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- Zero-sum
Zero-sum economics: the core issue of the great debate
Is the economy a zero-sum game? John Mackey, co-founder and co-CEO of Whole Foods Market says that it isn’t a zero-sum game.
(WSJ.com) Business is not a zero-sum game struggling over a fixed pie. Instead it grows and makes the total pie larger, creating value for all of its major stakeholders, including employees and communities.
This perspective is key to understanding the great debate between the Left and the Right, socialists and free marketers, statists and individualists. Those on the Left largely believe that the economy is a zero-sum game and thus believe that one person’s gain is another person’s loss. The only way to improve the lot of the impoverished, then, is to take money from the rich and give it to the impoverished. The way to do this is through the government.
The Right will argue, however, that the economy is not a zero-sum game and that free trade is a way in which two people can gain at the expense of no one. Thus, the best way to improve the lot of the impoverished is to simply provide an arena in which free trade can flourish. The only way to do that is to get government out of the picture as much as possible.
Who is right if either side is? And is there a way to reconcile this discord?
This is by far the best theoretical work I’ve encountered on the subject:
http://www.amazon.com/Not-Zero-Game-Manuel-Ayau/dp/9992279990/ref=sr_1_1?s=books&ie=UTF8&qid=1321484638&sr=1-1
“Not a Zero Sum Game” by guatemalan entrepreneur + Liberty champion Manuel F. Ayau. – A book even easier to read than Hazlitt’s “Economics in one lesson”. With crystal-clear logic and practical examples.
Thanks for the recommendation.
I’d like to think that free trade can allow everyone to gain without taking away from others. But, short of printing new money (which wouldn’t really be the realm of trade anyway), I’m not sure this is possible. Unless maybe you consider gaining to mean not just financially. So one person buys an iPhone, and Apple gets their $400–but the person gets an iPhone, which he must have wanted more than that $400. Looking at it that way, the economy might not have to be zero-sum.
Thanks for the summary. I think you nailed it with the iPhone example. That is exactly how trade improves the lot for both parties.
You have only to look at how much wealth there was in the world in the year 1000AD and the amount now to see that the economy, like knowledge and art, is not a zero-sum game. Certain aspects of the economy, such as futures and options trading could be seen that way but not the overall economy. The problem with people on the left is that they lack faith in other people, in people’s ability to be ingenious, and in people’s overall willingness to be good and to serve others while taking care of themselves, their family and friends, and their local community. It is this lack of faith in others that causes people on the left to want to use the coercive power of government to get to the Ideal state of the world that they hold in their minds. The problem then becomes that you can’t get to a good end using bad means. People on the right have their own problems and instances of bad means, but they generally do not fall into the trap of losing faith in others to do good voluntarily. They are thus more willing to see that the economy is not a zero-sum game unless an overreaching government makes it that way, as did the USSR and as is our current crony capitalist government. The left wants to give more power to our government to regulate the evil crony capitalists into proper behavior, not realizing that this just simply hands more power, directly and indirectly, to those crony capitalists, because they control the government. The answer should be obvious. The people on both sides should act to diminish central power and pull that power back to themselves directly, by substantially decreasing the size and coverage of our central government and reinvigorating local government and individual freedom to act. This will increase the degree to which the economy can act as a positive-sum game. It solves a lot of our current problems without *trying* to solve them.
Well said. You’re absolutely right that the solution lies in diminishing central government and encouraging local, individual freedom and responsibility.
To reconsider one of your first points: Some might argue that the zero-sum fallacy cannot be dispelled by the growth in aggregate wealth since 1000 AD. Yes, wealth has grown in the last thousand years, but it can still be a zero-sum condition if individuals within that aggregate can only gain at the expense of others. In other words, if one can only win if someone else loses, then it is a zero-sum game. The more centralized and controlled the economy is, the more it takes on these qualities and the more zero-sum it becomes.
Many thanks for the discussion.
Interesting idea that it could be zero-sum despite large growth in both total and per-capita income and wealth. Perhaps I have been too imprecise! However, I remain unpersuaded, simply because of how much is new. Where did the “new” come from? From our minds. The vast majority of what creates or is wealth nowadays comes not from competition but from insight, from the creation of something new ex nihilo through creativity. I’ve been an entrepreneur. I’ve seen that process in action in the economic sphere. Creativity and its products (new ideas, new knowledge, new processes, new art, etc.) take time to develop but are not zero-sum in themselves or in their effects. Look at the price of a lumen of light over the past 500 years to see that process in action. Were there any losers in that process? I don’t think so. Now apply that to every commodity. I think all have fallen *hugely* in cost to every man, woman and child alive today. 3% of our population now grows the food we need. Over the next 50 years the value and amount of the making of “things” in industrial plants will rise hugely in absolute terms even while the percent of our world’s population required to produce all that “stuff” will fall quite significantly, just as the agricultural percentage dropped below 5%. What will our economy (indeed our world) be like when only 10% of our world’s population can produce all our food *and* all our physical products? And it’s all ex nihilo at base, from creative ideas and efforts. It doesn’t seem to me that that is zero-sum at all, but perhaps I misunderstand your comment above.
You’re quite right that wealth can be generated from innovation and the efficient allocation of resources. And in this sense, the economy is not a zero-sum game. But in order for wealth to be generated in this way, one must first have access to resources. That is, in order to make use of an innovation or new technique, one must first obtain and control resources such as land and capital.
And that is where the economy takes on a more zero-sum frame. That is because in order to obtain and control those resources, someone else must give them up.
To take a more focused view, we are at a point in modern culture where resource allocation does continue to some extent under entrepreneurial efforts, loans, and other investments, but the average innovator these days faces increasing restrictions–from the state, from their corporate sponsors, from competing innovators, etc.
I guess my point is that it is impossible to say whether the economy is ‘zero-sum’ or not. Some aspects clearly are not, and yet some are very much so. In the end, ‘zero-sum’ just means ‘competitive’, and it cannot be denied that we live in a competitive economy despite the aggregate growth in the last centuries.
Again, thank you for the discussion.
Ah, now I get what you mean, I think. As in your book, the closing of the frontier enhances the likelihood that the economy is zero-sum. Of course, “zero-sum” and “competitive” don’t mean the same thing. Competition does not require a zero-sum situation but can occur even when innovation is ascendant. However, in a zero-sum situation, competition is required and inevitable, and generally the strong generally win out. You are absolutely correct that our current situation is increasingly a zero-sum situation, as the government takes more and more of our space for action and life. I might add that it seems to me that a strictly zero-sum economy will actually shrink, at least for the individual players. There is always waste and “fees” off the top of every transaction, particularly if you include impacts on the earth’s carrying capacity or quality in your definition of “economy”. Some of that isn’t recovered by anyone, since it is more like economic entropy. Thus, I suspect that a true zero-sum economy would decay into increasing poverty for the average participant, with fewer, richer rich players and many more poor players than at the start, until death or revolution. And this, unfortunately, seems increasingly the case in our present world.
Quite right about the “economic entropy”–well put.
With regard to the zero-sum/competition debate, I believe I see your distinction. Basically, since any of the competitors can innovate and create different products or more of the original, one side could gain without loss to the other. For instance, two groups are competing for the same water source and one of the groups innovates and digs a well. Since one innovated, they no longer must defeat the other in order to gain, and therefore it is not zero-sum. But doesn’t this mean, however, that the two groups are no longer competitive either?
Actually, I assume that all situations are in some fashion or another competitive, but that not all situations are zero-sum. Competition drives the participants toward “discovery” of advantage. Each advantage will of course cause some competitors to win a little or lose a little. It’s hard to see if the total gain of the little gain increments outweighs the total of the little losses. It also matters where you draw the boundary about who is a participant and who isn’t. All else being equal, if you draw the boundary to include only the competing providers, it may be close to a zero-sum situation. For example, housepainters went through a period where they automated a lot of their work. Do housepainters make more profit now than ten years ago? Probably not. So all that capital investment just maintained their ability to make a living. However, if you draw the boundary to include the competitors and their customers, then more customers can get more painting done for the same amount of money as before. Within that larger boundary, the big winners are the customers, not the competitors, but the total benefit is greater than zero and thus not zero-sum. A more obvious situation is Texas Instruments, which a long time ago benefited hugely from playing its learning curve advantage by pricing incredibly aggressively, based on where they knew the price was going to be. Their customer base and total demand absolutely exploded because of this aggressive pricing. Customers vastly expanded their benefits realized (including the ultimate beneficiaries like you and me), because lots more uses were possible and lots more benefits available to us thanks to the dropping costs TI provided. We responded with explosive demand, which TI ramped up to provide, which made it possible to respond with even lower prices as their learning curve soared and their prices dropped, allowing them to earn above-average returns, even as we all benefited. It didn’t last forever, but it was amazing while it did. So where you draw the boundaries of benefit and cost matters a lot. The reduction in the cost of a lumen of light over the past 300 years may or may not have benefited all the suppliers of light (although many clearly did benefit, some were losers), but the consumer of light had his life revolutionized in very positive ways. So a set of competitors gain temporary gains in profits by discovering temporary advantages at the margin, but ultimately those benefits end up accruing permanently to the customer. Provided the government allows that to occur. That’s how I see it, anyway. Perhaps you and I are simply drawing the boundary in a different place.
Yes, I would agree that we’re drawing the boundary line in different places. When talking about the zero-sum issue, that can be one of the sources of conflict.
I try to use a tighter boundary line because it is not clear to me that competition is the direct source for the growth that you identify. True, competition can encourage innovation and thus growth of knowledge and wealth. But it can also encourage animosity and violence. The example I use in the book is of the Cold War. Certainly the competition between the U.S. and the U.S.S.R. led to innovation and growth, especially in the sciences and military. But it also led to a lot of pain and struggle (loss of wealth). Competition could have led to one or the other, and certainly many other factors contributed. I try to draw that boundary as close to the actual condition as possible to better isolate and evaluate competition specifically. Meanwhile, I can certainly appreciate the fuller view as well.