zero sum economy

Examples of positive sum, negative sum and zero sum economic activity

  • In a capitalistic economy, in aggregate , there will always be more winners than losers. This is because the economy is growing in the long run and both parties benefit from an exchange.   Similarly, in the stock market, there will always be more winners than losers, even with transactions costs. This is because the stock market in the long run goes up.
  • In contrast, in Vegas  the economic activity in the hotel game rooms are negative sum games, in other words,  the house wins more than the players. More people lose than win.
  • In chess there is one winner and one loser, this is a zero sum game. For every winner there is a loser.  It is a one-to-one relationship.

People who are anti-capitalist do not understand that in a free economy during an transaction, both parities get something, and derive more utility from the exchange than before they entered it. In other words, the exchange increases happiness if both parties conducting business at an ‘arms length’. If not why would they engage in the economic exchange. In economic language it is a Pareto optimal. With the exceptions of imperfect information and government as a middle man, both side will win in an economic exchange when acting on their own enlightened self interest.

I do not know why people do not understand this.  Economics is not a game of chance or chess, it is a non-zero sum game, rather  it is a positive sum.

Note this check mate involved a white queen sacrificed. There is one winner in this game. It is an example of zero 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. One person leaves the table happy and one person leaves the table unhappy. It is a mathematical model where the total gain of each player in the game is added up, then you net out the losses of the losers, you will result in zero. It is simple mathematics, if people receive 10 units of utility from playing and another group of people lose 10 units then then at the end of the game, 10-10 = 0.

Modern zero game theory was supported by by the Von Neumann’s minimax theorem and the Nash equilibrium explanation. However, the idea was commonly understood even in the times of the ancient Greeks and before. You can further research  John von Neumann and Oskar Morgenstern and the global profit or loss in non zero sum, however, these are more academic argument.

How people perceive economics versus reality

The funny thing is most people believe life and economics is a zero sum game. That is the reason I when you see your neighbour 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 neighbour 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 therefore your only conclusion is although he did not steal to accumulate this capital,  someone must have lost for him to have won.

However, the economy does not work this way. Economics and trade, when done  at an arm’s length transaction basis always results in two winners. Each party gives something up to receive more  units of economic happiness, lets call them ‘utils’ before they entered the transaction.

Think of the simple transaction that occur at your local farmers market on Saturday morning. Some retired person, buys some organic tomatoes from a hipster urban farmer. The Hipster is happy because he earns money. The retired person has something to do, enjoys the conversation and gets some nice tomatoes of local quality he could not get at the large supermarket. Both parties are happy in this zero sum exchange.

Where does wealth come from?

Wealth comes from intellectual capital, that is someone creativity (such as an intellectual good, a book for example)  or the primary sector which people subsequently transform into something useful (iron ore transformed to a tool).  The primary sector creates wealth so all can benefit. The wealth is dormant in the ground.  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.   My point is in a free economy there is no exploitation, rather wealth creation and exchange. This means economics is a positive sum game. Not a game where of musical chairs, where people are losing and no new chairs are brought into the game. It is a positive some, economic agents create more and more chairs.

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.

  • If economics was zero sum then a Malthusian catastrophe would have occurred years ago.

Where does Zero sum economics exists – Government can create a zero sum or negative sum economic environment.  When governments interfere in the free exchange of goods, the positive model breaks down.  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.

I lived in a post communist country during the transformation and market distortions create unhappiness.

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 micro level but on a macro economic level we society as a whole wins. This is Adam Smith. Positive sum economics is capitalism and democracy and the ideals of the enlightenment.

14 Replies to “zero sum economy”

  1. Atul Gupta says:

    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?

    1. Mark Biernat says:

      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.

  2. 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?

    1. Mark Biernat says:

      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.

  3. Subhendu Das says:

    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.

    1. Mark Biernat says:

      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.

    2. Mark Liveringhouse says:

      If an exchange is free, then the exchange will be a win-win exchange for both parties. Each party in the exchange acquires something they value less to gain something they value more. If that were not the case, then neither party would make the exchange.

      For example, when you accept a job from an employer you do so because you value the compensation your work time brings more than the liesure time you give up. You conduct this exchange until the marginal value of your work and the marginal value of your leisure are equal. But every hour you worked before that point meant that you gained significant value over your alternative usage of time.

      Your employer accepts your work because it creates productive value for them. He values the money he pays as your compensation less than this productivity. He will accept your work hours to the point the marginal produtivity equals the value of compensation he is paying out. But every hour you worked before that point meant that the employer gained value.

      Win-Win.

      What makes the free exchange market system even better though is what is Zero Sum about it. ANd that is, once an exchange is made, each party does not owe the other party any further obligation. The free market system is the only system that has this as a feature. Every other system creates a further obligation from one party to the next. You owe your King, Pope, or your Socialist dictator future obligations because they control your you access to all future exchange.

  4. “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 ?

    1. Mark Biernat says:

      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.

  5. “diamond water paradox” Thanks I will look it up.

  6. traderdude says:

    ‘In the stock market there will always be more winners than losers, even with transactions costs.’

    Wait a minute. I thought the reverse is true. vast majority of traders lose money from my experience.

    1. Mark Biernat says:

      The market is a positive sum game. The market over the long term trends up in a growing economy as in the long term it refects the value of companies. However many people try to trade short term and without a system and the shorter the time period the more it gravitates towards zero sum.

  7. Conservation of energy ensures that if you take out of a pot that pot will lose an equivalent amount. This means that if we “win” and our reward is (x) then there’s -1(x) available for others to “win”.

    IMHO, this idea that everybody wins is just propaganda because it doesn’t tell about the distrubtion of the winnings nor does it tell you about the 3rd party. For example, one might say that humanity is in a win-win situation because everything keeps getting better. But then an honest and thorough person will point at all the animals and ecosystems that humans have destroyed on their path to success.

    Basically, humans have a prejudice to not believe in conservation of energy. There was a study recently released that explained this.

  8. Jakub Jonáš says:

    Interesting. But for pure positive sum economy we need anarcho-capitalism.

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