Economics is Not a Zero-Sum Game

By Jason Hughey, Capitalism Institute staff writer

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All around us, we are surrounded by competition.  One of the most obvious examples of this competition is in the sports world.  A couple weeks ago, the L.A. Kings just won the Stanley Cup finals in a surprising upset over the New Jersey Devils.  Even more recently,  the NBA world was focused on the Finals match up between the Miami Heat and the Oklahoma City Thunder.  The MLB is in full swing for those who are disappointed that hockey and basketball are over for the season.  Meanwhile, NFL and NCAA football fans eagerly await the start of the 2012 football season in the fall.  The key similarity in all of these sports is that they produce only one winner at the end of each season.

As a very competitive individual myself, I know what it’s like to be on both the winning and losing side of things.  Needless to say, I do not like to lose.  I really don’t know anyone who does.

Ok, so what does all this have to do with economics?

Most people perceive the economics of the free market as a competitive struggle for domination.  Much like Miami Heat’s smothering defeat of Oklahoma City in five games, leaving Lebron and Co. at the top of the world and the OKC Thunder grasping for their shattered egos, people think that the free market describes a system of “winners” and “losers” in which the wealthiest come out on top while everyone else is left behind.  The only way to succeed in this cut-throat system is to figure out how to thrive at the expense of others.

Some of this may sound familiar.  The Occupy Wall Street movement tells us that it’s the 1% vs. the 99%.  Marx once told us that it’s the laborers vs. the capitalists (the owners of production).  Labor unions tell us that it’s the employee vs. the corporation.  Protectionists tell us that it’s the United States vs. the rest of the world.  Socialists tell us it’s the rich vs. the poor.

There are few things that anyone could say to me that I would consider less depressing.  If my outlook on life was such that I believed that my material well-being depended upon the extortion and exploitation of others, I would be an extremely angry person.  I would literally hate everyone that partakes in the economic system.  I would be envious of those who had more money because I would feel like they got their money by somehow trampling me underfoot.  I would do everything I could to get someone to take their money and transfer it to me by whatever means necessary.

However, I don’t have an outlook like that.  Neither should you.  Unlike tonight’s game between the Cardinals and Rangers, the system of free markets is not a zero-sum game.  Everyone wins.  Unfortunately, this runs counter to practically everything that we learn from teachers, politicians, labor unions, and protestors on the street.  Society practically intuits the idea that economic success for some must come at the expense of others.

The Division of Labor: A System of Social Cooperation

The French economist, Frederic Bastiat, once wrote a brilliant treatise on the popular economic fallacies of his day entitled, Economic SophismsIn his book, Bastiat identified the nature of man’s economic condition.  In doing so, he paints a picture of what life would be like outside of a market system of production and distribution.  Individuals would have to face the ruggedness of nature on their own—unless they joined an economic order of market exchange.

“On his long journey through life, from the cradle to the grave, man has need to assimilate to himself a prodigious quantity of alimentary substances, to protect himself against the inclemency of the weather, to preserve himself from a number of ailments, or cure himself of them.  Hunger, thirst, disease, heat, cold, are so many obstacles strewn along his path.  In a state of isolation he must overcome them all, by hunting, fishing, tillage, spinning, weaving, building; and it is clear that it would be better for him that these obstacles were less numerous and formidable, or, better still, that they did not exist at all.  In society, he does not combat these obstacles personally, but others do it for him; and in return he employs himself in removing one of these obstacles which are encountered by his fellow-men.”

Bastiat continues to demonstrate how this system works in practice.  He explains that “The physician, for example, does not bake his own bread, or manufacture his own instruments, or weave or make his own coat.  Others do these things for him, and in return he treats the diseases with which his patients are afflicted.”

Thus, each individual in a free economy has the opportunity to specialize in the conquering of some obstacle or impediment that stands against human survival and flourishing.  He offers his specialized ability in removing this impediment to others in exchange for a profit.  They do the same for him.  In the end, by their collective efforts and the medium of exchange, each individual in society is better able to provide for his material well-being.  Note that in such a society, there are no losers.  Everyone benefits by the accumulated collective knowledge that occurs without centralized control.

Note that such an approach to generating prosperity is not in any way tied to an “us vs. them” mentality.  In fact, it runs contrary to all such notions.  Instead of accusing the economic system of trapping mankind in a zero-sum game, where we can only gain at the expense of others, it accurately portrays the market as a system of efficient social cooperation in which everyone wins.  The most successful in such a society do not trample people underfoot, instead, they serve them with their talents and knowledge.

Thus, the division of labor principle shows us one way how economics is not a zero-sum game.  Another way to understand how economics is not a zero-sum game is to remember the subjective theory of value.

Subjective Value Theory: It’s All In How You Look At It

At the end of a baseball game, the final score tells us who wins and who loses.  There’s an objective standard of determining the winner and loser.  However, in economics, all transactions are governed by the principle of the subjective theory of value.  This means that economic goods and services are not locked in some objective standard of value.  There’s no possible economic method that allows us to say that a horse and buggy should be valued today in the same way it would have been valued in the 18th century.

Each individual values economic goods and services subjectively, that is, no economic good holds any intrinsic worth.  The value of goods and services is based entirely on what individuals impute to that good or service.  That’s why a free market society produces so many options as opposed to state-regulated economies.  We value goods based on things like shape, feel, color, style, brand name, need, and a plethora of other factors.

The market exists as a response to this subjective value by providing us with options so that we are not restricted into a cookie-cutter system of production and distribution.  This is the beauty of the price system.  It exists in response to the subjective theory of value.  A free price system is allowed to fluctuate in order to match changes in people’s preferences over time.  This results in people’s subjective, changing preferences being satisfied in the most efficient manner possible.

How can we possibly believe that there are winners and losers when we understand that value is subjective?  I may not see a need to have a mansion with one-hundred rooms in it, but some business tycoons are able to maximize their utility by building such a mansion (they also provide a lot of jobs along the way too).  I may not see a need for a 60” flat screen television, but some people are willing to pay $1,000+ for a really nice television.  In the world of subjective value, that is fine.  Some people buy only specific high-quality suit brands.  I would like to be one of those people one day, but I realize others might not care to own even one suit.

In brief, the subjective theory of value should dictate how adults in a market economy function.  We should understand that everyone around us has different preferences and we respect those preferences.  We certainly shouldn’t complain or accuse them of benefitting at our expense.  Last I checked, if I did not own a Ferrari, and if some business tycoon buys one, then there’s no way to say that he has exploited me.  He’s simply satisfying his subjective value preferences.   If I don’t have the money to buy a Ferrari that he has, that is my fault, not his.  Even if I did have the money to buy his Ferrari, I probably wouldn’t, because my subjective value preferences would not incline me in that direction.

Conclusion

So the next time you’re tempted to look at the world of economics as a competition with ultimate winners and losers, think twice.  Economics is not the study of brutal competition where the rich guy stomps out the poor guy.  Sure, businesses may have competition for the privilege of selling to customers, but that is merely a healthy aspect of the ultimate process of social cooperation that a free market engenders (think about it: businesses are competing for the privilege of serving the consumer!  What other economic system produces a phenomenon where people compete in order to serve?).

Further, think about this: the only time when there are absolute winners and losers in an economic system is when the state uses its power of coercion to declare certain groups winners and other groups losers by an arbitrary, de facto ruling.

If you truly want to see society prosper in a manner that is harmonious and socially cooperative, then you cannot support political measures to favor or restrict one group at the expense of others.  Otherwise, you introduce a zero-sum game into the market when one was never there in the first place.  As Frederic Bastiat said in his book, The Law:

“As long as it is admitted that the law may be diverted from its true purpose — that it may violate property instead of protecting it — then everyone will want to participate in making the law, either to protect himself against plunder or to use it for plunder. Political questions will always be prejudicial, dominant, and all-absorbing. There will be fighting at the door of the Legislative Palace, and the struggle within will be no less furious…Is there any need to offer proof that this odious perversion of the law is a perpetual source of hatred and discord; that it tends to destroy society itself?”

Last season, the St. Louis Cardinals won the World Series.   The New York Giants won the Super Bowl.  Next season, things may turn out differently for both teams, but we will continue to win every day as long as we support a free economic system that engenders a genuine spirit of social cooperation instead of using the state’s coercive authority to produce a zero-sum game.

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