The essence of free markets is good-good exchanges, or what I like to think of as seduction. Exchanges of this sort are featured by the proposition: “I’ll do something good for you if you do something good for me.” Game theorists recognize this as a positive-sum game—a transaction where both parties, in their own estimation, are better off as a result. When I go to my grocer and offer him the following proposition: If you do something good for me—give me that gallon of milk—I’ll do something good for you—give you three dollars. As a result, I am better off because I valued the milk more than I valued the three dollars and he is better off because he valued the three dollars more than he valued the gallon of milk.
Of course there’s another type of exchange not typically, voluntarily entered into, namely good-bad exchanges, or what we might call rape. An example of that kind of exchange would be where I approached my grocer with a pistol, telling him that if he didn’t do something good for me (give me that gallon of milk) I’d do something bad to him: blow his brains out. Clearly, I would be better off, but he would be worse off. Game theorists call that a zero-sum game. That’s the case where in order for one person to be better off, of necessity the other must be worse off. Zero-sum games are transactions mostly initiated by thieves and governments, both are involved in what is euphemistically called income redistribution. The only difference is one does it under the color of the law and the other doesn’t.
Much of the income inequality debate in the United States has focused on “fifths,” “tenths” or “the top 1 percent” of households. Such divisions give the appearance of inequality, but there are far more people and workers in the top income brackets than in the lower ones. Indeed, there are 82 percent more people in the top fifth of households than in the bottom fifth. In 2006, 81 percent of households in the top quintile had two or more workers; but only 13 percent of households in the bottom fifth had two or more workers. In nearly 40 percent of these households, no one was working.
Further, people in different income divisions do not remain at those income levels throughout their lives. The Federal Reserve Bank of San Francisco found that absolute mobility – that is, the extent to which children earn more than their parents – is high:
- Of all U.S. adults, 67 percent had higher incomes than their parents; and among those born into the lowest income bracket, 83 percent exceeded their parents’ income.
- About 40 percent of people in the lowest fifth of income earners in 1986 moved to a higher income bracket by 1996, and roughly half the people in the lowest income quintile in 1996 had moved to a higher income bracket by 2005.
Indeed, one study found that a majority of Americans reach the upper income brackets at some point during their lives. Over a 44-year period, 12 percent of 25- to 60-year-olds moved into the top 1 percent for at least one year; 39 percent reached the top 5 percent; over half reached the top 10 percent; and nearly three-fourths were in the top fifth of the income distribution.