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 myster).  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 devasting, 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.

“How does the Harvard MBA view the Harvard Law Student who really wants a i-banking/analyst job at JP Morgan? Also, would you say that a business/corporate lawyer/law student has the necessary skills for competition in the investment arena? If you believe that they are capable of pulling this off, is there some kind of cut off of as per the quality (ranking) of law school for this kind of thing or not? What do you think of JD/MBAs?”

The Harvard MBA says:

It must be the time of year when people try to decide on college, grad school, and careers.  A lot of school-related questions this week! Fortunately for you, a JD from a top law school is rarely going to be viewed as a negative by any employer.  After all, you were probably a top undergrad three years ago; it’s not like your time at Harvard Law School has somehow destroyed your native intellect.