Economics is not a zero sum game

Barry Ritholtz thinks economics is a zero sum game:

The economy is more of a zero sum game than most people realize. The Politics of the past decade has been more about capturing a bigger piece of the pie, rather than EXPANDING that pie.

That is a zero sum game.

Consider taxes: The dividend and capital gains tax cuts fell to a very narrow portion of the population (of which I am a prime beneficiary). The known costs of these — increased deficits, weaker dollar strength and buying power — are borne more by certain segments in the population than others. That is zero sum.

His basic premise is that in order for one side to benefit, another must lose. It is unfortunate for someone as knowledgeable as Barry Ritholtz to propagate this claim.

It may be true that, “The Politics of the past decade has been more about capturing a bigger piece of the pie, rather than EXPANDING that pie”. However, this is a political issue. Politicians often see the world as a zero sum game. In order to win an election someone else must lose and only 50 people can be Senators. Economics is different.

Despite the politicians best efforts, the economy has continued to expand. Even if this expansion has only affected one segment of the population, that one group would be better off while the other groups would be no worse off. However, Mr. Ritholtz seems to believe that the problem is that they would be worse off relative to the other group. While this certainly may create envy and give some the impression that they are worse off, in reality, they are not.

It is easy to look at income distribution and believe that economics is a zero sum game because the distributions will always sum to one hundred percent. Therefore, when one share becomes larger, at least one of the other shares must fall.

Nevertheless even if one group’s share should fall, an expansion of the pie will benefit everyone. Further, there is very clear evidence that the pie is expanding. Over the last 35 years, real GDP per capita has doubled.

Mr. Ritholtz also uses tax policy to argue that economics is a zero sum game. He contends that the rich received money through tax cuts while the government created a larger deficit. However, this is an argument about a budget, not economics.

By making this claim, Mr. Ritholtz is making inferences about the deficit. The federal budget is large and complicated (too much so, actually). However, Ritholtz implies that tax cuts caused the deficit. The tax cuts no more caused the deficit than the famous transportation bill or earmarks.

Even if we give Mr. Ritholtz the benefit of the doubt, there is still no reason to believe that this is a zero sum game. The government incurs the cost of interest when it borrows to fund the deficit. The recipients of the tax cuts do not simply stuff the extra money under a mattress, they use it to invest in stocks, real estate, mutual funds, bonds, and even businesses. Therefore, if the individuals are able to see a greater return on their investments than the government pays out in interest, this is not a zero sum game.

To put it quite simply, economics is not a zero sum game. Economics, on its most basic level, is the study of the allocation of scarce resources. Adam Smith famously explained that in order for a transaction to take place, both parties must benefit. Therefore, it is true that in order to buy a stock, someone else must sell the stock. However, this is not a zero sum game because I value the stock more than the money I paid and the seller values the money more than the stock. We are each better off. This is a basic fundamental of economic theory. It is unfortunate that someone as knowledgeable as Barry Ritholtz would propagate anything else.

21 responses to “Economics is not a zero sum game

  1. Yes, we agree on that —

    I am not saying that everything in economics is always a zero sum game — not even close.

    But I do believe that many more things are zero sum than people realize.

    Deficit spend, and there are winners and losers. Raise taxes, and there are winners and losers. Cut taxes, the same.

  2. “Nevertheless even if one group’s share should fall, an expansion of the pie will benefit everyone. Further, there is very clear evidence that the pie is expanding. Over the last 35 years, real GDP per capita has doubled.”

    I agree with Barry Ritholtz that economics is a zero sum game. But I will like to modify it a little (later). As this article says, the economic pie expands each year and thus it is not a zero sum game. If you look at the expansion rate of the economic pie as given in the article, the rate is 100% of growth over 35 years. That can be roughly translated to less than 3% growth per year. So now we need to modify Ritholtz’s equation so that Economics is not a zero sum game but rather:
    Economics over the last 35 years has been a 3% sum game. What does this mean? To understand this, you have to understand zero sum game. Zero sum means that if one person gains 10%of the total Economic pie, others lose 10% of the this pie. Taking the “expansion of the pie” into account, we see that if one person gains 10% of the pie, then another loses only 7% of the pie as there was a growth of 3%.

    So, conclusion in my opinion is that Mr. Ritholtz is much more closer to the truth in stating that economics is a zero sum game than this article that says that this equation does not apply to economics.

  3. Given that economic growth (in the real world) is strongly correlated to resource production (and consumption) and that that there is a finite supply of those resources (most notably crude oil) then the global economic system must act as a zero sum game.

    If growth of the economy were linked solely to growth of ‘natural capital’, i.e. not mining resource supplies, then the economy could grow without being affected by the limitation of material resources due to the energy inputs the global system receives from the sun.

  4. Late to the `game’ here, but it is zero sum game, even in economics. I am a technical econometrician and it is very valid point to make this zero-sum.

    Money does not equal Wealth. We may expand the GDP (or have it fall as now in late 2008) but realize that GDP figures (and we /are/ talking about Real GDP, right? :-) don’t take into account the clustering of wealth.

    Long story is that I have yet to see a valid description from any economist WITH USE CASES that can claim measurably and normalizing against induced inflation that it is not a zero sum game.

    Just because you realized an immaterial value in a financial transaction does not produce wealth of a country. That would imply we can equate velocity with wealth?

  5. Economics is not inherently a zero-sum or positive-sum game. Depending on the economic situation, often induced by political pressures, it can be either of the two or even a negative-sum game. Command system economies are notorious for creating perverse incentives whereby the population as a whole becomes less wealthy. The ways in which people deal with scarcity often depend on the political climate and thus, so do the results of their actions.

    By the way, only 50 people can be senators? What are the other 50 senators? Cows?

    @ Mr. Ritholtz
    When taxes are cut, there surely must be winners and losers but it would be a mistake to blindly assume that the winners do not include many people whose taxes are not cut. In fact, tax revenues, and the real wealth they represent, may be increased in the long run; thus, counter-intuitively, even welfare recipients could be among the winners, even if the gap between rich and poor grows. It seems unlikely that any manipulation of tax-rates could have a precisely zero-sum result since the problem is not inherently a zero-sum problem like craps or blackjack is.

    This line of reasoning, for better or worse, is one reason why people in my income bracket often support tax cuts that won’t directly affect them.

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  7. I found your site and am now a fan of yours.

    re:
    “Given that economic growth (in the real world) is strongly correlated to resource production (and consumption) and that that there is a finite supply of those resources (most notably crude oil) then the global economic system must act as a zero sum game”.

    This would be true if the additions and subtractions add up to a consistent amount. Taking it one step further it infers that wealth may NOT be created, only redistributed. Following this logic, to object to the profits of anyone richer than others is very understandable.

    Exchanges in a free market economy are not limited to zero sum equations.

    As TEE clearly pointed out:
    “in order for a transaction to take place, both parties must benefit… I value the stock more than the money I paid and the seller values the money more than the stock”.
    —- wealth is very subjective according to an individual’s understanding of value.

    Agreed that there is a “finite supply of resources”, but introducing factors (that include labor, talent, knowledge) that are an inherent to an individual, value of the resources also become increasingly subjective.
    Labor, in the strict physical sense, is a far less significant kind of capital than mental capital.
    Take for example the difference between someone making piles out of sand and someone else making glass. As well as the difference between someone making glass or someone else making silicon chips.

    History has shown that every time a limit is found, someone will come along and surpass it as long as they are able to do so freely. The innovation that comes with the freedom to create “wealth” breaks the justification that wealth is connected to a limited amount of resources in the world, hence the free market economic model is not a zero sum game.

  8. I think the one commodity, that always has intrinsic value is food. Which as it turns out is the best example of why economics is not a zero sum game. We can now grow more food, in the same plot of land than ever before. A piece of land that use to be able to only produce 1000 bushels, now produces 5000 and by less people.

    Yes more resources were used up, but many of these resources are essentially free, rain water, and the sun’s energy. So now, if we can clearly see more food being grown, that means our “pie” can get bigger. And if this pie has gotten bigger, then it can be used to make other pies bigger.`

    In the sense of the laws of thermodynamics, yes everything must ultimately be a zero sum game. But if you contain the system as the earth, then it is clearly not a zero sum game, since there is ultimately energy always coming into the system from the sun. That energy, can and is, used to produce more, and effectively enlarging the pie.

    If economics was truly a zero sum game, then there would be no such thing as a deadweight loss and what is most efficient would be irrelevant. You might as well go back to using horses to plow land.

    So looking at the food example again. If it use to take one man working full time to feed 6 people then let’s assume those 6 people working 4 hours could feed all 6 as well. Now one man working full time can feed 24 or 24 men working only 1 hour can feed all 24. Therefore these men, have gained, 3 hours of time to do other things. This gain, is in effect the pie increasing.

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  11. I’ve alwaysfelt the fallacy of the wealth creation, non-zero sum argument is the simple failure to acknowledge the costs in all forms and over a sufficiently long time frame. Decades of economic growth? – What’s is the combined debt of nations, and who’s expected to eventually pay it. Material wealth and civilization? What’s been the cost to the environment, and assuming it can be corrected in the future, at what cost and to whom? Quality of life? We in America have a society that is bubbling down, a quality of life that is poorer in many respects than 20-30 years ago. What wealth creation arguments seem to rely on is a snapshot of time when the wealth component can be demonstrated, there is seemingly no competent analysis of cost impacts that surface 20-50-100 years later, or in succeeding generations. Want to talk about technology creating wealth? Do some thinking about how many stable economic systems were destroyed by technological advances; while you are working 11 hours a day, commuting two hrs,, both you and your spouse, fighting to be part of the middle class like your parents. I’m not learnered enough to understand the economic model at play, but I strongly suspect we’ve been patting ourselves and Adsam Smith on the back while riding the bubble of all bubbles, setting ourselves up for a cumulative disaster that we will deny to our death .

  12. OmniusCharles

    It’s quite clear that some wealth is generated, but the majority is existing wealth merely transferred. Hence I agree that the global economy is *almost* zero sum.

    If economists are so confident that the economy is not zero-sum, why do they all demand money to be transferred from their employers to themselves? Why don’t they simply conjure up some of this ‘new wealth’ that belongs to no one else and live of that? Why don’t they give their books away for free and live of the value added merely by the existence of their book, without having to take others share of the pie for it?

  13. Ja de wereld economie is wel degelijk een zero sum game. de vertroebeling zit in de feiten dat sommige bronnen, mijnen voor niet juiste waarden ingebracht worden en door het tweede feit dat de bancaire wereld de afrekening in de tijd kan verschuiven.

  14. I agree, classical economics in a free capitalist society is not zero sum. One may transact — buy or sell — as their heart desires and each party walks away with value. However, Marxist redistribution — by force of government –IS zero sum in that one is the victim of legalized theft and loses value in exchange for the growing burden of govt created debt which enriches only government and other parasites as they feed. Eventually the wealth of the host is depleted to zero at which point the parasite has nothing left to feed upon. Both parties are left at zero.

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  17. In the stagnant economies of the US and UK over the last 5 years, the wealthy have hoovered up what little economic growth there has been.

    Meanwhile for ordinary working citizens (especially those on the lowest pay) living standards have fallen year on year and job security has suffered as businesses seek to take advantage of the downturn to create a more flexible labor force.

    For the past 5 years western economics has been pretty close to a zero sum game. Those with wealth have been able to capitalize on their relative strength to grow wealthier in both real and relative terms. The natural magnetism of existing of wealth is not dissipated by a stagnant or shrinking economy, rather the structures are changed such that that magnetism operates on the wealth of those unable to defend their positions.

    The brand of neo-liberal economics we’ve blindly accepted as orthodoxy for the last 30 years is just about palatable to ordinary people in times of strong growth (and in the shadow of the failed global experiments in Socialism). They at least feel some benefit, some sense of betterment from a growing economy, albeit a relatively small slice of the growth “pie”. But in times when growth can no longer be taken for granted (as is undoubtedly the case in the decades to come in a resource-strapped global environment) the last few years shows us the future downfall of this model in a zero sum environment.

    Wealth doesn’t trickle down. It travels upwards. Capillary action is a better analogy. The more wealth above, the stronger the suction. In a zero/low growth economy, not only does this process suck the wealth from the working class, it sucks away the ability of the economy to grow from the middle thereby hardwiring the zero-sum dynamic into the system in perpetuity.

    This approach is neither economically or socially sustainable. In a functioning democracy it wouldn’t be politically sustainable either.

    Barry Ritholtz’s comments seem prescient.

  18. Adrian Dragulescu and Victor M. Yakovenko and the Positive Money group basically prove that money is zero sum.

  19. Less than zero sum.
    One can really only eat one lunch a day.
    The more hamburgers eaten
    the less chicken.
    The extra is just wasted
    if not eaten
    therefore actually a minus sum.
    Same with cars.
    One can only drive one at a time.

  20. The economy for the most part IS A ZERO SUM GAME. If someone is doing better, that means his gain came from someone else’s loss. Some may point out that it is possible for everyone to gain. This is incorrect also. If everyone gains, then inflation occurrs. The ones who gain faster than inflation win, the ones who gain slower than inflation lose. There will always be a winner and loser. If there wasn’t a loser in this, why would marketers always be after your dollars? They gain, you lose, at least in that transaction. You may think that you value your iphone over money while the seller values movey over the iphone they sold you. What you don’t know is the consumerism brainwashing you went through that “convinced” you that you “need” a new iphone every year. The iphone you buy every year loses value so you lose.

    The author also suggests that the stock buyer values the stock he bought more than money while the seller values money more than stock he sold. He forgot to mention that one of them may not have all the information available to the other. If the seller has information that the stock will fall but the buyer doesn’t know it, the buy is the loser, the seller is the winner. If the buy knows the stock will rise but the seller doesn’t, then the seller is the loser and the buyer is the winner. Economists also like to point out that the market it efficient in pricing the stock. They base this claim on the assumption that ALL people involved in the transaction know EXACTLY the same thing and UNDERSTAND it EXACLTY the same way so they ALL make an intelligent decision. This isn’t the case. There will ALWAYS be a small group of people who know more than others. This small group wins while the others lose. This is a zero sum game. So it is with the economy as a whole.

  21. Living in a developed country makes you biased but on a global level and on long term the economy is a zero sum game.

    You can only grow if you export more than you import. Logically not all countries can export more. There are winners and losers.

    By borrowing money and not fully taking into account the real price of natural resources and pollution the result of the sum can be delayed in time.

    I do not like this and have unfortunately no adequate solution which is acceptable for the majority of the people.

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