties (as per their self-assessed interests), it simply never happens in the first place:

If an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it. Most economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can only gain at the expense of another.

Harford elaborates:

There’s a basic truth incorporated into any system of prices. That truth comes from the fact that stores and consumers do not have to buy or sell at a given price—they can always opt out. If you’d been willing to pay only fifty cents for [a one-dollar cup of] coffee, nobody could have forced you to raise your offer or forced the barista to drop the price. The sale simply would not have occurred.

Of course, you sometimes hear people complaining that if they want something—say, an apartment on Central Park West—then they have to pay the exorbitant asking price. That’s true, but although prices sometimes seem unfairly high, you hardly ever have to pay them. You could always use your money to buy an apartment in Harlem or a house in Newark or a million cups of coffee instead.

In a free market, people don’t buy things that are worth less to them than the asking price. And people don’t sell things that are worth more to them than the asking price (or if they do, it’s never for long; firms that routinely sell cups of coffee for half of what they cost to produce will go out of business pretty quickly). The reason is simple: nobody is forcing them to, which means that most transactions that happen in a free market improve efficiency, because they make both parties better off—or at least not worse off— and don’t harm anyone else.

Now you can begin to see why I say that prices “tell the truth” and reveal information. In a free market, all the buyers of coffee would prefer to have coffee than the money the coffee cost, which is shorthand for saying they prefer coffee to whatever else they might have spent ninety-two cents on. That is, the value of the product to the customer is equal to or higher than the price; and the cost to the producer equal to or lower than the price. Painfully obvious, perhaps, but the implications turn out to be dramatic.

It may seem trivial to say that in a free market we know customers value coffee more than the money they pay for it. Yet it’s not quite as trivial as it looks. For a start, this “trivial” piece of information is already more than we can say about anything that is paid for outside the market—for example, Washington DC’s hugely controversial new baseball stadium. The Montreal Expos baseball team agreed to move to DC on the condition that the DC government subsidize the cost of a new stadium. Some say the subsidy will be $70 million, others that it will be far higher. Maybe this is a good idea, and maybe not. It’s not clear how we decide whether this is a good way of spending taxpayers’ money.

When decisions are made inside a market system there’s no such controversy. If I decide to pay $70 for a ticket to see a baseball game, nobody questions whether it’s worth it; I made my choice, so obviously I thought so. This free choice produces information about my priorities and preferences, and when millions of us make choices, market prices aggregate the priorities and preferences of us all.

Sowell expounds further:

Many individual fallacies in economics are founded on the larger, and usually implicit, fallacious assumption that economic transactions are a zero-sum process, in which what is gained by someone is lost by someone else. But voluntary economic transactions—whether between employer and employee, tenant and landlord, or international trade—would not continue to take place unless both parties were better off making these transactions than not making them. Obvious as this may seem, its implications are not always obvious to those who advocate policies to help one party to these transactions.

Let us start at square one. Why do economic transactions take place at all and what determines the terms of those transactions? The potential for mutual benefit is necessary but not sufficient, unless the transactions terms are in fact mutually acceptable. Each side may of course prefer terms that are especially favorable to themselves but they will accept other terms rather than lose the benefits of making the transaction altogether. There may be many terms acceptable to one side or the other but the only way transactions can take place is if these sets of terms acceptable to each side overlap.

Suppose that a government policy is imposed, in the interest of helping one side—say, employees or tenants. Such a policy means that there are now three different parties involved in these transactions and only those particular terms which are simultaneously acceptable to all three parties are legally permitted. In other words, these new terms preclude some terms that would otherwise be mutually acceptable to the parties themselves. With fewer terms now available for making transactions, fewer transactions are likely to be made. Since these transactions are mutually beneficial, this usually means that both parties are now worse off in some respect. This general principle has many concrete examples in the real world.

Rent control, for example, has been imposed in various cities around the world, with the intention of helping tenants. Almost invariably, landlords and builders of housing find the reduced range of terms less acceptable and therefore supply less housing. In Egypt, for example, rent control was imposed in 1960. An Egyptian woman who lived through that era and wrote about it in 2006 reported:

The end result was that people stopped investing in apartment buildings, and a huge shortage in rentals and housing forced many Egyptians to live in horrible conditions with several families sharing one small apartment. The effects of the harsh rent control is still felt today in Egypt. Mistakes like that can last for generations.

In other words, while landlords and builders simply lost an opportunity to make as much money as they could have otherwise, many tenants lost an opportunity to find a decent place to live. They all lost, though in different ways. Egypt was not unique. The imposition of rent control has been followed by housing shortages in New York, Hong Kong, Stockholm, Melbourne, Hanoi and innumerable other cities around the world.

The immediate effect of rents set below where they would be set by supply and demand is that more people seek to rent apartments for themselves, now that apartments are cheaper. But, without any more apartments being built, this means that many other people cannot find vacant apartments. Moreover, long before existing buildings wear out, auxiliary services like maintenance and repair decline, since a housing shortage means that landlords are no longer under the same competitive pressures to spend money on such things in order to attract tenants, when there are more applicants than apartments during a housing shortage. Such neglect of maintenance and repair makes buildings wear out faster. Meanwhile, the lower rate of return on investments in new apartment buildings, because of rent control, causes fewer of them to be built. Where rent control laws are especially stringent, no new apartment buildings at all may be built to replace those that are wearing out. Not a single apartment building was built in Melbourne for years after World War II because of rent control laws in Australia. In a number of Massachusetts communities, no rental housing was built for a quarter of a century, until the state banned local rent control laws, after which building resumed.

Some tenants undoubtedly benefit from rent control laws—those who already have an apartment when such laws are passed and who find the lower levels of repair, maintenance and other auxiliary services, such as heat and hot water, acceptable as a trade-off, in view of the money saved on the rent. As time goes on, however, with some deteriorating buildings eventually being boarded up, the circle of tenants who find the trade-off acceptable tends to decline, and places with especially stringent rent control laws tend to have especially bitter complaints about landlords’ neglect in failing to supply adequate heat, hot water, maintenance and repair. In short, reducing the set of mutually acceptable terms tends to reduce the set of mutually acceptable results, with both tenants and landlords ending up worse off on the whole, though in different ways.

Another area where governments impose their own set of acceptable transactions terms are laws regulating the pay, benefits, and working conditions of employees. Improvements in all these areas make the worker better off and cost the employer money. Here again, this tends to lead to fewer transactions. Over the years, unemployment rates have tended to be chronically higher, and the periods of unemployment chronically longer, in European Union countries, where minimum wage laws and government policies requiring employers to provide various benefits to their employees have been more generous than in the United States—and the rate at which these countries create new jobs has tended to be far lower than the rate at which new jobs have been created in the American economy. Here again, the overlap between three sets of acceptable terms tends to be less than the overlap between the two sets of terms acceptable to the parties directly involved.

As in the case of tenants under rent control, those on the inside looking out benefit at the expense of those on the outside looking in. Those workers who keep their jobs are made better off by the various benefits that employers are required to provide by law but the higher unemployment rates and longer periods of unemployment deprive others of jobs that they could have had in the absence of laws which have the net effect of discouraging hiring and encouraging the substitution of capital for labor, as well as the outsourcing of jobs to other countries. The trite expression “There is no free lunch” has become trite precisely because it has turned out to be true for so long and in so many different contexts.

Perhaps the most detrimental consequences of the implicit assumption of zero-sum transactions have been in poor countries that have kept out foreign trade and foreign investments, in order to avoid being “exploited.” Large disparities between the prosperity of the countries from which trade and investment come and the poverty in Third World countries receiving this trade and investment have led some to conclude that the rich have gotten rich by taking from the poor. Various versions of this zero-sum view—from Lenin’s theory of imperialism to “dependency theory” in Latin America—achieved widespread acceptance in the twentieth century and proved to be very resistant to contrary evidence.

Eventually, however, the fact that many once-poor places like Hong Kong, South Korea, and Singapore achieved prosperity through freer international trade and investment became so blatant and so widely known that, by the end of the twentieth century, the governments of many other countries began abandoning their zero-sum view of economic transactions. China and India have been striking examples of poor countries whose abandonment of severe international trade and investment restrictions led to dramatic increases in their economic growth rates, which in turn led to tens of millions of their citizens rising out of poverty. Another way of looking at this is that the zero-sum fallacy had kept millions of very poor people needlessly mired in poverty for generations before such notions were abandoned. That is an enormously high price to pay for an unsubstantiated assumption. Fallacies can have huge impacts.

Now, I do think there are some important caveats to be made here. For one thing, when we say that people’s participation in market transactions can only ever be voluntary, it’s worth noting that the definition of “voluntary” can be somewhat relative. The fact that some participants in the market have more resources and/or bargaining power than others means that those more advantaged individuals have more freedom to choose which transactions they want to participate in and which they want to reject – whereas for the less advantaged, their array of options might be much more limited; so while their ultimate decisions will still be voluntary, it won’t exactly mean as much in the situations where they’re deciding between two largely unappealing options because no other choices are available. We might imagine, for instance, a scenario in which, say, Person A is drowning in the middle of the ocean, and Person B comes along in a ship and offers to throw them a life preserver, but only on the condition that they sign over their entire life savings in exchange. In this scenario, it’s pretty hard to argue that Person B isn’t, in some sense, exploiting Person A. That being said, though, if Person B was only out at sea in the first place because they’d been tasked with looking for these specific kinds of opportunities to exploit, and no one else was willing to spend their time sailing around searching for drowning people to rescue, it seems equally hard to argue that Person A would have been better off if there had been a law banning Person B from coming along and making the offer at all – because in that case, Person B wouldn’t have been there to rescue Person A in the first place (they would have just stayed home like everyone else), and Person A would have drowned. It seems, then, that the problem isn’t necessarily that Person B is out there making a lopsided offer to Person A – rather, it’s that nobody else is out there offering Person A any better alternatives. In other words, simply issuing a ban against offering lopsided deals not only fails to solve the problem; it actually makes things worse for everybody (most of all Person A). What we want instead is to give everyone enough of a social safety net (or in this case, a life preserver) to cushion them from the most exigent scenarios, so that they have the freedom to choose which offers they want to accept or reject, rather than feeling forced to accept the first lopsided offer that comes along. And the same principle generalizes to all the other examples of “exploitative” market transactions mentioned above. If you’re particularly outraged, for instance, that some employers are offering low wages and that some workers are accepting those wages because they don’t have any better options, you shouldn’t necessarily just pin the blame on the “exploitative” employers – because after all, they’re literally offering to give the workers more than anyone else is. Rather, what should upset you most is the fact that the rest of society isn’t offering the workers any better opportunities (in the form of better-paying employment, education, job training, a stronger social safety net, etc.) which would enable them to ignore the low offers if they wanted to. Again, simply banning the employers from making their offers in the first place doesn’t help anybody – least of all the workers; all it does is take away one of their possible options. What does help them is to give them more alternatives, not less – because the more flexibility they have, the more freedom they have, and vice-versa.

And this brings up another caveat that I’ve already touched on but just wanted to mention again here. We’ve talked a lot about all the different ways to keep markets efficient – avoiding misallocation of resources by not regulating too much, avoiding deadweight losses by not taxing too much, and so on. In the most basic sense, these policies are all about making the economic pie bigger for society as a whole; they aren’t really concerned as much with the size of each individual’s slice. And in fairness, as a general rule, the size of each individual’s slice will tend to grow as the overall size of the pie grows – i.e. the richer a country is, the higher its standard of living will tend to be, even for its lowest-earning workers, compared to the workers in poorer countries – so these things aren’t entirely independent of each other. In fact, I’d consider this correlation to be one of the stronger points in favor of the conservative/libertarian argument that we should just deregulate everything and focus on growth above all else, since even a tiny sliver of an extremely large pie is better than a relatively thicker slice of a much smaller pie, and if a growth-first approach allows the pie to grow big enough, it may be worth doing even if it causes the thinnest slices of the pie to get even thinner percentage-wise, since they’ll still be getting bigger in absolute terms. Nevertheless, it seems clear to me that regardless of how big the pie might be overall, there are some cases in which the smallest slices really are so pitifully thin compared to the largest slices that it’s worth losing some efficiency (i.e. making the pie smaller overall) in order to make things more equitable. In other words, if there’s one person who’s a billionaire, and a thousand others who are on the verge of starvation, I don’t think that implementing a policy that makes the billionaire $10M richer and affects no one else is automatically better than a policy that makes everyone else $10,000 richer but reduces the billionaire’s wealth by $1, despite the fact that the first policy is technically more efficient in the economic sense. As Harford puts it, the level of efficiency simply isn’t the most important factor in every case; sometimes things like equity and establishing a decent standard of living for everyone matter more:

Remember that when economists say the economy is inefficient, they mean that there’s a way to make somebody better off without harming anybody else. While the perfectly competitive market is perfectly efficient, efficiency is not enough to ensure a fair society, or even a society in which we would want to live. After all, it is efficient if Bill Gates has all the money and everybody else starves to death . . . because there is no way to make anybody better off without making Bill Gates worse off. We need something more than efficiency.

(See also Shalizi’s compelling post on this point here.)

But again, having said all of this, we shouldn’t just jump to the extreme opposite conclusion either, by insisting that economic equity is the only thing that matters; to do that would be to repeat the communists’ fatal mistake. At some level, economic inequalities will always exist, simply as a result of people freely doing what they want and buying the things they want. If a million people (for instance) want to give LeBron James money in exchange for him playing basketball for their entertainment, it’s true that this will result in him having a lot more money than they do – but what’s also true is that he will have given them something that they valued more than that money (i.e. entertainment). Both parties are made “richer” in a sense, because money isn’t the only thing that people value. So although James’s salary does represent a glaring inequality in monetary terms, it also reflects an equally large asymmetry of non-monetary utility provided in the opposite direction. And this is the kind of inequality that can be a good thing – not necessarily in every case, but certainly in many cases. Even if you don’t buy the LeBron James argument, after all, it’s hard to argue that paying surgeons a higher-than-average salary doesn’t make society as a whole better off, since it ensures that a sufficient number of people will actually be willing to put in the work to become surgeons and earn that higher salary (whereas they might not be as willing to do so without that incentive). And again, this doesn’t necessarily mean that we should be willing to accept any arbitrary amount of inequality (I think it’s probably fair to say that ultra-rich individuals like Bill Gates and LeBron James, in particular, would still be sufficiently motivated to pursue their careers even if they only expected to make a fraction of what they currently do). It just means that the mere existence of some economic inequality isn’t automatically a bad thing in and of itself; it may simply be the result of prices and preferences and incentives functioning properly.

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