wealth is not zero-sum

Jacob over at Early Retirement Extreme recently referenced this old post of mine in his article Zero-sum games earlier this week, so I thought I’d repost the article.  To be honest, I had almost forgotten about it, so I enjoyed re-reading it – not to toot my own horn or anything.

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 focused on chaos theory. Game theory, as noted above, considers some situations to be “zero-sum” situations; if I gain, you lose. Me +1; you -1. The implications of the zero-sum situation in game theory, as wikipedia points out, have been extended to economics and war and even personal relationships.  That’s not the whole universe of game theory, of course – many other situations arise, but zero-sum is the one that is most easily understood and (unfortunately) used widely in the real world.

So 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

  • http://freefrombroke.com Craig

    I took an economics class where we were introduced to game theory. Very interesting stuff. He used the ferry scene in Batman Begins as an example of the Prisoner’s Dilemma.

    Anyway, one class he taught focused on whether you are a maker or a taker – do you make money by taking or making it. If you create something new that adds value to lives you are a maker. If you are one who looks to push bad loans on people to sell the most financial products then you are a taker.

    I think our society has the capacity of both zero-sum and non-zero-sum; it depends on how we want to create our wealth.

  • ctreit

    Thanks for posting this again. I think I missed it the first time around. This is a very good read for anybody who thinks that making money got to be stealing. The few people who make money by stealing it or doing something close to it give the entire wealth creation a bad reputation.