I feel a rant coming on. My apologies but I have to get this one out as it bugs me a lot. Quite simply, the world economy is not a zero-sum game.
Now, this post is not meant to take a political stance. Whether you lean left or right doesn’t really matter in this case. What matters is perspective and attitude.
The Zero-Sum Game Concept
I hear the concept of a zero-sum game in reference to the economy a lot. The concept is that someone getting ahead means someone else cannot. That wealth has to come at the expense of someone else.
My First Exposure to the Zero-Sum Game Fallacy
My first exposure to the zero-sum game economic model was during my MBA. One of the required classes was diversity training. Anyway one day they did a class enactment of what they called the economy. So they took a bag of candy and subdivided between students. Then they played a game of chance which redistributed the bag to where a larger portion of the spoils went to a particular group. That group was then allowed to change the rules of the games however they liked. The point was supposed to be that those with the power set the rules so they don’t lose it. The secondary message was the bag is finite and those with the power take the majority of it.
The Rich Do Define the Rules and Take a Larger Raw Share of the Gains
Now the first part of the message I don’t really have an issue with. Even as a higher income individual it’s not like I could afford to pay a lobbyist to rally a senator to pass a law on my behalf. It’s clear some wealthy individuals can and do make these types of moves. Nor could I afford to bribe someone with 500K to get my kid into a prestigious college. It is not fair, I get it. I also don’t really disagree that the top tier takes most of the end bag. Warren Buffet, after all, makes more in a day than I make in a decade.
But The Rising Tide Still Lifts all Boats
No, where I disagree is the bag itself. The bag changes in size. The economy is constantly growing and so are its spoils. Those spoils may most impact the richest amongst us, but they ultimately improve everyone’s lives.
Case in point:
- Raise your hand.
- If you currently live in a house with a TV, lower it.
- If you currently live in a house with more than one car, lower it.
- If you currently live in a house with electricity, lower it.
- If you currently live in a house with running water lower it.
Needless to say, there should be no one reading this with their hands still raised. The only folks in America that I know of that would still have raised hands are the homeless and the Amish. Yet as recently as the 40s and 50s most of the people in rural America would still have raised hands.
Rising Quality of Living, Not Zero-Sum Improvements
It’s that raised quality of living that is the growing of the bag, the economy. 30 years ago only rich people had cell phones. These days the government considers them such a necessity free phones are provided for people in poverty. That is progress and a growing economy. Also 30 years ago only upper middle class and hobbyists had computers/internet. These days you can use one for free at your local library… Anyway, you get the point.
Innovation in society improves your quality of life. We all benefit from it, no matter how subtly.
Class Warfare and Comparison
These days it seems to be common to hate the rich. Class warfare is in vogue as everyone bristles over the latest CEO multimillion-dollar payday. The argument always seems to be that CEO makes millions thus depriving the workers of his company. That obscene wealth of these individuals is somehow responsible for your poverty.
CEO Wealth and Worker Pay are Unrelated
Well here is the deal. The wealth of that CEO has nothing to do with your wealth in almost all cases. Certainly not if you are just reading about it in the paper. But not even if you are an employee of their company. No one is saying here I’ll pay my employees less so I can pay my CEO more. No, they pay whatever is the right amount to attract an employee to do the work. No more or less. Thus your CEO’s pay has nothing to do with your pay as an employee, despite the potential optics.
CEO Pay and Shareholders, the True Issue
There are of course some exceptions where CEO pay Matters. A CEO’s wealth does impact shareholders returns. CEO hyper compensation is a legitimate issue when it comes to an owner deciding if they are getting value for money out of CEO pay. That is a question beyond the scope of this post. Also to our original diversity example, how that CEO uses their wealth may very well relate to you in a negative way. But again that’s beyond the point of this post as well.
So what is my point? Well, the comparison is still impossible to avoid. It is inevitable wealth inequality will cause strife. Also, it is obvious those that are well to do are subsidized by the poor. The world is designed to allow people in power to stay there.
Focus on Increasing the Size of the Bag and Less Time Worrying About Your Neighbors Bag
But on the broader scale having a fixed set of rules and some people having more than others is not inherently bad. All else being equal we all benefit so long as technology and innovation move the world forward. It’s important to stand up for what you believe in, after all this world has plenty of injustice to fight against. However, remember that life is what you make it. Have gratitude that you were born in the time period with the best quality of living thus far. Use that gratitude and drive to make your life and the world a better place. Spend less time worrying about what your neighbor, or CEO, has and more time worrying about what you can do to change the world. How can you increase the size of the bag?
Love this post and very well illustrated.
My daughter has in her hand enough technology to be the most advanced person only 30 years ago.
There are some zero sum games that are present like the stock market, when someone wins by making a trade, then there has to be someone that lost. But apart from that scenario, a growing bag is indeed what is happening. Will be interesting to see what happens in a few decades.
Very true. The stock market is a sales transaction between two people. That definitely can have a winner and a loser. That’s different then the economy or your place in it where you are not strictly speaking transacting with a single other person.
Well said, the zero sum game fallacy spurs on so much jealously. The market determines what people get paid, what it takes to attract someone to the job. You could not have paid me enough to do my CEO’s job. He worked 18 hours a day and dealt with nothing but problems. Sure he made ten times what I did but I was happier.
Sorry, but you are missing a very fundamental point. Your understanding of the economy, the candy, the bag, the TV, the car and electricity, is that you look at it purely from the material perspective and you neglect the legal aspect of it. You make the same mistake just about every economist out there makes. The material aspect of the economy is subordinate to the legal aspect, i.e. property, contract and statutory law.
Yes, it is true mankind can produce far more than mankind needs, the GDP figures prove this beyond a shadow of a doubt – in fact, the average worker in developed countries produces around 5 times what an unemployed person needs to live a basic but comfortable existence (i.e. housing, clothing, food, energy etc). But being able to produce, invent, etc, is one thing, having the legal powers and rights to control the means of producing, distributing and consuming is another.**
And this is where you all go wrong. A piece of candy, a TV, a car etc, all exist in isolation as material objects. Correct? Their only condition is that they must occupy some space. Ok. But your legal right to control and own those objects does not exist in isolation. It exists by virtue of there being legal obligations on others to refrain from enjoying the objects, and on govt to protect your rights.
A very simple but crude example to demonstrate this is that if you divided up all the land between all individuals then each individual might have 2 or 3 acres each. If you enter into a contract with someone and as part of the contract you put up your land as collateral and then you cant meet your contractual obligations you lose your land. You no longer have a legal right to the land, and all you have is legal obligations to stay off everyone elses land. This is the zero-sum! No amount of technological advancement, know-how or intellect will change this fact. For all the land that exists in the world, your lack of legal rights means you cannot access any. It is a simple as this.
Now, land being a crude example, it is still the same logic for everything else. For every legal right one possesses another or others must hold the legal obligation commensurate with the right. You cannot have one without the other and I dare anyone to show me how you can create legal rights for all and yet have no corresponding legal obligations? If the UN for example claims that all humans have a right to housing, then explain to me how that right can be exercised if there is no one to exercise it on? You see the point here? In order for every human in a particular country to have access to housing, then politically, the rest of society must give up something to pay for it. The very fact that we have politics to begin with should tell you all that it is zero-sum otherwise why the hell are they all arguing with each other? What the right gains the left claims it came at their expense, what the left gains the right claims it came at their expense!
The reality is that our economy is a legal economy, and the wealthy in this world are wealthy in legal, and more importantly, permanent legal rights, whereas the poor are poor in not only permanent, but also temporary legal rights.
I think the problem here is you are viewing the world as a single good with no substitutes. It’s the same failure those who support the concept of peak oil make. But there is always a substitute or other option to spend your money on. The value of each of those items differs for every individual.
If enough people demand a single good and there is not enough to go around, we find a way to develop an alternative. That lowers the value of the initial item and the alternative over time. So in your land example, the alternative might be renting. It might be in an extreme case land on another planet or building artificial land as they did in Dubai. The bag is ever growing because substitution and technology advancement are constants.
A great example of this is the famous bet between Simon and Ehrlich over the price of raw metals. Essentially the correct bet was that the cost of raw metals would fall over time.
If technology advancement were ever to stall, then things get interesting. I in fact wrote a piece on that possibility and what it might mean.
It is in fact true that a stable country with clearly defined rules and property rights is key to a functioning economy. But that does not negate that the bag is ever growing.
** Just as a side-note, since WW2, the amount of goods/services the average worker can purchase with the wage he receives for producing those goods/services has only ever reached 65% and is currently down near 50% for most developed countries. The other 35-50% goes to property owners and govt.
Wealth distribution and wealth creation are not the same things. Nothing in this piece should be construed as any position on wealth distribution or poverty. The point here is that your neighbor’s wealth does not obstruct your own wealth. That says nothing about the hurdles that keep some people down while letting others get ahead.
We live on a finite planet with a finite amount of ressources.
How in the world is that NOT a zero-sum game?
But do we? We have a finite amount of a given resource. Say Oil. But economics states that alternatives will be sought at a given price point. That means what is on the planet, what exists today, etc are not the limit.
Want an example? Back at the end of the 2000s everyone claimed we were at peak oil. The idea of an oil alternative was a pipe dream and thus everyone believed the price of all energy was going to go through the roof. Contrast that with today. Oil is actually quite cheap once you adjust for inflation. What changed? That’s one example.
> That obscene wealth of these individuals is somehow responsible for your poverty. […] No one is saying here I’ll pay my employees less so I can pay my CEO more.
I agree with most of your points, but I think this point is disingenuous. Your phrasing is a bit of a straw man; they instead say something more like, “what CEO can we hire to achieve a certain profit margin in a given timeframe”, where achieving that often requires suppressing wages and cutting benefits, or other measures that have led to people’s wages stagnating for the last 30 years while wealth at the upper echelons has sky rocketed.
Couple that with the fact that CEO compensation had almost no correlation with their effectiveness at achieving their stated objectives throughout their career, and the fact that CEOs often sit on the boards of other corporations and so have an incentive to bump CEO pay in order to inflate their own value in the CEO market, and you can see how the meritocratic assumptions behind your point here don’t hold much water.
It seems quite clear that there are some negative externalities at play that are leading to this explosion of wealth inequality. A tide that lifts all boats doesn’t help much if someone has blocked ocean access so you can’t even get your boat in the water.
The point is the CEO salary itself doesn’t block your ocean access or relate to wage suppression. It’s unrelated. Whether an individual CEO deserves their excessive pay is a question for the shareholders, not society as a whole. But there are plenty of CEOs that succeed without suppressing wages and still have high pay. There are plenty that don’t as well. Someone else’s high pay does not stop you from making a high pay. Their actions with that money or power may. Direct your ire at the appropriate people, and don’t let it stop you from reaching for your dreams.
>The point is the CEO salary itself doesn’t block your ocean access or relate to wage suppression. It’s unrelated.
No it’s not. CEO compensation is often tied to profit. Profit is sometimes driven by cuts, either to pay, benefits, staff, union busting, etc. Pretending it’s completely unrelated is disingenuous, like I said. There many, many ways in which they are related, both directly and indirectly.
> Whether an individual CEO deserves their excessive pay is a question for the shareholders, not society as a whole.
Society sets the rules by which corporations play, so it’s not meaningful to ignore the environment in which compensation is calculated. When CEO compensation climbs to ridiculous levels because it’s benefitting from negative externalities that the rest of society ends up paying, it’s absolutely within society’s purview to revise those rules and close those loopholes.
I guess we will have to agree to disagree. There are plenty of sources of profit beyond cuts to labor. You are missing the whole revenue side of the equation which also can lead to increased CEO compensation. Even when we talk about pay cuts it’s not just CEO compensation that drives them to cut labor costs in some cases. Ie compensation or not they lose their job without profit improvement. So changing CEO compensation will not change the profit motive. For that you’d have to change the whole stakeholder model to decrease the shareholder weight. Whether that is worth it is a separate question from CEO compensation.
Thank you for clarifying the concepts for me. One user pointed out, “the resources are finite… how is this not a zero sum game?” I agree with your posts, is is logical and reasonable, especially with the “all other things equal assumption”