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.
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.