In a capitalistic economy in aggregate there will always be more winners than losers. In the stock market there will always be more winners than losers, even with transactions costs. Vegas in contrast is a negative sum game. In chess there is one winner and one loser, this is a zero sum game. I do not know why people do not understand this. Economics is not a game of chance or chess, it is a nonzero sum game, it is a postive sum.
What is a zero sum game? A zero sum game is a game where for every winner there is a loser. Therefore in order for somebody to win they must take something from somebody else.
The funny thing is most people believe life and economics is a zero sum game. That is the reason I when you see your neighbor with ostentatious wealth you feel there is some sort of injustice which allow him to get this wealth. This is because you look at your neighbor and can not believe that he possibly accumulated this well on his own accord with his own brain power. He does not look too smart and you’re only conclusion is although he did not steal it someone must have lost for him to have won.
However, the economy does not work this way. Economics and trade when done with on an arm’s length transaction basis always results in two winners.
The reason this is true is and because wealth is first created in the primary sector. That is agriculture mining minerals oil etc. Food is grown, Oil is refined and this gives people the energy to transform the world based on their creative powers. The rest of economics is just a matter of exchange based on optimizing their indifference curves.
Of course this is a great simplification, however, on a theoretical level this is how the world works. Every time you do an economic transaction both parties engaged in economic exchange because there is some perceived benefit.
Zero sum economics exists only when there is large government. The win-win model works in a free capitalist economy. This model does not work in a controlled economy. Examples of a controlled economy are state-run economies, the socialist economies, oligarch economies. The reason this does not work in control economy is some one has been an unfair advantage. When a market is not free people use their intelligence and creativity to get around the system instead of creating value.
This is why it is important to keep the market free as possible. To give people the chance to express their creativity and life. This is the way the world works. When we are all doing are thing, the world has benefits which are unseen on a miro level but on a macro economic level we society as a whole wins. This is Adam Smith. Postive sum economics is capitalism and democracy and the ideals of the enlightenment.
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9 responses to zero sum economy
Is money zero sum?
Dear Mark, great website. I found your website while I was searching for PDF of The Wealth of Nations, I have not read it yet.
I am trying to understand world economy, because that is the key to be rich.
I know economy is positive sum, but what I don’t know is if money is also positive sum, or zero sum?
I can imagine a positive moneyless economy, but I am currently unable to imagine how does money gels with positive economy.
I believe I am missing something, can you guide me?
Atul, Thank you for your kind words. Adam Smith is a great writer, but be aware it is not lite reading. However, it will expand your brain and your vocabulary and you will understand economics better than most, even professors.
From Smith you have some subtle lessons like the idea that we are all really or close to equal when it comes to economic ability. Also the idea of value and wealth creation.
Or to be more precise,
How does money increases in a country, as its economy grows?
How are money, resources and flow-of-money related?
Economics and what is money
Money is a medium of exchange, store of value and a unit of measure.
However, it is most importantly a barter, an exchange good. It is the way people barter for exchanging value that they have created.
It is zero some in the sense that if you trade currency, there are basically as many winners as losers in the FX market. You can not have a winner without a loser.
If you are talking about wealth creation money is not zero sum because people create things, use their brains for creativity to satisfy a need of another person.
If you want to make money take an assessment of your interests. I believe most people have similar mental ability (almost all millionaires have IQs within one standard deviations of the norm) and if you have an interest than changes are someone else does.
Therefore, if you want to make money focus on your real passion, wealth and value creation is 1% inspiration and 99% perspiration.
However, that being said also look at home other people have made money. Maybe not the exact idea but the general theory.
For example, in Europe and the the USA I noticed the riches people are selling to the middle class, like Wal-Mart and in Europe a similar company. Also where is the trend of the future.
But since I believe things are not zero sum, as long as you are patient and work at something of value, you will make money.
There is no win-win in economics
There is a law of nature called law of conservation. It says mass and energy cannot be created or destroyed. They can only be transformed from one form to another form.
GDP is like a pot of gold, and total money (M3) is like a bag of dollar bills. They are tied together by an one to one relations via the law of conservation. This bag can buy that pot.
If you print another bag of money, then the price of pot of gold will become double. But if you give this money to a smaller group, then that group will have larger share of that pot of gold. According to the law of conservation the other group will be loser and will have lower share of gold.
Not only they have less money now, the price also has become doubled, so they have lower purchasing power.
Capitalism is always about redistribution of money to a smaller group. The upper fifth this way becomes richer and the bottom fifth becomes poorer.
In every win-win situation, you will always find a third party who will be the loser according to the law of conservation. If you increase the dollar bills without increasing the pot of gold, you create inflation and transfer of wealth.
You can see profiting and interest charging is just like accumulating money in a smaller group. Thus creating inflation and transfer of wealth.
There is no win-win situation in economics. If you look carefully you will be able to detect the cheating and find the loser. The law of conservation is not wrong.
Wealth creation and economics is always moving against entrophy. If this is not true how come are we not living in the cave or the jungle like we were thousands of years ago? How come Europe does not have feudalism like a few hundred years ago? How come Americans have plasma TVs and cars and living to ripe old ages? How come China is getting rich?
There is something called a Gini coeffient and this is different for every society. Some societies like Denmark and Sweden are rich and equal, others are less so. But the bottom line is economics is a win win. Now someday the sun will burn out and the universe will go into a state of entrophy and eventually some cold cosmic soup.
But as long as the sun supplies the earth with energy we can harness the resources from the planet and the cosmos to shape our realities and fullfill our dreams until our flames are gone and we return to the source.
Crony capitalism Vs. Real capitalism
“Capitalism is always about redistribution of money to a smaller group”. ?
In a free market economy other than taxes which are imposed and to a large extent detrimental to a free market we do not have to redistribute the products of our labor to a smaller group unless they provide us with a product or service that we choose to obtain from them. We do so because we are willing to pay them a percentage of profit for something of value to us that we would not have been able to obtain at the agreed price and quality they provided us with.
In a real free market, that is with out Crony Capitalist such as Protectionist, Lobbyist, Subsidies, Government interventions, Government corruption the so-called smaller group would always keeps changing since this group could never be static or be protected and would always need to adapt,change and reinvent its self or die.
The rewards of the smaller group is not guaranteed and may not be permanent but over all it is a beneficial cost or investment from to the larger group.
Take note that the smaller groups can only eat three meals per day and they do not pile this cash in boxes or party all night. Corporate retain earnings are reinvested and most of the smaller group never see or need to see the color of their wealth. Instead it allows them to manage their factories, reinvest in new ventures hire new people, make acquisitions etc. As long as they are competitive they can remain the protectors of the wealth they generated and that’s quite different from wining the lottery.
In societies where there are no such smaller groups you have mediocrity and stagnation at best or abuse, fear, submission, in the worst cases. In such countries the larger group is totally controlled by a much smaller and totally dominant group often even to small to be called a group.
“If you increase the dollar bills without increasing the pot of gold, you create inflation and transfer of wealth”.
That is correct but who exactly does increase this money supply ? The treasury does. It actually spends before it borrows and now the FED is buying more and more Government Bonds via the secondary markets. What is going on ? Is this Financial Incest?
This is the exact opposite of how a Capitalist and Free Market works.
Inflation is the best friend of wars makers. Throughout history wars have been paid by debasing currency. That is one if not the biggest transfer of wealth. When we lose our buying power from our legitimate claim on goods and services called money via inflation we are in reality paying Government debts. It’s that simple.
Over all Government debts are never paid, it’s the currency that always depreciated. We could say that its like a perpetual default transfer from the Crony Capitalist Leviathan State to its producing subjects.
Also in a Capitalist free markets economy interest rates are set according to a risk ratio and certainly not controlled by a Central Bank that keeps playing God with the economy.
The Federal reserve bank is a non transparent disgrace to freedom and total failure.
“Mass and energy cannot be created or destroyed”.
Sure, it’s all metaphysical and nothing is lost and nothing is created.
So what ?
A rock does not think but a nice building is a product of the mind. With all due respect GDP is more than a pot of gold and the money supply does needs to adjust accordingly.
Providing a simple glass of water in the middle of the desert for the thirsty traveler(s) as more value than a glass of fine wine in a Paris restaurant. Only water is it not ?
zero sum economy
Why the free market is a victim of false accusations
I do not have a lot to argue with here.
The common criticisms against capitalism are not really criticisms of capitalism but are against market distortions, almost always created by fiscal and monetary policies from the central government.
In fact, many people who are complaining about a certain aspect of the way free markets, are really taking issue to government management and intervention and they do not know this. It is a false accusation. They think it is the free market but it is not.
They wonder what is happening to the pie both in terms of size and distribution and assume it is the market. It is not. I live in a post socialist country and believe me the market empowers the creative and those willing to use their talents to the best of their ability.
Government suppression of talent and mis-allocations of resources are illustrated with such things as, the Federal reserve or the $278,000 it took to create one job with the fiscal job stimulus.
Or the support for the industrial military complex of Pax Americana where we blow trillions in a WWII style military system.
Why the Washington D.C. area is one the richest areas in the country but has no industry or creative enterprises relative to other parts of the country economically.
This opulence is supported by the yoke of taxes or the Fed (whose policies is a subtle form of taxation). Did you see the dark comedy ‘Burn after reading”? The absurdity of Washington is partially illustrated by employees in the film.
The above are flaws with government not with the free market.
Your last point about water in the desert being worth more than wine in Paris is the called the “diamond water paradox” or the paradox of value. That is value is determined subjectively and not as Marx believe by the amount of labor applied or as other believe by government which can micro manage and steer markets based on their view of what is valuable.
“diamond water paradox” Thanks I will look it up.
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