Is global economics a zero-sum game?

I have only a fuzzy understanding of world economics. Is it a zero-sum game? I read today that Europe and the US face recessions; is this because the Middle East and Asia (specifically China) are doing so well?

The Harvard MBA says:

Great question, especially given the fact that presidential candidates are busy burnishing their anti-globalization bona fides.  I’ll be happy to answer, though those seeking a more rigorous explanation based on economic theory may wish to look elsewhere.

World economics are definitely NOT a zero-sum game.  Were that truly the case, you’d still be sitting around your cave with your buddies Thak and Grunt, snacking on beetles and grubs.  Clearly, the world economy is larger today than it was 25 years ago.

A slightly more nuanced interpretation of the question might be, is international trade a zero sum game?  If China does well, does that mean that the United States will do poorly?

Again, the answer is clearly no.  If that were the case, then the Great Depression would have been viewed as a boon in at least a few countries, rather than a global disaster that wrecked the economies of nearly every industrialized nation and gave rise to Facism.  In fact world economies are getting more and more correlated; China is plenty worried that a slowing U.S. economy will affect their own, since so much of their growth is built on exporting goods to the American market.

But while these may be the facts, I believe that you can get a more visceral understanding by examining the simplest possible example.

Let’s return to our friends, Thak and Grunt.  Our cavemen friends spend their days gathering and eating beetles and grubs.  Then one day, Thak discovers that the blackberries on the bush outside their cave are plentiful and edible.  Both Thak and Grunt are now better off.  Their meals are tastier, and it takes less time for them to gather their daily food.  Their simple economy has grown.

Man has done this many times throughout his history, from the discovery of agriculture, to the Industrial Revolution, to the electronic age.  We broaden our horizons, and our entire economy grows.

Now let’s look at something trickier.  Let’s say Thak discovers the blackberry bush, but keeps it a secret from Grunt (and Grunt is too dim-witted to figure out the mystery).  Does Grunt benefit?

First of all, it’s pretty easy to see that Grunt can’t be harmed.  He can continue to gather exactly the same quantity of beetles and grubs as before.

Second, if we introduce the concept of trade, Grunt will certainly be better off.  Perhaps Thak decides that eating nothing but blackberries is monotonous, and misses the crunch of beetle exoskeletons.  He might trade some portion of his blueberries for some of Grunt’s beetles.  Thak wins.

But Grunt also wins.  Grunt gets to benefit from Thak’s blackberry discovery.  And because trade is a voluntary transaction, by definition Grunt feels that he is better off swapping beetles for berries–otherwise he wouldn’t agree to the exchange.

So now we’ve seen that economics is not a zero-sum game, and that trade brings benefits to both parties.  So why is it that there are so many bitter people in Ohio and Pennsylvania?

The answer is that while economics is not a zero-sum game, and trade always benefits the participants, change can still produce winners and losers.

Let’s take a look at the plight of the Detroit auto worker.  In the old days, Mr. UAW managed to make a good living on the assembly line even without the benefit of a college degree or unusual technical skills.  Then along came Toyota, Honda, and Nissan, and pretty soon Michael Moore was running around Flint, Michigan railing against the evils of capitalism.

Someone won (Japanese auto makers), and someone lost (Detroit auto workers).  So is that an example of a zero-sum game?

Not really.  What’s missing is a full accounting of winners and losers.  Most importantly, American motorists were big winners.  The Japanese auto makers produced cheaper, safer, more reliable cars.  Car buyers ended up saving money AND getting a better product (which probably even saved a large number of people from dying in accidents).

Not only did the benefits accruing to the Japanese auto makers and American motorists outweigh the losses suffered by Detroit auto workers, the net benefit to Americans was almost certainly positive (not even counting the benefits enjoyed by that blowhard Michael Moore–a factor that I view as a big net negative for America as a whole).

The reason we think of the rise of the Japanese auto industry as being bad for America is because the winners are largely invisible (and unaware) and the losers are highly visible (and loud).

In 2005, the Big 3 US auto makers employed 250,000 workers, who were paid an average of $50/hour, or $100,000 per year (this compensation figure includes benefits).  The total value these workers received was $25 billion.  Americans buy about $600 billion of cars per year (17 million vehicles per year).  Do you think that American consumers have benefited at least 4.2% on the cost of new cars because of Japanese competition?  If anything, the equation seems like it is wildly on the favorable side, especially when you consider that those 250,000 workers could, presumably, get other jobs.

The problem is that the 17 million car buyers each year don’t think of themselves as a special interest group and don’t have their own political action committee to bribe–er, support–members of Congress.

However, even if America as a whole benefits from Japanese competition, our friend Mr. UAW does lose out.  There aren’t that many $100K jobs available for people without college degrees or specialized technical skills.  Most of the autoworkers who lost their jobs probably didn’t have the skills to make as much money in other fields.

The results were devastating, both personally, and for communities.  Detroit still hasn’t recovered.

The key question is not whether the government should try to turn back the clock and block globalization–doing so harms the country as a whole (even though most politicians and voters are apparently too thick-headed to realize this).  The question is, how do we take some of the value that globalization creates and use it to ease the transition for the losers, even though their losses are outweighed by the gains of the winners.

That, my friends, will have to wait for another essay.

29 Comments

  1. Alex
    Posted May 4, 2008 at 5:14 am | Permalink

    “The question is, how do we take some of the value that globalization creates and use it to ease the transition for the losers, even though their losses are outweighed by the gains of the winners.” - I’d be interested to hear your thoughts on that.

  2. Posted May 5, 2008 at 5:19 pm | Permalink

    Chris:

    In a world with limited (scarce is the term economists use, I think) resources how can everyone win?

  3. admin
    Posted May 5, 2008 at 6:45 pm | Permalink

    Alex,

    The concept of a safety net for economic have-nots makes a lot of sense even if you don’t feel any compassion for the poor.

    Widespread suffering tends to express itself in revolutionary behavior, and I personally have no desire to be put before a firing squad.

    Even the Montgomery J. Burns-style evil rich understand that it’s cheaper to pay for a safety net than it is to raise your own private army.

    I think what you’d do is provide financial assistance and retraining resources. What you want to avoid, however, is a generous welfare state that encourages idleness and resentment on the part of the working.

    Instead, go for a miserly welfare state (http://chrisyeh.blogspot.com/2008/05/modest-proposal-to-solve-poverty.html) that provides an uncomfortable safety net.

    And such a safety net can probably be made general enough to serve everyone, so you don’t have to come up with an elaborate infrastructure to ensure that benefits only go to those laid off by targeted industries.

  4. admin
    Posted May 5, 2008 at 6:50 pm | Permalink

    Anthony,

    It is true that in a world of scarce resources, it’s not possible for everyone to win. But it is possible to increase the pool of resources, and the distribution of resources has an impact on that growth.

    Imagine a world where all resources went to a single individual. Not much incentive to improve things, is there?

    Now imagine a world in which all resources were distributed equally to all humans. Again, not much incentive to improve things.

    The trick is figuring out the Goldilocks distribution–not too inequal, not too equal–to maximize resource growth. My guess is that a relatively inequal but fair distribution generates the best possible results.

  5. Posted May 12, 2008 at 7:42 pm | Permalink

    The economy is not a zero-sum game because knowledge is the primary factor in wealth now. If I create an engine that doubles the mileage you get out of a gallon of gasoline, and then I manufacture and sell this engine competitively, I will have doubled the world’s gasoline supply.

    Scarcity of resources is an illusion. Rather the problem is a scarcity of knowledge and the wisdom to use it.

    How we educate ourselves and manage our relationship to our environment (social and physical) is the key to global economic development.

  6. USLawman
    Posted December 14, 2008 at 3:49 am | Permalink

    What nonsense, talk about distorting reality to reinforce bias. You can’t see the losers, so I guess we should believe they don’t exist. $100 an hour autoworkers, huh…only if you pile on the cost of all those unfunded benefits the employer lied about funding for 30 years to inflate earnings. We do not live in economies and societies where blueberries grow outside our caves, and much of our population wears the ball and chain of debt service and is afraid to venture from fragile employment. Yes, we are entreing the frame of zero sum game having exploited all the easy pickings.

  7. Nicholas
    Posted February 11, 2009 at 6:25 am | Permalink

    Doesn’t this idea of the “growing economy” in the positive-sum interpretation of economics ignore the inherent inflation that comes with the growth. The trade value of Grunt’s beetles has now decreased due to the ready availability of blackberries. When per capita GDP increases, yes, everyone has more currency, but that currency’s relative value is decreased, leaving only those who gained greater than the average proportion in a better state than before.

  8. Rob
    Posted February 17, 2009 at 5:25 am | Permalink

    Ok. Tell us, who are the winners in this financial meltdown? Who were the winners in the crash of 1929? Cue Bono?

  9. Rob
    Posted February 17, 2009 at 5:28 am | Permalink

    Ok. Tell us. Who are the winners in this financial meltdown? Who were the winners in the crash of 1929 and the depression that followed?

    Thanks.

  10. JE
    Posted March 5, 2009 at 3:19 am | Permalink

    Nicholas, just because blackberries have a higher value does not mean that the value of Grunt’s beetles “decreases” at all. The blackberries are simply worth more because they taste better.

    It’s also not true that a currency’s relative value decreases when GDP increases. You need to distinguish currency from wealth. The amount of currency stays the same, but the amount of overall wealth in the economy rises with the GDP, and with it rises the standard of living in the country (i.e. we’re eating blackberries instead of beetles).

  11. schuyler
    Posted March 19, 2009 at 7:53 pm | Permalink

    Popular and traditional economic theories do not take into account the natural laws that govern the physical world, e.g. Thermodynamics. When an economy functions on a global scale, then fundamental natural limits become critical for the sustainability of an economic system. Ecosystems have finite limits, in relation to fossil fuels or minerals that we mine from the earth, for example. Water, nutrient rich soil, and other sustainable resources have rate limits; that is, they can only recover at a finite rate. There is a finite rate at which solar energy falls upon the earth. In the context of such examples a global economy indeed DOES represent a zero sum game. For a given standard of living there is a finite number of people the earth and it’s ecosystems can support. When resource limits are reached, there will be a corresponding change in some other factor of the balanced physical system, e.g. lower standard of living, fewer people, etc. Forget what MBAs have to say about global economics; in the scope of very large scale systems, their fundamental assertions are unscientific and consistently wrong.

  12. VA
    Posted August 26, 2009 at 5:47 pm | Permalink

    “…So now we’ve seen that economics is not a zero-sum game, and that trade brings benefits to both parties.”

    What exactly are these benefits? We should be able to quantify them in some manner. Physics dictates that nature is a zero sum game, so in the case of Thak and Grunt, some benefit is being transferred from natural resources (blueberries and beetles) to themselves.
    Notice that if the blueberries were not eaten then they would fall to the soil and enrich the soil and give rise to newer blueberry shrubs. By eating the blueberries, Thak has appropriated that benefit for his own survival. Similarly with beetles and Grunt.

    So the economic growth (benefit) has occurred by transferring some natural resources for human survival.

    Ultimately, survival is the only real benefit. Even a luxury is a means to prolong ones life even though it’s very inefficient at doing so…

  13. RJM
    Posted November 7, 2009 at 11:25 am | Permalink

    IMHO, the economy is a zero-sum game. Ultimately, total profits must equal total losses. Yet the economy does grow. However this is only possible because the losses are eventually written off and are forgotten about. In the example of Thak and Grunt, the blackberries always existed and therefore were always (potentially) part of the economy. Their discovery did not expand the economy.

  14. RJM
    Posted November 7, 2009 at 11:32 am | Permalink

    Another factor is credit and debt. One way the economy expands is through debt. All of the apparent growth in in the economy, including capital assets is offset by equal and opposite levels of debt (less whatever has been written off). When added together these equal zero.

  15. Andrew
    Posted December 5, 2011 at 11:21 am | Permalink

    You have not proved that the economy is not a zero sum game. You use examples exploiting natural resources (blueberries/beetles) which are merely assets that were static moving to the dynamic. The fact that the assets change in ownership (from not owned by a caveman to being owned by a caveman) does not prove that there is an addition to the world economy, it only proves that they entered human ownership.

    Additionally, your example with the auto makers does not prove that the gains outweigh the losses. What are the ancillary costs to the country of the lost economic value of the UAW workers?

    In the same simplistic way that you dismiss the idea that the economy is zero sum I ask this: If world trade is not a zero sum game why has the average American wage dropped in value (in inflation adjusted dollars) since Reagan opened the Pandora’s Box of supply side economics? Let me be as arrogant as you and answer that it is obvious that the ascending wage of China and India are at a direct cost to American and Western European wages.

    I do not really say that I am correct, I only say that you have not proved anything. You should go back to school and see if you can learn how to use scientific method or maybe how to do a geometric proof.

  16. outtanames999
    Posted April 7, 2012 at 9:39 am | Permalink

    But the world economy is now a zero sum game. It’s a zero sum game simply because there is no longer anywhere to go to hide your money to achieve a strategic advantage.

    The world is known. Resources are known. Economic performance is known. Population is known. There may be technological advances but those are quickly known as well. All of which diminishes the advantage that may come from knowledge.

    Economies are intertwined to the maximum degree preventing a strategic advantage to moving money from one economy to another. Today there is only a single economy. There is nowhere left to hide.

    There are no more colonies. Bush was a dumb f*** but he was right about one thing - we need to colonize Mars. That would at least then give us an out-of-this- world-economy trading partner.

    Until then, welcome to the zero sum game.

  17. Ultimo
    Posted July 26, 2012 at 10:58 pm | Permalink

    Currency has only relative value. How much a worker earns is, of course, relative to the wealth of others in the society.

    Imagine a simple society in which there are only 5 workers who each earn 5 units a day. Let’s say that food is the primary concern in this society and so each worker is willing to spend 60% of his/her salary for daily food.

    If we construct a free market pricing policy for a food provider we can see the free market value for daily food as an aggregate of the value of the food for a worker times the available currency of the worker. Food value = [(.60)*5 + (.60)*5 + (.60)*5 + (.60)*5 + (.60)*5]/5 = 3. So the food provider sells daily food at 3 currency units.

    Now say politics has caused 4 of these workers to now earn 50 currency units a day while the last worker still only earns 5 currency units. Note that the last worker still makes the same amount. If we assume that the desire rate of each worker for food is .60 then the new free market value for daily food is [(.60)*50 + (.60)*50 + (.60)*50 + (.60)*50 + (.60)*5]/5 = 24.6 which means the last worker now starves. Again, the last worker doesn’t make less money, it is just that his money is worth less because it is a relative measure to the money of the rest of his society.

    Imagine, on the other hand, that only one of the workers now makes 50 currency units a day while the other workers still earn 5 currency units. The free market value for food is now [(.60)*50 + (.60)*5 + (.60)*5 + (.60)*5 + (.60)*5]/5 = 8.4. This means that now only the first worker can afford food. Again, it isn’t that the other workers make less than they used to. The currency is relative to the available currency of everyone in the system. The first worker has obviously benefited and can now afford many things other than food, but at the expense of the now relative poverty of the other 4 workers.

    This is, of course, a simplistic model. But one can see my point. The gain in currency for any person(s) is propagated by the increase in cost of goods to everyone (i.e. inflation). You can see it clearly in the equation: cost = average of [(desire rate)*(available currency)]. An increase in available currency necessarily increases the cost. Unless, that is, the desire rate isn’t static and is itself a function of available currency. But I think that the desire rate itself would only increase if the available currency increased. That is to say that if a person has more available money then the person’s desire for particular goods increases.

    The cost equation also doesn’t factor in supply or premium goods/services (i.e. luxury items). But I think supply and luxury would affect the equation independent of available money. Cost = premium coefficient * average of [(desire rate)*(available currency)] - supply dynamic. Even in this new model, increases in individuals’ available currency propagates through the system as increased cost.

    To summarize, the increase in wealth by the world’s super rich doesn’t directly decrease the wages of the middle class. But it does decrease the relative value of the wages of the middle class as propagated by increase in free market costs of goods and services (i.e. inflation).

    Nicholas (the above poster) is correct in his analysis. You’re only doing better as a function of time if you’re income rises at a rate greater than that of inflation.

  18. Ultimo
    Posted July 26, 2012 at 11:00 pm | Permalink

    Edit: *your in last sentence of above post.

    Nothing like proof-reading after posting, right?

  19. Ultimo
    Posted July 28, 2012 at 6:10 pm | Permalink

    Admin.

    Forgive me bust I must expand upon my previous post.

    Firstly, when you argue that the value (currency and trade goods) within a system can grow you’re missing the entire point of the debate.

    I concede, Thak and Grunt can increase the value within their system. Although I think you are wrong even in your assertions about how. Unrealized natural resources (the blackberries in your Thak and Grunt example) would already be taken into account if you used an appropriate frame of reference for your system. The natural resource is either already claimed by someone or is a resource of the shared system (in Thak and Grunt’s case, their ecosystem). The former shows a direct loss to someone corresponding to Thak’s gain, and, even if you don’t care about the latter, natural resources are finite. Thus the gain to Thak and Grunt’s system is finite and represents unsustainable growth. At some point, Thak and Grunt will have taken into their system all available natural resources and could no longer grow their economic system via inclusion of more natural resources. I believe this was VA’s point in his post.

    The only sustainable growth into an economic system I can see is the human creation of art and innovation. This is the ability to create increased trade value in raw materials.

    But that entire line of argument is irrelevant. I concede the ability to indefinitely increase the amount of value in an economic system. The heart of this debate lies in the fact that currency and trade value are relative values.

    If I were to create a currency called ultimos you and I would have no idea what the value of an ultimo was unless we had a conversion to another form of known currency. The ultimo would have no absolute value (there may be trade value in the materials it is made from). The same applies to the trade value of commodities. There may be some intrinsic value in gold bars and bales of hay to some people, but because we’re talking economics and not philosophy, we’re concerned with a commodity’s trade value.

    If I were to invent a widget and wanted to know the trade value of a widget how would I determine it? I could just guess a price and try to sell it. A more scientific approach would be to begin asking people what they would pay for a widget. I ask person A. Person A values shelter at 40%, food at 20%, savings at 20%, entertainment at 19% and now having seen a widget, widgets at 1%. Person A has 100 currency units to spend per day (the time measure is irrelevant as long as it is consistent) and so is willing to spend 40 units on shelter, 20 on food, 20 to savings, 19 on entertainment, and will pay 1 unit for my widget. I continue asking people what they’ll pay for my widget and get a set of data values.

    Now if I want to sell 1 widget, I’d pick the maximum of the set and sell at that price. If I wanted to sell 2 widgets, I’d sell 1 widget to the person who offered me the most and a second widget to the person who offered second most. I’d take the top 2 values from my data set. If I sell x number of widgets, I’d pick the top x values from my data set. If I wanted to sell many, many widgets and essentially saturate the market, my average sell price would mathematically limit to the average of the data set I had collected.

    This is my justification for the mathematical cost formula I presented in my previous post. My market based sell price would settle on the average of [(a personal desire proportion)*(available personal currency)]. Again, you can see directly in the math, this sell price is a function of desire and personal currency. The trade value of my widget is related to the currency available to everyone in my economic system. It is a relative measure. The sell price of the widget does not exist independently of the personal economic states of the individuals in the system.

    I had conceded unlimited growth in the value within an economic system. The economic growth is either 1) evenly distributed to all individuals in the system or 2) disproportionately distributed to all individuals in the system.

    If the economic growth is disproportionately distributed, then it lowers the relative wealth of those who receive less than the rate by which the growth inflates the system. This was my original point in my previous post. Any increase to the amount of value in an economic system devalues the individual unit of currency in the system (inflation).

    Take Thak and Grunt. Say before the blackberries Thak and Grunt reached a trading equilibrium and each had 3 beetles and 2 grubs. An outsider shows up with a club he wants to trade. Thak and Grunt are both full and are both willing to spend all their currency (they could just as well be willing to trade any proportion of their currency) to acquire the club. The trade value of the club is 3 beetles and 2 grubs.

    Now let’s say Thak HAS discovered the blackberries and is unwilling to trade them to Grunt. This is the case of disproportionate economic growth. Grunt has 3 beetles and 2 grubs, but Thak has 3 beetles, 2 grubs, and 6 blackberries. The outsider again wants to trade his club. “Grunt can’t be harmed”, you say? Thak can offer 3 beetles, 2 grubs, and 6 blackberries. Assuming blackberries have ANY value to the outsider, Thak gets the club. An indirect consequence of Thak’s economic gain was the relative economic loss to Grunt. That’s the point. The value of the trade goods are relative to the amount circulating in the system and the proportion of which the individual trading has.

    Say Thak has discovered blackberries and IS willing to trade. Before his discovery, they had reached an equilibrium of 3 beetles and 2 grubs each. Grunt has to trade some number of his beetles and/or grubs for some number of Thak’s blackberries. Say Grunt trades 1 beetle for 3 of Thak’s blackberries. Now Grunt gets to have blackberries. But now Grunt has 2 fewer beetles than Thak. Again the outsider shows up and wants to trade his club. Grunt can offer 2 beetles, 2 grubs, and 3 blackberries. Thak can offer 4 beetles, 2 grubs, and 3 blackberries. Thak still has more trade value.

    Surely, then, if value is added to the system proportionately, then no ones loses right? Yes, but no one wins either. Again, take Thak and Grunt. Each has 3 beetles and 2 grubs at equilibrium. Thak discovers the 6 blackberries and simply gives Grunt 3. Again suppose the outsider and his club arrive. Also, again suppose both Thak and Grunt are full and willing to trade all of their currency for the club. (Note if a different desire proportion were used in the first example, use it here as well.) In the first example, the trade cost of the outsider’s club was 3 beetles and 2 grubs. Now the trade cost for the club is 3 beetles, 2 grubs, and 3 blackberries. Because the desire proportion for the club remains constant, the cost of the club is inflated to match the now wealthier Thak and Grunt.

    The purchasing power of an individual is relative to one’s proportion of the system. You can grow an economic system all you like. But if the growth is disproportionate, then those whose wealth didn’t grow lost relative wealth due to inflation. And if the growth is proportionate then no one gained any relative wealth. The boost to the system directly matched inflation.

    If you don’t believe me, try this for a thought experiment. Imagine doubling the wealth and income of everyone in the world. Do you think the price of everything would double?

    You can add money or commodities to an economic system. But wealth is a relative measure. So whoever didn’t directly benefit from the boost loses relative wealth. It is indeed zero-sum.

  20. admin
    Posted August 9, 2012 at 11:33 pm | Permalink

    Ultimo,

    You’re right that the blueberries represent an unexploited natural resource rather than a technological innovation.

    However, the point about the system being non-zero-sum still applies. Clearly, our economic systems have progressed since the caveman days. Some of this is due to the exploitation of natural resources, but more is due to technological innovation.

    If you believe that it is possible to boost both population and living standards (which has clearly occurred over the past century) you believe in a dynamic, non-zero-sum system.

  21. Ultimo
    Posted August 24, 2012 at 6:55 pm | Permalink

    Chris,

    I apologize for only now using your name.

    You are making the mistake of conflating innovation with the economic activity of selling it. I must admit until recently I had a similar line of thinking about innovation but suspected something was amiss. Having discovered it, allow me to illustrate it.

    Let’s use the example of the innovation of the automobile. Say the automobile had exactly replaced the value to people of the combination of horse and buggies and bicycles (I know that is NOT the case, but will return to that). Then for every thousand currency units of automobile purchased, a thousand currency units of horse and buggy/bicycle otherwise purchased would not be purchased. The automobile has exactly replaced the horse and buggy/bicycle as a desired means of transportation. So yes, the makers, distributors, and sellers of automobiles have gained relative wealth from this innovation, but it has been exactly replaced by loss in relative wealth to those making, distributing, and selling horse and buggies/bicycles.

    Now, more realistically, say the automobile is worth more than the horse and buggy/bicycle. Again makers, distributors, and sellers of automobiles gain relative wealth from the innovation. And again, makers, distributors, and sellers of horse and buggies/bicycles lose relative wealth. Your argument would be that the gain on the automobile side is greater than the loss on the horse and buggy/bicycle side. True, but there is addition loss in relative wealth. Now that automobiles occupy a greater share of the desire proportion to people, something else loses desire proportion. There is only 100% to go around. Whatever lost desire proportion due to the increase in desire for transport (automobiles have increased the desire proportion of transport) losses trade value. People are willing to spend less on things they desire less. So the additional wealth generated from the switch to automobiles is lost somewhere else in the system. In either case, the innovation from horse and buggy/bicycle to automobile is zero-sum system wide.

    If you still don’t believe me, consider this more apparent example. Say Mr. Henry Ford was a very generous man. Say when he created the automobile he decided to give them away rather than sell them. Now everyone’s horse and buggy/bicycle is replaced with an automobile. Everyone’s standard of living has increased and no economic transactions have occurred.

    The innovation and the act of selling the innovation are independent events. The innovation does usually benefit society. There is usually a positive sum related to innovation. But the economic activity of selling the innovation is indeed zero-sum.

    This is the exact reason that the increases in the standards of living are available only to those with the relative wealth to afford them. Not everyone drives cars; not everyone has the internet; not everyone has refrigerated food; not everyone has access to proper medicine. In fact, a much larger proportion of the population lives via subsistence farming than we dare admit.

    In your fallacious argument of non-zero sum look at how one could generate wealth. 1) Take from someone else. This directly implies zero-sum. 2) Increase the amount of something in the system. This only deflates the value of those somethings already in the system. This is the reason the government doesn’t just print more money. 3) Increase the trade value of something in the system. (Innovation/art) I had actually already made this point in my argument for finding my widget selling price. Notice that for an invention like a widget to have any trade value it must occupy a non-zero portion of someone’s desire proportion. Since the person’s desire proportion was already set at 100% this must necessarily take away desire proportion from something else and thus reduce its trade value. We all have personal experience with this when we go shopping. The value gained in my widget is lost somewhere else in the system. This isn’t instantaneous, I concede, but the market will bare this out in time. i.e. a widget could approximately replace a magic eight ball or some other knick knack or could reduce the desire for a magic eight ball to 1/2 its original value and then the widget and magic eight ball would each occupy 1/2 the original value of a magic eight ball. 4) Increase the amount of people in the system increasing the market for products/services. People aren’t born with trade value. How will s/he obtain trade value? 1) Directly take from others, 2) Increase the amount of something in the system, 3) Increase the trade value of something in the system, 4) Use his/her capital labor. I’ve already covered the first three. Say a person uses his/her labor capital to gain trade value. Well, s/he participated in a fair market trade. Time/energy for trade value. That is zero-sum. The individual transactions s/he now transacts with his/her new trade value are zero-sum. I believe that covers all possible avenues of a growth argument.

    You only need acknowledge that 1) wealth is a relative value and 2) individual economic transactions are zero-sum and those 2 tenets imply the system is zero-sum.

    For my last point, I will expand upon the thought experiment I posed previously. Take an imaginary global human population for your economic system. Say there is one global czar with limitless power who, to the delight of his people, exactly doubles the amount of everything everyone has. So now a farmer has 2 acres of land for every 1 acre and has 2 oxen for every 1 ox and 2 currency units for every 1, etc. Surely he would be heralded as an exemplary leader, yes? He DOUBLED the economy! Say, then, he dislikes the currency unit and replaces it with a new currency unit worth exactly 2 of the old unit. He then dislikes the acre measurement unit and replaces it with a new acre which is exactly 2 old acres. He then dislikes a single ox unit of measurement and replaces it with a new ox unit of measurement that is exactly 2 oxen.

    Whatever the supply and demand dynamics that were in force before the doubling are exactly replicated again. If a person had 1 acre of land, 2 currency units, and 3 oxes before the doubling, s/he now has 1 new acre, 2 new currency units, and 3 new oxes. In terms of the economics, s/he can afford EXACTLY what s/he could afford before the doubling but now in terms of new units instead of old units. But wait a minute, you say. If s/he could afford to buy 1 car before the doubling, s/he can now afford 1 new car which is 2 old cars. Of course s/he gained from the doubling. You’re mistaking twice as much “stuff” for economic gain. You can very well argue that there is a tangible benefit to having twice as much “stuff” as before and I’m inclined to agree with you. But that is not an economic gain. That is an intrinsic gain, much the same as the innovation is an intrinsic gain and not an economic one. To clearly see this, one has to only imagine a person in my thought experiment who purchases something in which you can’t see the doubling influence.

    Go back to the person in my thought experiment. S/he had 1 acre, 2 currency units, and 3 oxes. Say that was precisely enough for a funeral service s/he wanted when s/he died which cost 20 currency units. Like I mentioned before, the supply and demand dynamics haven’t changed after the doubling because it is the same amount of people with the same amount of currency units and trade units (it is only the measurements of the units which have changed). The funeral for this person now costs 20 new currency units which is again exactly what s/he can afford. When s/he dies, there will still be nothing left in his/her estate. Where did the value in the doubling of the “stuff” in the system go? It was never an economic value to begin with. It was a sort of intrinsic, culturally defined value to having more stuff. It was NOT any increase to anyone’s proportion of the “stuff” in the system, which is what economic wealth measures. That is where the fallacy of your non zero-sum argument lies.

    So even in your argument’s best case scenario, proportional growth, we can see it is not an economic growth at all. It may be more stuff proportionately distributed, but once one has to interact with the market to acquire different things, we can see it is not economic growth.

    Now, I concede, if you look at an absolute measure of the system in my thought experiment, it is of course doubled. But that is only valid as an absolute standard. There is nothing else for the entire system to interact with. The value of the entire system cannot be considered a trade value because there is nothing for the entire system to trade with. So if the entire system in my thought experiment was one person who doubled his/her stuff. S/he certainly did gain in value right? Yes, but if s/he is the whole system, who can s/he trade with? It was not an increase in trade value because there can be no trades. It was an increase in intrinsic value.

    That is another example of the fallacy in your argument.

    Again, the very definition of economic value dooms economics to the study of relative values. And relative values implies zero-sum.

  22. admin
    Posted August 27, 2012 at 4:53 pm | Permalink

    Ultimo,

    Thanks for taking the time to write such a detailed comment.

    I still believe that economics is not a zero-sum game. Your argument makes a key incorrect assumption, that increasing the amount of something in the system only deflates the value of that which is already in the system.

    While it may deflate the relative value, it does not deflate the absolute value.

    The key is that money is simply a means of exchanging value; it is not the value itself. Monetary policy cannot create value; the only reason we think it can is because poor monetary policy can destroy value, and thus reforming monetary policy increases productivity.

    Let’s imagine an agricultural society that makes just enough food to feed its people at a starvation level.

    Now imagine an inventor creates a new technology that allows that society to double its food production.

    If the money supply remains the same, food will presumably be less expensive, thanks to supply and demand. It’s unclear if the farmers will actually be better off.

    Yet in a broader sense, society has clearly benefited. The society goes from the edge of starvation to a comfortable life of plenty.

    Regardless of how the flows of money change, that society is much better off.

    Since the society is better off, it is clearly not a zero-sum system.

  23. Zenyatta
    Posted October 24, 2012 at 4:17 am | Permalink

    I am a geophysicist, not an economist. Consider the following perspective: everything that we do as humans is contained within a system described by fundamental physical laws, for example the First Law of Thermodynamics. This law, in conjunction with Einstein’s theory, states that energy(=matter) can be neither created nor destroyed, but can change form; i.e., the classical example of “zero sum.” Since all human activities are contained within this system described by these laws, then by extension the activities themselves must also be zero sum - ultimately. Systems appear “non- zero sum” due to i) limits placed on the timeframe, boundary conditions, or perspective from which the system is viewed, or ii) a partial consideration, understanding, appreciation, acknowledgement, and/or recognition of all sources and sinks of energy. Case in point: your “blackberry discovery” example considers only the effect on the cavemen, and nothing else. That is not the entire system in play. Don’t get me wrong, placing limits, using boundary conditions, and restricting perspective are very helpful and handy methods to help to understand part of a system. But everything “evens out,” eventually.

    I am mystified by the arguments pro-con regarding “wealth” being zero sum as a justification that the poor should be taxed less or the rich should be taxed more, etc. etc. (By the way, I fall into the “1%” category, and I work in one of the most conservative industries in our country). The fact of the matter is that the “wealth distribution function” here in the US is asymmetrical … and I would argue that it is rightly so. However, if you look at the statistics on US mean household income (http://www.census.gov/hhes/www/income/data/historical/household/ — I reviewed the table for “all races,” did not parse any further…), you will note that the lower 3 quintiles show virtually no real income growth in 30+ years, whereas the upper two quintiles (and the uppermost 5% — my category — ) show marked increases in real income growth. The mean for quintile 1 is well below the 2012 poverty threshold for a family of four, and the mean for quintile 2 is just above it. I suspect that quintiles 1-3 struggle quite a bit. I have not had time to study the % population by quintile, but I anticipate there’s quite a number of hard-working Americans in those groups — not just shiftless white folks collecting welfare.. ;>) . In our great nation, even after factoring in the imperative for all of us to have incentive to improve ourselves, is it reasonable, fair, or justified for that much of our population to live so close to the edge, over such a long period of time that spans many different administrations? I would argue no, it is not reasonable, fair, or justified. and objectively I would assert that the value of what I do may be “inflated” at the expense of hard-working people in lower incomes brackets. My compensatory action is charitable giving … and not because it is a religious requirement, but because it is the humantiarian thing to do.

    Think about it …. if the lower 3 quintiles showed a slope representing appreciable income growth, would we be talking so much about tax burdens, rich vs poor, etc.? Of course, I can hear the arguments now about ” free market forces” etc. but let’s dispense with ideal models and live in the real world. Yes, our capitalist system is the best one devised so far …. but it is not objective, information is not instantaneously available to all, people like me … and you … can be selfish and irrational from time to time, those with more power / money have more control and influence and are tempted to abuse it, and we all struggle with our level of responsibilty toward the general welfare of our fellow citizens.

    (Note, sharp eyes and minds will note that the income stats mentioned above do not include the cash value of non-cash welfare benefits … but adding that in will not fundamentally alter the basic premise here…)

    Lastly, note that I am an income-quintile “jumper,” from quintile 2 or 3 to the top 5%. I was raised on a farm in the SE US. How did it happen? By applying my native intelligence (the endowment of which I had no control over) and being born in the right place at the right time (also no control), combined with hard work, folks along the way who took the time to care, and mysterious injections of luck and timing for which I neither prayed nor requested). Go figure.

    Happy reading and thinking.

  24. admin
    Posted October 26, 2012 at 5:05 pm | Permalink

    Zenyatta,

    Thanks for the thoughtful comment. I’m in agreement that the stagnation of real incomes for lower quintiles and the increasing inequality of income in the United States are real problems.

    In terms of solutions, however, globalization and trade are not the enemy. I think the Economist made a very good point in their recent special issue on inequality; their argument (which I agree with) is that capitalism doesn’t require extreme inequality; in fact, the extremes of inequality around the world generally stem from cronyism, not honest competition.

    Mark Zuckerberg may be rich, but he enriched numerous others in the process.

    In contrast, the subprime mortgage debacle enriched a number of bankers, but nearly bankrupted the country.

    If the government sets and enforces a fair playing field, I don’t have a problem with some inequality; after all, talented people like you will be able to succeed. And few in this country are in favor of equality of outcome, rather than equality of opportunity. Our problem today is that there isn’t equality of opportunity, largely due to our broken educational system.

    Finally, one minor point–the Earth is not a closed system. We are the constant beneficiary of a massive energy subsidy from the Sun. Ultimately, the solar system is largely zero-sum, but that restriction won’t come into play until the Sun’s hydrogen starts to run out in 5 billion years. Therefore, the thermodynamic argument for a zero-sum economy does not apply.

  25. Ultimo
    Posted October 29, 2012 at 10:17 pm | Permalink

    Chris,

    There is nothing I love more than a concession of my own ignorance. I must admit I went into this debate without knowing the actual definition of economics. Let me give the definition I found: the study of the material welfare of mankind. So you’re right, that is not zero-sum. The instant the first human ancestor created the first tool or piece of clothing it became positive sum. But that is a terrible and conflated definition of economics and I’ll tell you why.

    By the definition above I can conclude then that beavers have economies because they build dams or birds have economies because they construct nests? Of course not. We all know “economics” refers to the trading of the material world which is why other species don’t have economies. Every economic statistic I’ve ever seen is measured in currency which is literally nothing BUT trade value.

    The definition of economics is so inaccurate you can just sidestep a meaningful discussion about it. Is that a coincidence or was it intentionally constructed that way to give the elitist argument a default victory? I don’t know. I will say, however, that academia, including your alma mater, is an incredibly monied industry.

    Also, in the example of your last reply to my messages, you mentioned a scenario in which a population doubles their food production to elevate the population from fringe starvation to comfort. Once the food is no longer needed for immediate consumption, the food’s value is trade value and we’re once again in a discussion of relative value.

    More to the point, we DO produce more food than we need. Guess what? People (poor people) still starve. Do you know what grocery stores do with food on the day of expiration? Some donate it. Some destroy it. They don’t want employees to have an incentive to not sell the food. Same with books, by the way.

    In summation, I do concede your victory in the debate. But the premise on which you draw your conclusion is faulty and I hope I have demonstrated why.

  26. admin
    Posted October 29, 2012 at 10:38 pm | Permalink

    Ultimo,

    Economics is simply a system for understanding how the world works. The terminology you use doesn’t change the underlying reality; it simply helps you understand it.

    During the subprime mortgage bubble, the bankers pretended that their economic models could make risky loans safe; we all know how that turned out!

    You can use economics to describe beaver behavior, just as you could to describe human behavior. A decade ago, people considered it strange to apply economics to activity within video games; today, this is commonplace, and video game developers hire economists to help them design their games.

    The underlying facts are simple–our world is not zero-sum. If it were, we’d still be a tiny group of cavemen skulking in a cave. All the economic theory in the world can only describe that non-zero-sum system; it cannot produce it.

  27. Ultimo
    Posted March 24, 2013 at 8:43 pm | Permalink

    Chris.

    You are correct in that our world is not zero sum. I absolutely agree that the progression from cave dwelling to modern electricity and travel and production is without question positive sum. My objection lies in what you define as “economic”.

    Let me offer another thought experiment. I like to rely on these because real world scenarios have far too many variables for system-wide understanding and modeling.

    Imagine three people living on a small, isolated tropical island. Each person has found two sand dollars (their unit of currency) and each person has developed a trade. Person 1 has set up tree hammocks for sleeping. Person 2 has found a banana tree from which s/he sells bananas. Person 3 has found a vista from which you can view dolphins as a means of entertainment. Each day person 1 spends his/her 2 sand dollars: 1 for a banana and 1 to watch dolphins. Each day person 2 spends his/her 2 sand dollars: 1 on a hammock on which to sleep and 1 to watch dolphins. And each day person 3 spends his/her sand dollars: 1 on a hammock to sleep and 1 on a banana. At the end of each day, each person receives 2 sand dollars for his/her services and spends those 2 sand dollars the following day. It is a very simplistic, but stable economy in which the three citizens enjoy comfort, food, and entertainment. Let us label this society A.

    Now, imagine that person 1 realizes s/he can build pillows from leaves to make his/her hammocks a little more comfortable. Imagine, also, person 2 finds a nearby coconut tree and sells his/her bananas with an accompanying coconut. And, lastly, imagine person 3 finds a second vista from which sharks can be viewed and now offers two entertainment spots. Let us say all 3 people are happy and content and it never occurs to any of them to raise his/her price and so the cash flows of this system are identical to society A, but the goods/services offered are more advanced. Let us label this society B.

    Now return to society A and its less sophisticated goods/services. Say on day i person 1 realizes s/he can build pillows from leaves and s/he realizes this increases his/her product value. So on day i person 1 sells a rest in his/her hammocks for 2 sand dollars. Person 2 and person 3 both dig around and find 1 extra sand dollar each to accommodate for the price increase. At nightfall of day i, person 1 now has 4 sand dollars, person 2 has 2 sand dollars, and person 3 has 2 sand dollars. Person 1 is very proud of himself/herself because his/her innovation has now made him/her the richest person on the island. On day i+1, person 2 finds that nearby coconut tree and recognizes an increase in product value and sells a banana with an accompanying coconut for 2 sand dollars. Person 1 pays the 2 sand dollars for a banana and a coconut and so does person 3. On nightfall of day i+1, person 1 has 5 sand dollars, person 2 has 3 sand dollars, and person 3 has 0 sand dollars. Person 1 still feels wealthy tonight, person 2 feels middle class, and person 3 feels poor. Then on day i+2 person 3 finds that shark vista and sells an afternoon on either/both vista(s) for 2 sand dollars. To reach equilibrium again, person 3 will have to forego hammocks for 2 nights and person 2 will have to skip half a night’s sleep in a hammock, but the system can again reach equilibrium with each person spending 4 sand dollars a day and earning 4 sand dollars a day. Let us call this society C.

    My point is this: I, and I contend most people, would say there is no economic difference between societies A and B. There is no difference in the rate or amount of currency changing hands. There certainly is a difference between the two societies, but I argue their differences are those of technology and innovation.

    There is a difference that I would label as “economic” between societies B and C. Rates of purchase are not different, but prices are. Technology and innovation led to increase in product value which manifested in increased price. But since each person innovated at the same proportionate level, the system inflation is exactly offset. If you replace society C’s currency with that of a doubly valued currency, the currency system total and individual exchanges exactly replicate those of society B. Societies B and C are identical even though prices increased in one. (There was a small penalty to persons 2 and 3 for being later to the innovation party, so to speak.) Even though members of society C began charging more for their products/services, they are in no different position than their society B counterparts. There was economic change, but zero-sum.

    I realize you label the differences between societies A and B as economic because society B “increased the material welfare of the people.” But I contend that is an error in labeling. There is a difference between material welfare and distribution of resources.

    This is an important distinction because “economics” has been given such a broad, umbrella-like definition that it encompasses literally anything humankind could do to make life better in any capacity. And I think that is a grave error because the scope of that definition hides the important fact that economics defined as “distribution of resources” is absolutely zero-sum.

    If one takes the time to really dig into this debate as you and I have one can see that distinction and think about what that means. But you and I both know that most people don’t expend that level of time or energy on the subject. That’s why it is critically important that people understand “distribution of resources” is zero-sum and why I think economics as it is currently defined is so wrong and dangerous. When most people hear the word economics they think “distribution of resources.” It is plain to see material welfare increases, yet why do you suppose enough people think economics is zero-sum that you have to publish a webpage about it? (When I Googled it, I found several others so either many, many of us don’t realize material welfare has increased or economics is mislabeled.) For us, as a global society, to have a dialogue about economics (distribution of resources) and its implications it must be defined properly.

    As you summarized, the world is not zero-sum. Most of us, myself included, think that the material welfare of most people today is indeed greater than it was for most previous people. When you talk about a person’s, or a people’s, proportion of that material welfare, however, then you are discussing a relative value. And relative values are zero-sum.

    If you want to cling to your definition of economics and claim there is an economic difference between societies B and C in my thought experiment, then I cannot assuage you. But I think it is more important to consider distributions of material welfare than it is to notice houses are more comfortable than caves.

  28. Ultimo
    Posted May 14, 2013 at 12:48 pm | Permalink

    Chris, it’s me again.

    Perhaps you’ve grown weary of responding to me, but I’ve got another point to make.

    In my earliest posts I was trying to distinguish between trade value and something else I labelled as “intrinsic” value. I can make a better distinction. The difference between the two is trade value versus use value.

    Imagine a technological society equivalent to roughly 300 years ago in which only you and I live. I live modestly by raising cattle and farming and you live however you live.

    Say you’re a genius of the rare breed that composed Edison or Tesla and you invent the typewriter. The typewriter has tremendous use value because now you can record the written word faster and easier than handscript. But what is the trade value of your typewriter? That, my friend, depends entirely on me and not you. The trade value is determined, as I wrote earlier, by how much I desire it and how much wealth I have available for trade. Say I fully desire your typewriter and have available two oxen for trade. Then your typewriter has a trade value of two oxen. Say we accept such a trade.

    But your genius has not run its course and you’ve conceived of a personal computer that runs on things you call batteries. Is the use value of a personal computer greater than that of a typewriter? I think so. Say now you wish to trade this computer with me. What is its trade value? Well, I only had two oxen to trade and I traded both of those for the typewriter. So the only trade value I can offer is the typewriter. Your computer has a trade value of a typewriter which had a trade value of two oxen.

    The point is that whatever you invent, no matter how much increase in use value you create, its trade value is bounded by the wealth of those around you.

    In the real world governments like to do things like print more money which, among with other, more devious effects, give the illusion that trade value increases. But as we both know, the increase in trade value is offset by inflation.

    If you want to argue “it doesn’t matter because ‘economics’ encompasses both trade value and use value” than I have to concede defeat although I can and do argue that economics is mislabeled for the reasons I gave last post.

    If, however, your argument is that the trade value itself is positive sum then you’re completely wrong.

    I believe your argument is the former and not the latter although it is sometimes difficult to discern what exactly your argument is.

  29. TomRevitt
    Posted August 2, 2013 at 4:21 am | Permalink

    It may not be a zero sum game because as low wages and benefits proliferate across the world and now America too, the top one percent, still get more and more so they continue to gain. But the rest of the 99 percent work harder and harder for the SAME payment and benefits. So total globalization is not a zero sum game. But for the bottom 99 percent it approaches a true zero sum game and soon will reach it!

7 Trackbacks

  1. […] - this may almost be easy enough for captain toxic fumes to understand. Ask the Harvard MBA Is global economics a zero-sum game? I’d suggest he check the ventilation fan in his shop, first thing tomorrow, lest he end up looking […]

  2. […] disagree with your zero-sum concept. Here is one Harvard MBA economist on the subject of zero sum. Ask the Harvard MBA ? Is global economics a zero-sum game? Humans make wealth, simply by demanding it. Wealth in an of itself is a human invention. All of […]

  3. […] disagree with your zero-sum concept. Here is one Harvard MBA economist on the subject of zero sum. Ask the Harvard MBA ? Is global economics a zero-sum game? Humans make wealth, simply by demanding it. Wealth in an of itself is a human invention. All of […]

  4. […] definition also exists, this is what I was referring to: Ask the Harvard MBA Is global economics a zero-sum game? and esp this: Promethean Capitalism Part Thirteen: The Economic Zero-Sum Fallacy Of course I […]

  5. By » Rich people aren’t a problem Evan Hempel on July 9, 2011 at 5:19 am

    […] economy isn’t a zero-sum game – trades only occur when the parties to an exchange each perceive that they will benefit.  This […]

  6. […] However, often success stories are cases where people overcame a hardship. Our economy in not a zero-sum-game. If it was our economy would be the same size for the past 100 years (it isn’t). Most of the […]

  7. By Oct. 28 Blessings are not zero-sum on November 8, 2011 at 7:32 pm

    […] know zero-sum economics is a fallacy. Lately, I am learning I need to apply that to the rest of […]

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*