Economics is not a zero-sum game: A Tale of Two Widgets

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Disclaimer: I do not hold a collegiate degree in economics. My collegiate degrees are in engineering. I do however find economics fascinating, took economics classes as electives in college, and spend spare time of mine reading the works and watching the videos of renowned libertarian economists Thomas Sowell and Milton Friedman.

A brief comment on economics as a field. While economists of different schools advocate for different specific policies. The principles of economics are well supported. Here's a good video where Milton Friedman and Walter Heller discuss the differences between economists and why they actually have a lot in common. https://www.youtube.com/watch?v=kG8iXMaZTXE

Now with the prelude out of the way, the main point I wanted to get to. The main misconception I come across when people discuss economics is that they view it as a zero-sum game. This is an issue both on the left and the right. Examples of viewing economics as a zero-sum game include:

1) Believing for someone to get richer, someone else must get poorer.

2) Believing that a trade deficit is causing your country to become poorer while making another country richer.

I'll address the first point with the tale of two widget factories.

The owner of widget factory 1 is an egalitarian. He believes he and his workers should get roughly equal amounts of money from the factory. He has 10 workers in his widget factory. He keeps 10% of the profits for himself, while paying each of his workers 9%. His widget factory produces $100 of widgets per hour. Each of his workers get $9 per hour while he gets $10 per hour.

The owner of widget factory 2 is not an egalitarian. She believes she should get as much money out of her factory as possible, while paying her workers as little as possible. She keeps 50% of the profits for herself while paying each of her workers 5%. She also invests half her profits into buying new upto date equipment for her factory. As such her factory is twice as productive as owner 1s. Her widget factory produces $200 of widgets per hour. She gets $50 per hour, pays $50 per hour back into the factory. Each of her workers gets $10 per hour.

Factory 1 Summary:
Overall productivity: $100/hour
Owner: $10/hour
Workers: $9/hour

Factory 2 Summary:
Overall productivity: $200/hour
Owner: $50/hour
Workers: $10/hour
Invested: $50/hour

Because factory 2 is more productive than factory 1, the owner can make 5 times what her workers make while still paying them more than her competitor. Now I know what you're wondering. What about factory 3? Factory 3 is just as productive as factory 2 but has the profits split evenly.

Factory 3 Summary:
Overall productivity:
Owner: $13.5/hour
Workers: $13.5/hour
Invested: $50/hour

In theory this factory can exist. In practice it rarely does. Why is worthy of its own post. Short version is that it requires perfect knowledge of the optimal investment and that knowledge is rare.

Last edited by Antrax on 09 Aug 2019, 1:02 am, edited 1 time in total.

"Zero sum" thinking is detrimental.

It likely leads people to playing the "blame game".

Examples:
"Rich people are greedy"
"The 1% is hogging all the wealth".
"Illegal immigrants are taking jobs".
"Capitalism is evil"
Blame others for your situation, don't blame yourself.

I am ashamed to say I once commonly blamed others for my problems, which is why my signature line references that shame.

"After a failure, the easiest thing to do is to blame someone else". <---Be honest and look at yourself first.

The thing that goes with always blaming yourself is also only ever giving yourself credit, and pretending that the people who helped you never did. Of course you shouldn't always blame others, but I feel that the "don't blame someone else" thing has become a cliche. It sometimes is someone else's fault. No person is an island, and we all affect each other; at the same time, we do have choices.

This I think is a more nuanced and correct view of things, and avoids relying on cliches. It forces you to actually think through what is going on.

Well, we live on a finite planet with finite resources, so if you use a resource then you are in essence preventing someone else from using it. So how is statement one false?

I think this is the basis of the assertion (in the context of private ownership).

While the planet is finite there are two important things to keep in mind:

1) Not all the resources of the planet are put to use.

2) Just because resources are used doesn't mean they can not be used better.

For example if you took all the corn in the world and made giant corn sculptures out of it instead of eating it, large quantities of another crop would have to be grown in its place to feed people. You would need twice as many farmers, which means fewer people doing things other than farming and a poorer society overall. By reallocating the corn towards food instead of giant corn sculpture all of society would get richer.

Put it this way, the foolish farmer who uses their resources to make giant corn sculptures instead of food is making other people poorer, but also themself. The farmer who uses their resources to have people eat corn is making themself richer, but also everyone else by providing value to society.

To further expand, wealth is ultimately tied to productivity. Society as a whole cannot get richer without an increase in productivity. However, society as a whole can get richer if someone devises a way to improve productivity. A person getting rich off such methods is not stealing from other people, but rather earning a share of the benefit they provide to society.

Generally I agree with both of your points. But I do think there are situations when they might not be true. I think people just feel injustice when they are only getting slightly richer and someone else is getting a lot richer.
I took economics classes as well and am still interested in it. One thing I have learned is that the global economy as well as local economies will usually follow the rules, but not always. There are definitely countries in which the rich get richer and poor get poorer. That is possible everywhere depending on the level of corruption in the government.

It's my view that you should not view another's good fortune as a bad thing particularly if you are also better off.



Certainly true. Human systems are complex and models and rules simplify complex behavior.



Absolutely, and I never wanted to imply otherwise. However, as you alluded to, it is non market forces that enable this.

It always amazes me that the Left/Democrats constantly announce themselves as "the Party of Science" -- "We believe in science! We don't believe in stupid creation myths invented by 2000-year-old Middle Eastern goat herders that didn't know anything about science!"

And then these same people will immediately turn around and embrace the economic principles followed by 2000-year-old Middle Eastern goat herders. "Jesus was a socialist so you should be too!"

Economics is built on a basic math and you can't escape those rules eternally. You can temporarily sidestep them through tools like fractional reserve banking but creating a money supply with the same mathematical principles as a ponzi scheme isn't going to last forever...
Remember that one successful fiat currency? Nope, nobody does because they all eventually explode.

If you plug your example in to a computer program and set it to iterate eternally you can continue to try and change the code and rules but it will always blow up eventually.

I'm not sure why you think this is such a problem. Money is just arbitrary values. The government could arbitrarily decide that 1 penny in 2020 was equal to 1 dollar in 2019. It would cause temporary confusion and chaos, but it wouldn't change the real wealth of the country. That is only altered by the economic productivity of the country.

Yes this is true that it will eventually go back to the the standard rules. What you are saying is one reason why I was against the most recent tax cuts. The economy was already strong so using artificial measures to try to strengthen it more could result in negative consequences such as inflation.

I am surprised that folks think of economics in general as being a zero sum game. A middle Ages feudal economy is zero sum. But not a modern capitalist economy.

In some financial arenas ARE zero sum, and some are not. I have heard that the commodities market IS a zero sum game (in order for you to make money in commodities, someone else somewhere has to loose money). But the Stock Market is NOT a zero sum game. You making money in it does not necessarily mean that someone else is loosing money in stocks.

International trade is not zero sum. Usually quite the opposite If the Chinese make money selling us stuff it doesn't make us poor. It means they have our dollar to spend. And what else would they wanna do with those dollars, but to spend them?. And that added demand creates the opportunity for us to sell THEM stuff. So both nations get rich.

In my opinion the economy showed the symptoms of the end game in the 70's when the viability of the US dollar being tied to gold came to an end. The coffin was nailed then and we have been in the end game since. These mechanisms are huge and can take longer than a human life time to unwind but there's no question in my mind that in a few hundred years the history books will tell the story of the US empire coming to an end and the insolvency of the US dollar will be a major part of that.

The illusion that some hold of economies being able to circumvent the basic mathematic principles they are built on will be seen as one of humankind's greatest follies just like every fiat currency that ever existed in the history of humans...

Sure, if a world reserve fiat currency can be eternally sustainable and survive asymptotic behavior approaching infinity. Aside from that little challenge, your theories are sound.