New Prime Minister Liz Truss has made growing the pie a centrepiece of her economic policy: “For too long, the political debate has been dominated by how we distribute a limited economic pie. Instead, we need to grow the pie so that everyone has a bigger slice.”
This has led to some ridicule, with keyboard warriors claiming that you can’t grow pies, sardonically remarking that they’ll go to the local garden centre to buy seeds to plant a steak and kidney pie tree. Clearly, Truss wasn’t using “pie” in a literal sense (the role of a government is not to give citizens more steak and kidney pies), nor “grow” literally to suggest you grow it with seeds. Policymakers can talk about “economic growth” even though economies don’t grow on trees, and people can pursue “personal growth” even though they stop growing physically when they’re adults. Superstar economist Daron Acemoglu just used the “grow the pie” vs. “split the pie” analogy in the current episode of the Freakonomics podcast.
Other critics have mocked that you can’t grow pies without putting in eggs and flour. But Truss wasn’t claiming that pies would grow magically – if so, there wouldn’t be any need for economic policy, as it would happen anyway. Instead, she argues that you should invest resources (the analogy of eggs and flour) in growing wealth, rather than redistributing wealth.
Ridiculing others may get likes and retweets, but is unhelpful as it misses the opportunity to have a robust debate on what the objective of government policy is – what the “pie” is that a government should try to grow. And it’s on this issue that Truss’s policy can legitimately be criticised.
Truss’s policy seems to assume the pie is financial wealth or GDP. This leads to at least three concerns:
(1) GDP is a narrow objective as it ignores many non-financial goals that the electorate cares about. You can increase GDP by increasing the retirement age or moving to a six-day work week, but this would be detrimental to Gross Domestic Happiness.
(2) Focusing narrowly on GDP growth will exceed planetary boundaries, as argued by some “degrowth economists”.
(3) Growing GDP or financial wealth, with no concern for its distribution, will lead to an unjust society – wealth may be hoarded by the 1%.
In my book, the pie is not financial wealth, nor GDP, but social value. It includes financial wealth to investors, but that’s only one slice. Other slices go to employees (fair wages, human capital development, a vibrant and inclusive corporate culture), the environment (innovations to address the climate crisis, reducing resource usage, waste and emissions), customers (do products and services genuinely enhance customer welfare, or reap profits through mis-selling or causing addiction?), communities, suppliers, and the environment.
Growing The Pie means creating social value and viewing profits as a by-product – if you grow the pie, investors’ slice expands – not pursuing profits directly or trying to maximise financial wealth or GDP growth. This aims to address the three above concerns:
(1) The objective is not just GDP or financial wealth; that’s only one slice. Polluting the environment, over-working employees, and price-gouging customers will decrease the slices of these three stakeholders and shrink the pie overall.
(2) Many ways of growing the pie will not hit planetary boundaries. For example, increasing workers’ slice through mentorship, work-life balance, and empowerment doesn’t harm the environment. Indeed, the aforementioned activities to increase the environment’s slice will loosen planetary boundaries.
(3) Many of the slices belong to the 99%. For example, the environment, communities, and tax revenues to the government are public goods, and customers and workers are big slices of the pie. This doesn#t mean that we should completely ignore the distribution of the pie (the pie can still grow if investors’ slice rises hugely, even if everyone else’s falls slightly), and indeed the book highlights how the gains from pie growth should be fairly distributed. However, only by growing the pie is it possible to find a distribution that makes everyone better off (this is known in economics as the Coase Theorem). On that point, I agree with Truss, even though my view of the pie is different. Value creation comes first, and value redistribution is an important second, as long as you have the correct notion of value.
Here is the relevant extract from Chapter 11 in my book:
“The expression ‘grow the pie’ is sometimes used in macroeconomics to argue that growing the wealth of the nation as a whole benefits citizens, particularly less affluent ones, more than redistributing wealth. Thus, policymakers should focus primarily on economic growth.
Contrary to common belief, this doesn’t mean the reliance on free markets and minimal government intervention. Instead, there remains a significant role for redistributive policies to the extent that they also support growth. Free health care or university education, or subsidising these for the poor, substantially increases the productive capacity of citizens who’d otherwise be unable to afford such investments. However, this approach to macroeconomic policy would caution against redistribution for its own sake, as doing so may reduce incentives to create wealth to begin with.
While Pieconomics stresses the importance of growing the pie, it also recognises that social welfare depends not only on the size of the pie, but also its distribution. So, in contrast to ‘grow-the-pie’ macroeconomic policy, Pieconomics argues that redistribution for its own sake can be desirable (such as high income taxes for top earnings), even if there are disincentive effects, as long as they’re not major. As we showed in Figure 2.2, a leader may prefer a smaller pie that’s more evenly distributed, particularly if material stakeholders are better off.
But the most important difference is that, under ‘grow-the-pie’ macroeconomic policy, the pie represents wealth and a policymaker’s goal is to create wealth. Under Pieconomics, the pie represents social value and a leader’s responsibility is to create social value, of which profits are only one slice.”