a zero-sum worldview

Fractal wrongness

In game theory and economic theory, zero-sum describes a situation in which a participant’s gain or loss is exactly balanced by the losses or gains of the other participant(s). If the total gains of the participants are added up, and the total losses are subtracted, they will sum to zero. Cutting a cake is zero- or constant-sum because taking a larger piece reduces the amount of cake available for others. (from Wikipedia)

Let me go all geeky for a moment. I was a math major in college. I was precocious enough to get admitted to a state university’s PhD program directly, jumping past the Master’s program. It was a terrible mistake – I was in well over my head, both academically and “attitudinally” (if that’s a word), but I did learn a few things in the year I stuck it out. One was that I wasn’t a mathematician. It takes a weird breed to live in the world of numbers like that. Another thing I learned was that math – once you get to a certain level – is less science than poetry. It gets almost horrifying in short order; I spent an entire semester on a single mathematical problem related to chaos theory (“a butterfly flaps its wings in South America and causes a tornado in Iowa, etc. etc.”).

My point is just that before I abandoned math for the routine money-centric world of finance I learned enough to alter my worldview about certain things. One of the areas I was very interested in was game theory, although primarily I did focus on chaos theory. Game theory had the interesting concept of zero-sum situations; if I gain, you lose. Me +1; you -1. The implications of game theory, as wikipedia points out, have been extended to economics and war and even personal relationships.

But is wealth zero-sum? Is your increase in wealth directly related to someone else’s decrease in wealth? If you do better in your career, does that mean someone else’s career suffers? And, to bring it (as always, in this election season) to the macro level, if you are taxed less does it mean that someone else must be taxed more?

Any reasonable person who isn’t sticking to ideological talking points can probably immediately identify the answer: no. Wealth is not zero-sum. If I create a new technology – a Delorean that uses table scraps to power a time-travel engine, for example – I will create wealth for myself and others. The benefit will spread and everyone will benefit. No-one loses. Wealth is created when the person GETTING the wealth gives more than they receive. Has Stephen King benefited others more than himself? If you could put a price tag on enjoyment, probably he has – he’s probably provided millions and millions of “enjoyment hours” at some nominal cost and received millions of dollars in compensation. The value he’s provided has far outweighed the value he’s received.

Too many people today view wealth creation as “stealing.” Yeah, the real estate boom created wealth at the cost of all of us – through bailouts and long-term economic damage. But REAL wealth creation means that you’re giving away MORE than you’re receiving. If you build a better mousetrap, you’re going to make millions – but people are going to benefit from your better mousetrap far more than you’re going to benefit from them buying it. Everyone wins. I think if more of us thought this way we’d be better off. The trick in life is not to think of how you can increase your wealth by taking but how you can increase your wealth by giving.
photo credit: the mad LOLscientist

26 comments

  • I did game theory and math modeling and statistics. You can design the game any way you want, and there are things in society and wealth that are zero sum, like casino betting. But you're right, there is wealth creation, which is one reason why one country can be wealthier than another.

    Until recently, we believed that asset appreciation was a non-zero sum game, that the very fact that the asset (a house) was in demand was increasing its value. In general that's true, but behind the curtain was the spectre of leverage, which in fact resulted in less value per transaction, rather than more. To apply a form of chaos theory, we reached that tipping point, and it all came tumbling down.

  • Most things are not zero-sum games, even in game theory. That's what makes life and maths interesting.

    Even if you consider buying a house, it's possible to increase its value relative to the rest of the market if you improve it – people will pay more than it costs to avoid the hassle.

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  • The homeless that live at garbage dumps so they can scrounge for food suffer with your Delorean concept. They'll have less food to eat, unless the food fuel is really homeless people pushing the Deloreans around after you've fed them scraps…

  • I don't know about things never being zero-sum. It seems to me that if we think large enough and long enough we can see that at some point in time there can be circumstances where things become zero-sum because the it appears that the universe has limits. Technology helps us extend those limits, but I don't think it will ever be able to destroy those limits.

    I guess if we could simply will something out of nothing then we could live in a world without limits, but my level of confidence in that occurring is zero.

  • I agree that creating wealth is not a zero-sum game and I think you summed it up nicely (pun intended). Fundamentally speaking, wealth is not really about money, which is sometimes a difficult for people to understand. Wealth is about providing value. When you work for a living, you (hopefully) provide value to a customer (somewhere down the line). If you do not provide value, then you represent an inefficiency within the economy.

    There are certainly many inefficiencies within the economy where people perform work that does not necessarily provide value. However, in the long-run these inefficiencies disappear, particularly when there is a downturn in the economy. That is when companies look for inefficiencies and and reduce them with layoffs. Many of those that are laid off might go on to start their own businesses which in turn creates more value for people in new ways. If they do not start their own businesses, they will eventually find new jobs where they are likely to provide value to customers.

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  • I'm not disagreeing with what you are saying overall in that creating wealth isn't stealing. But let's take your engine example: Wouldn't people be paying what it's worth to them to have such an engine? The inventor and the consumer would exchange equal value. You give me something that's valued at “x” and I'll give you “x” in exchange. Isn't that zero-sum? I give up what I'm getting?

    And the inventor wouldn't be stealing by making money for his creation. He'd be making what it's worth.

    Does that make sense or am I reading too much Ayn Rand lately?

    • FFB, I guess the idea is that commerce is zero sum – goods are exchanged for the equivalent in currency – but wealth is created when you offer more than you receive, which results in a non-stop inflow of currency in exchange for your goods (which have to be renewable, like a book, for example).

      It's a little new-age-ish, I know, but I'm just trying to say that if I create a book for $1 and sell it for $1 one time, of course it doesn't create wealth. If I create a book for $1 (ideas + materials) and a million people buy it for $.50, then I've given them something worth more than what they paid but I'm also profiting.

    • But what about the other industries? That's $.50 less each person can spend on other items.

      I know it's not that simple, though. I'll revert back to your original example, because I think it demonstrates my point better. A cheap time-travel machine that runs on scraps means that everyone who buys it, has that much less money to spend on other things. But they also save loads of money on the plutonium they needed to buy before. 🙂 But then, those in the plutonium market take a huge hit, and have to layoff a lot of people.

      I certainly don't know enough about finance to fully disagree with you, but there is only a limited supply of money. Creating more means lessening the buying power of it all, so you can't get around it.

      Granted, you talked about “wealth” rather than “money. ” Inventions that increase people's standards of living for a small value (or at least smaller than they;d have to pay now for it), like your example, certainly create more “wealth.” But I don't know that it disproves what others say about finances being zero-sum.

  • Greg the Writer

    This is one of the wiser things I've seen you post good ol' Brip Blap!

    I am in the process of putting material together for a website that talks about things like this. The more wealth one has, the more they have most likely benefitted humanity. Wealth is not created by a single hand, rather created by a wanting world. Fill a need, get paid, help the world, move on to the next need.

    Solving problems and adding value is what it is all about. Truly makes me a lover of capitalism haha.

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  • Nabloid.com

    Creating wealth is definitely NOT a zero sum game. As you said, services, inventors, and technologies can be huge benefits to many people, far more than what they “cost”.

    @ Clever Dude: What if a company were to invent an efficient method for growing MORE food, cheaper, using less water, which makes more food available to more people for less money??? Don't exclude the wealth creation involved with new technologies.

    That said, there are obviously some limited resources on this planet that are a zero-sum game, but I wouldn't say those limited resources create wealth, but they are probably best described as a store of wealth for some people. And the mining companies that make money, are creating wealth by “finding” and “extracting” these limited resources so they can be usable, not just being paid for the resource itself – our they wouldn't have to do any work (or wealth building) besides just sitting on their land with the minerals/metals contained in it.

    I like some limited resources as a store of wealth, but I always invest in the mining operations which help create wealth as well, through exploration and extraction of these resources. – Even better, I like innovative companies that invent or use new technology to solve problems and create wealth for everyone (like the greenhouse growing technique HDVG system employed by Valcent, as just one example, for growing more food in less space with less water for a cheaper price, than has ever been done.) That is wealth creation, and it ain't no zero sum game!!! Win-win!!

  • It's not that the buyers are necessarily benefiting more than the seller (or creator) it is that both parties benefit in a fair market transaction. Either way, I agree that wealth is created. Hooray for capitalism!

  • “Wealth” of an individual is not a zero sum game when viewed as a system on it's own; but considering the whole universe, I guess it's always a zero sum system otherwise the universe wouldn't be in equilibrium (forgive me, I am using the first-law-of-thermodynamics-language … almost equivalent to saying that energy cannot be created nor destroyed, but it can be converted from one form to another).

    One of the earlier comments make the point very well .. it's an equilibrium between value and wealth. Wealth can only be created if you provide a service or commodity of equal value ….. or like you mention above, when you steal someone else's wealth.

    Now I am confused. Thanks.

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  • Interesting. So entrepreneurship and wealth-building are NOT games? At least, not in the traditional sense?

    How about trudging to work, though? If I get a good job with an employer, does that mean another person doesn't have a shot at that job, at least until I move on? Or could you argue that if I succeed at the job, similar jobs eventually will be created, or that my company will expand and create other jobs with lesser, the same, or greater pay?

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  • My idea is less brilliant than Dan Ariely's approaches, but in this blog you can see a proposal on the hypothetical jump non-zero-sum from an irrational position. The Spanish university is very bad, I am sorry.

    http://misproyectosacademicos.blogspot.com/

  • My idea is less brilliant than Dan Ariely's approaches, but in this blog you can see a proposal on the hypothetical jump non-zero-sum from an irrational position. The Spanish university is very bad, I am sorry.

    http://misproyectosacademicos.blogspot.com/

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