July 21, 2005

Zero-Sum Economics and the Political Left

The economic left in more or less all cases has a belief (or fear or suspicion) that economics is fundamentally a zero-sum game. In contrast to a positive-sum game where everybody can benefit at the same time or where the overall winnings outweigh the losses, a zero-sum game requires that every winner produce a loser. This means that rich people, in effect, take a 'bigger slice of the pie' and must necessarily take their excess by leaving others with less. This is the foundational perspective for most ideologues of redistributive economics, not the much better-marketed 'helping the disadvantaged' line they like to give. It's the source of hatred for the rich; if the rich didn't take more than their share, there would be more for the poor.

But the flip-side of a zero-sum game is that it is also not a negative-sum game. A negative-sum game means that the losses outweigh the winnings. Both positive- and negative-sum games are often referred to as non-zero-sum games. The opposition of a zero-sum game, which many economic leftists believe in, is a non-zero-sum game - whether it's a positive- or negative-sum game.

Think of it like the first law of thermodynamics (conservation of energy); the total energy going into a system must equal the total energy coming out of it, and cannot be created or destroyed. Energy is not destroyed but transferred. (Physics geeks, ignore entropy and the second law of thermodynamics for these purposes).

So for economics, while the zero-sum people think that a positive-sum economy is false because the gains of the rich hurt the poor, they also think that a negative-sum economy is false because money will simply be reallocated. I'll give an example, and for these purposes I'll shorthand 'leftist' meaning someone who consciously or subconsciously believes in a zero-sum economy.

Our leftist despises the rich because every dollar they have is a dollar the poor don't have. A positive-sum game is beyond his one-dimensional,authoritarian mindset. At the same time, a negative-sum economy doesn't even occur to him as a possible consequence of his redistributive schemes. In 'fixing' asset inequality by giving poor individuals and poor businesses more goods and assets, our leftist could be disproving the zero-sum economy with a negative-sum result.

The rich individuals and businesses lose immediately from the redistribution. But the economy overall (recalling that 'economy' is a metaphor for market transactions within a given universe or space) could lose if the redistribution results in lost productivity or jobs. The bad businesses have been saved in order to protect their employees, but now the bad businesses have a greater share of the economy and are behaving less competently than would better businesses. Their bad decisions could result in lower growth or stagnation, lessened innovation and general inefficiency. After all, without bankruptcy acting as a recycling function on the economy, the resources of inept businessmen are never sold off to adept businessmen.

In other words, the leftist believes in a zero-sum game, so tries to 'correct' a positive-sum game, but also because he believes in a zero-sum game, he doesn't see the threat posed by a negative-sum game.

While many real-world leftists are not so obtuse or philosophical about zero-sum economics, they still make many assumptions based on some perspective that money is not created by the rich nor is it squandered by socialist budgets. The same viewpoint that discounts creation of wealth also discounts destruction of it.

The more practical problem is that people stuck in a zero-sum view of economics are grossly incompetent at diagnosing economic problems or at prescribing economic solutions. Yet because of their warped perspective, they're forever drawn to making policy recommendations. And why not? They see constant problems as the rich take more than 'their fair share' and see few problems with their wealth-squandering policy proposals.

We all need to acknowledge several things, starting at the basic level, that taken together prove we operate in a fundamentally non-zero-sum economy.

1) If A buys a widget from B, then both are better off or they wouldn't undertake the trade. This is exemplified every day when customers visit restaurants, stores and other establishments that don't charge more than the product is worth (by definition, or again, the customers would leave) and yet are able to stay in business or even turn a profit. If the zero-sum view were correct, then either B is selling the product for too little or too much, and between A and B one MUST be a loser and one MUST be a winner. That is not the case.

2) If C redistributes money from expertly-run company D to disastrously-run company E, then in all likelihood the money will not be used as efficiently. Company E will likely produce products lower in quantity or quality (or both) than Company D. Company D and consumers are worse off, and the benefits garnered by Company E are lower than the benefits that would have been garnered by Company D had C not redistributed anything. Since this is ahypothetical, we can assume that E is as embarrassingly inept as D is astonishingly adept. If the zero-sum view were correct, then no matter how incompetent Company E might be, the scenario would have to result in the same net benefits and wealth. That is also not the case.

3) Even if a situation does arise where the winnings and losses balance out, that does not prove that the economy is a zero-sum game, since it would be hypothetically possible to find such a situation within a non-zero-sum universe.

Accepting the premise that the economy operates on non-zero-sum rules, we can come to several conclusions. First, wealth can be created by individual effort, because wealth can be created. Second, the possession of greater-than-average wealth does not take away wealth from others, because there need not be a loser to match every winner. Third, bad government policies can be net-negative, because wealth can be destroyed. With this knowledge, we can understand that wealth does not deserve jealousy and that government intervention against the market can easily do more harm than good.

Proving not just that government interventioncan but usually does cause more harm than good is another topic altogether.

UPDATE: This article has been published on my website here, and is listed under issue articles here.

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