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One question I have had since reading Dr Peikoffs OPAR is about the idea that one persons accumulation of wealth does not "feed off" another persons loss, that wealth accumulation is not a zero-sum game. Now I am sure there is an easy explanation for this but for some reason I just cannot see how this is possible. If someone makes a profit, doesn't that mean that someone else losses? Could someone help me out with this concept because I cant seem to grasp it.

asked Jan 01 '11 at 23:11

wolysoly's gravatar image

wolysoly
9014

Just to provide one example: think of a car company that designs a new motor. This new motor consumes less gas than the older one. While the production of every single new motor costs less than in case of the old one, the car company sells the cars with the new motor for the same price as the cars with its predecessor. Every customer profits because of the milage and the company profits because the production of the new motors is cheaper. That's what's meant by making money. For more, I refer you to Francisco's money speech.

(Jan 02 '11 at 10:30) Selfmadesoul ♦ Selfmadesoul's gravatar image

Wealth is not a zero sum game because people create wealth.

What is wealth? Wealth is physical stuff that makes life easier. Note, it's not money. Money is a form of wealth which is only of value in a fairly advanced society. Wealth is more fundamental than that.

Consider how useless a $100 bill would be if you lived alone, on a desert island. But consider how much more valuable a net for catching fish would be. Making a net from sticks and other available materials would be smart thing to do, because it would enable you to spend less time catching all the fish you need to live.

Making a net requires time and thought and effort. But the return is more free time. Ending each day with with enough fish to eat becomes easier.

Wealth, as such, makes life more secure (e.g. antibiotics in case you get an infection, rather than near-certain death), more comfortable (a warm bed in a house rather than a mat of sticks in a damp cave), easier (an electronic calculator rather than a pencil), and even more fun (a tennis court and a pair of rackets, rather than a thicket). People create wealth because they want life to be secure, comfortable, easy, and fun.

Perhaps, then, what is hard to grasp is that trade is not a zero-sum game.

Imagine there are two men on a desert island, one who makes water-shoes, and one who makes nets, and they trade, one net for one pair of water-shoes. One can get confused about this by thinking "The net's worth $30, and the shoes are worth $25, so the shoemaker is gaining $5 worth, and the net-maker is losing $5 worth."

The problem here is in thinking that a net, or a pair of water-shoes, has an inherent worth independent of who is evaluating it. Bringing in supposed dollar prices to measure the worth of nets and water-shoes hides a crucial pair of facts: that the net-maker's first pair of water shoes is worth more to him than his second net, and the shoemaker's first net is worth more to him than his second pair of water shoes.

Assuming, due to acquired skill, the net-maker can make good nets faster than the shoe-maker can, and assuming the shoe-maker can make good shoes faster than the net-maker can, trade lets each man have both a net, and a pair of shoes, at a time-cost that is lower than it would be had he attempted to make both a net and a pair of shoes himself.

That's why both men want to trade. It allows each of them to achieve the desired end result in less time.

Due to specialization, trade enables each man to help the other man while benefiting himself.

Imagine what would happen if trade were somehow forbidden: Each man would make both nets and water-shoes. No man would be motivated to make more nets (or shoes) than he needed. Neither man would become as expert at a craft as he would have become had trade been possible.

Free trade, then, motivates specialization, and specialization (the development of skill at doing one thing), increases wealth creation, because skill makes creating wealth easier.

The larger a society grows, given free trade, the fewer skills any particular individual must master in order to live, and therefore the more skilled he can become in his specialty. Each person gets really good at producing a particular kind of wealth, and trades it for the other kinds of wealth he needs.

This yields immense prosperity, and nobody loses unless he wastes his time producing lots of things which nobody wants. To prosper, one must not produce blindly.

Peter Schiff's book "How an Economy Grows and Why It Crashes" inspired my examples. I recommend this book, at least its beginning chapters.

answered May 07 '11 at 11:01

John%20Paquette's gravatar image

John Paquette ♦
1002956310

edited May 07 '11 at 12:30

In a zero sum game, the "gain" of one player, is reflected in an identical "loss" in another.

That is a false model of an economic transaction.

Here's a specific example. An IPOD. Apple pays (this is a guess) about $50 for all the parts, and labor that goes into making an Ipod. I want an Ipod. I estimate an Ipod is worth $500 to me (based upon all the entertainment it will provide me over the lifetime of the device.) I can buy an Ipod for $200.

So, I have "gained" $300 in value in this transaction, while Apple has gained $150 in this transaction.

Voluntary trade among equals is not a zero sum game, but a game in which the participants both win. If they didn't both win, they would not participate.

answered Jan 02 '11 at 12:55

John%20Hoffman's gravatar image

John Hoffman ♦
19015

This question reminds me of the following passage from Galt's Speech:

The problem of production, they [your teachers] tell you, has been solved and deserves no study or concern; the only problem left for your 'reflexes' to solve is now the problem of distribution. Who solved the problem of production? Humanity, they answer. What was the solution? The goods are here. How did they get here? Somehow. What caused it? Nothing has causes.

This passage is also quoted in CUI, Chap. 24.

Before there can be trade, there must be production. It is primarily production, not trade, that increases the total amount of wealth.

Trade can be a huge "enabler" for production, however, by allowing producers to concentrate on what they do best and then trade with others for whatever else they need or want but don't produce themselves. This is known as "division of labor" in economics.

Even if the focus of the question was intended to be limited narrowly to monetary units alone, without regard for the tangible goods and services that represent real wealth, it still remains true that monetary units have to be created before they can be traded. Today, monetary units are most often created by governments, often with considerable involvement by persons who have political "pull" and little or no knowledge of any economic principles pertaining to how quickly or slowly a nation's money supply should be expanded or reduced, and why. In earlier times, monetary units consisted of gold or silver "certificates" redeemable in actual gold or silver (or other designated metals or precious materials). Actual metal coins generally serve as monetary units, too, and in that case it should be obvious that the metal had to be mined and shaped into coins before the coins could exist. Even tobacco leaves have been used as money during our history, and obviously the tobacco had to be grown and harvested before it could serve as money.

But money alone is not wealth. Money is only a medium of exchange and store of wealth.

answered Jan 02 '11 at 10:58

Ideas%20for%20Life's gravatar image

Ideas for Life ♦
467718

I am somewhat surprised by the lack of economic answers to what is primarily an economic question.

I would highly recommend not only this page but this website in general: The Freeman - Seven Deadly Fallacies of Bad Economics. The four core fallacies we most frequently encounter in public-policy discussions: the zero-sum fallacy (ignoring that voluntary economic arrangements are positive-sum); the fallacy of composition (particularly that robbing Peter to pay Paul benefits society simply because it benefits Paul); the chess-piece fallacy (assuming that some authority can achieve desired results as though he were moving chess-pieces on a board, ignoring people’s desires and incentives); and the open-ended fallacy (that commitments to ever-more health care, safety, open space, and so on, are sensible in a world of scarcity). One that you might have heard of before is the parable of the broken window by Frédéric Bastiat.

I also HIGHLY recommend Thomas Sowell's Economic Facts & Fallacies to any and all Objectivists. While Sowell is not an Austrian economists (he is kind of in between) it does not affect this work and his excellent scholarship and clarity in his ability to make complex economics simple for even the layman cannot go unnoticed. He deals with all manner of fallacies in this book, from the basic fallacies to things such as rent-control and employment discrimination. It is one of my favorite economics books (and I have many). While philosophical and moral arguments are critical and highly effective it helps a great deal to be aware of the economics as well. Put together, they are quite a potent force in debate.

Another thing policy-pushers try to do is create the impression that the United States faces an income distribution “crisis”. These rely on misleading statistics. Whether that is intentional or not of course must be applied on a case by case basis. For example, there are substantial differences between real income growth per household and per capita, from 1969 to 1996 as an example, the former rose only 6 percent in America, while the latter rose 51 percent. By emphasizing only the first statistic, it is possible to create the impression that income growth has been fairly stagnant. You will also find that in comparisons of discrimination between Whites, Hispanics and African-Americans the Asian statistic is usually left out, there is a reason for that which is explained in great detail within the book. Another way of misleading people is to focus only on income data and ignore consumption—consumption by people in the poorest quintile is actually twice their income, but that fact is usually ignored.

Moreover, the idea that there is an income crisis is greatly undermined if, instead of looking at “snapshot” data, you consider the high degree of income mobility. The latter data tends to be ignored. With this section, Sowell shows that it’s unwise to jump to conclusions based on highly selective facts.

For the philosophically inclined, refer to Ayn Rand's trader principle within the lexicon that also has a nice summarization here and her essay The "Conflict" of Men's Interests which I believe also is in audio with an additional Q&A section found in the registered section of the ARI website for free.

answered Jan 02 '11 at 16:34

capitalistswine's gravatar image

capitalistswine ♦
218520

edited Jan 03 '11 at 01:36

Wealth is never a zero sum game. This FACT of economics is easily demonstrated. If wealth were a zero sum game, why is the world wealthier today, than is was in say, King Tut's time? If wealth were a zero sum game, we would only have all the wealth of that time, to spread amongst the billions more people that exist today. The world would be poor beyond belief.

Another demonstration can be made from a different angle: Oil has always existed as long as man has been on this earth. But oil's wealth was created by men who perceived and conceptualized how it could finally be used. They engaged their minds and in productive work to create things from it. These men brought together individual discoveries of metaphysics, i.e. Chemistry of Hyrdro-Carbons, Laws of Thermo-dynamics, Physics of motion etc, and realized what new wealth could be created if they combined these things in a certain new way. We all became wealthier because they have engaged themselves in these productive activities. How many lives have been saved because of their efforts? How much more sanitary is our world because of it? How much more information and trade happens because of it - including your viewing this post? All because individuals, one after the other in varying fields of interest, have found ways to create wealth from a black sticky substance that was avoided by humans for millenia. How much more wealthy (better off) is the world now because we can transport ourselves, our goods and services across vast spaces both on the ground and through the air? Men of Tut's time were limited to horses, boats on the Nile, and their own two feet.

Wealth is created by man and his mind, it is NOT finite and distributed. There will hopefully always be people who use their minds and productive work, to create new forms of wealth. I would agree with the economic reading materials on the subject that CapitalistsWine has posted.

answered Jan 11 '11 at 10:45

Chuck's gravatar image

Chuck ♦
501

Here is a very simple example that can help illustrate this. Suppose I have two slices of pizza, and you have to cans of soda. If we don't trade, I will go thirsty, and you will go hungry. If I trade you a slice of pizza for a can of soda, we are both better off than we were before because now we both get to eat a slice of pizza and drink a can of soda. No physical goods were created or destroyed in this transaction, but we are both wealthier after the trade than before it because we both ended up in a situation that we preferred to the situation beforehand. We are both using the stuff around us to make ourselves as happy as possible, and after the trade the level of happiness we can attain is higher than before, so we are wealthier than before.

answered Jan 11 '11 at 11:29

Francisco's gravatar image

Francisco ♦
1606

"Wealth" DOES NOT EQUAL "dollars in my pocket". If it did, than paying Apple $200 for an iPhone would make Apple $200 wealthier and you $200 poorer. However, you now have an iPhone that is a higher value to you than the $200, otherwise you would not have bought it!

Wealth, we can therefore see, represents not money but the values that you act to gain in the course of living life.

This leads us to an incredible understanding -- if you are running a business, the more profitable you are, the more value i.e. wealth you have created that did not exist before! Now consider what the left thinks about profit, and realize how evil their position really is.

This also leads us to another incredible idea -- wealth is not limited by physical resources, but is rather created by man's mind. The iphone was worth more than $200 to you because of the ingenuity and creativeness of it's creators -- not because of the amount of plastic and metal present. Therefore the wealth of humanity i.e. "the pie" will keep growing as long as there are men able to think and produce values.

answered May 06 '11 at 18:45

Raman's gravatar image

Raman ♦
548110

edited May 06 '11 at 19:08

I answered this question in a recent episode of my Rationally Selfish Webcast.  An audio recording of my response is available as a podcast here: NoodleCast #75: Live Rationally Selfish Webcast. The discussion of this question runs from 52:40 to 58:24. 

My Answer, In Brief: Values are not mere material things: they can be created and destroyed -- and they are increased by voluntary trade. As such, profits are the creation of value, not merely the extraction of values from other people. For my full answer, listen to the podcast!

To catch all the Rationally Selfish Podcasts, subscribe to the podcast feeds in iTunes in enhanced M4A format (RSS) or standard MP3 format (RSS). Or better yet, join Greg Perkins and me for the live Rationally Selfish Webcast on Sundays at 8 am PT / 9 am MT / 10 am CT / 11 am ET.

answered May 10 '11 at 15:36

Diana%20Hsieh's gravatar image

Diana Hsieh ♦
10004246

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Asked: Jan 01 '11 at 23:11

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Last updated: May 10 '11 at 15:36