If Everything is Zero Sum then Nothing is Zero Sum

It's never too good an idea to disagree with Barry Ritholtz, since he's really sharp and unafraid to call people out on their nonsense.  Nevertheless, I'll take a minor amount of umbrage with his post today on zero-sum games:

Here's the bottom line: Any finite resource is a ZSG. Even an infinite resource has only 100% of marketshare, to be divided amongst competitors. That percentage is also a ZSG.

He then goes on to explain how this applies to markets, business and the economy as a whole.  Ok, fair enough.  Market share can't exceed 100%, no doubt about it.  So, defined narrowly, everything is zero sum.  If you buy a carton of eggs, you're down $1.99 while the store is up $1.99.  You're up a carton of eggs, while the store is down a carton of eggs.  Zero sum, right?  But big deal.  Both parties are better off (in theory) than if they hadn't made the transaction.

There are a lot of similarities between a free market economy and a biological ecosystem, but the zero sum issue is an area of divergence.  I imagine that if you looked at a beehive today it would look very much like a beehive from 10,000 years ago.  The ratio of energy that goes in is strongly correlated to what comes out, and this ratio probably hasn't changed very much.  But such is not the case with a market.  The ratio of energy inputs to outputs has expanded greatly over the last 10,000 years.  Stanford's Paul Romer puts it succinctly:

Think of the mineral iron oxide, suggests Romer. It’s rust. More than 10,000 years ago our ancestors used iron oxide as a pigment to make art on cave walls. Now, by rearranging those same atoms into a precisely thin iron oxide film on plastic we get a floppy disk, which can hold a reproduction of the same cave paintings, and all the possible permutations of it wrought by Photoshop. We have amplified the possibilities a millionfold.

The power of combinatorial explosions—which is what you get with ideas and opportunities—means, says Romer, "There’s essentially no scarcity to deal with." Because the more you use opportunities, the less scarce they get.

So, sure, you can take a snapshot in time, and say there's only so much iron oxide available and so there's only so much we can produce with it.  But since we're not frozen in time, it doesn't mean much to acknowledge these limitations or to say that the economy is zero sum.

Comments

[wcw]

While I tend to have sympathy for the contrary view, in the end Mr. Ritholtz can always pull out the laws of thermodynamics.

However, it is a silly argument to spawn such invective (scan the comments thread). Let's just agree that trading is a negative-sum game after transactions costs, but that trade itself is a positive-sum game under realistic assumptions.

[Barry Ritholtz]

I am not saying that everything is always a zero sum game — not even close.

I agree that if you buy a product from a seller, you both end up are better off. Thats a net add, not a zero sum.

But let Google take share from Yahoo & Microsoft, let iTunes steal customers from Tower Records -- that IS zero sum.

But I do believe that many more things are zero sum than people realize.

[A Stalwart]

ZERO SUM GAMES ARE A FLEETING PHENOMENON: I've read Barry's comments. I think it is indeed all a matter of timeframe, as Joe has outlined in this post. In a snapshot in time, everything is zero zum, but as time moves forward opportunities for development in the world multiply. And to view the world in a snapshot isn't realistic or useful.

Zero sum games are fleeting occurences which disapear as time moves forward.

For example, if tax cuts for the rich truly lead to a much larger economy in the future, then they benefit the poor.

TRADING ISN'T NEGATIVE-SUM: And seeing trading as negative sum again is also thinking too narrowly. When two parties trade each gives the other an asset, which each desires. This asset will be more productive in the hands of the new owner, thats why he wants it. I have a garden hoe, but can't farm. So I sell it to a guy who can. He'll get more out of, even if there was a small transaction cost in between. We include transaction costs in our calculation when we decide if the product is worth more or less than the price we need to pay. We buy it usually when its worth more to us. And if someone sells it to us at our stated price then the asset must be worth less to them. Both sides buy/sell the asset for more than the value it created for them.

NATURE: Even in nature (to correct you Joe), creatures become more effficient. Look at humans, products of evolution, we can do some pretty amazing things compared to the dinosaurs.

As far as pulling out the laws of thermodynamics, I think one needs to think in terms of "what is value". Value is something humans attribute to objects. If we can do much more using much less then value can go way up even while the universe is "decaying".

Interesting stuff though. But yes I think we need some trained philosophers over at The Big Picture to help people segregate arguements and then tackle them systematically. Otherwise, yes its an ugly mess of disjointed comments.

[berlin]

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