The Myth of The Zero-Sum Pie Game
Nov 24, 2012 at 3:33 PM
The zero-sum game theory, otherwise known in layperson’s parlance as the fixed pie quotient, in economics suggest that in order for one person to succeed in wealth another must decline in wealth; in other words, zero-sum game proponents suggest that there is an inverse corollary between the capital and prosperity of the one percent, those who reside in top one percent of a fungible income scale, and the incomes and impecunious nature of the ninety-nine percent, the lower quadrant on the economic scale. The wealth of the entrepreneur or capitalist’s must be taken from the hides of the proletariat, says the zero-sum game theorist. Of course this theory, in economics anyway, is an absurd fallacy.
The Montaigne Dogma (named after Michael de Montaigne who was a noted 16th century French essayist), as the zero-sum doctrine is sometimes called, may exist among nations that do not operate under a purely free market system, but they are wholly anathematic to laissez-faire economics: when one economic agent produces a commodity or resource that another economic agent needs, then it could it can be accurately concluded that both agents needs and wants have been fulfilled.
Indeed, wealthy entrepreneurs, regardless as to whether they are nouveau riche or patricians, succeed in business and acquiring profits simply because they have found a way to, through either chiseled talents and prodigious amounts of grey matter–or perhaps both, ameliorate the pain and distress of their fellow human beings. When they produce a commodity or resource that enables others to more efficiently conduct their lives, the profits that they derive from that commodity could not possibly symbolize an inverse ratio between prosperity for some and poverty for others.
Additionally, those same entrepreneurs and capitalists were able to successfully traverse, using calculated risks, through the narrow and rocky shoals of an undetermined future to capture succors and relief for the plights and pains of future consumers; in other words, they acquired vast riches by dealing out vast amounts of philanthropy-resulting products.
To wit, using an example made famous by Austrian economist Ludwig von Mises, when a baker, in order to beget a profit, kneads and pounds dough for a loaf of bread that is sold to his dentist, he is, in effect, aiding his dentist by giving him the means to not only live but to be physically healthy and vigorous. Likewise, when the shoe is on the other foot, which is often-times the case, the dentist can, to beget a profit of varying size, help fix his baker’s decayed tooth, leaving both the dentist happy, having received remuneration for his work, and the baker relieved, having had his tooth fixed. Both men, in the previously mentioned example, accurately displayed the double thank you phenomenon, wherein one man, the dentist, uttered a thank you after receiving supposed legal tender while the other man, the baker, did the same after having his decayed molar fixed.
Moreover, if the baker’s dentist is especially reliable and effective, then his skills with an enamel polisher and dental drill will be in high demand among consumers. In effect, his monopoly on efficiency and painless tooth extraction necessarily increases his consumer base, which procures him handsome profits. It is also worth noting that neither the dentist nor the baker were harmed during their economic exchanges; they both, in varying degrees, benefited; in order for the Montaigne Dogma to have efficacy there would have had to have been a victim, both in the aggregate and in the immediate, during the dentist’s exchange with the baker and vice versa.
French philosopher and thinker, Voltaire, a man widely lauded for his ability to flesh out dogmatic ideas, wrote in 1764 that “to be a good patriot is to wish that one’s own community should enrich itself by trade and acquire power by arms. It is obvious that a country cannot profit but at the expense of another, and that it cannot conquer without inflicting harm on other people.” Unfortunately Voltaire, as sagacious as he was, was unable to see the forest for the trees. Social cooperation in the name of commerce among individuals in society and between societies does not entail that a country must succeed and “enrich” itself at the expense of another. Like the example of the baker and the dentist, foreign exchange among countries, at least when done under the aegis of social cooperation and not social coercion, is advantageous for both sides of trade.
To adulterate the zero-sum game, politician economists, at the behest of politicians, advocate for regulations that seek to inject a third party in between the baker and dentist’s economic transactions. In other words, instead of two agents, the baker and the dentist, negotiating terms, there are now three, four or more persons injected in contracts that affect only the two immediate actors, the dentist and the baker. The terms have now become, among the original economic actors, watered down to such a degree that future actions between the two, going forward, are unlikely to happen.
There are many instances of the dwindling effects of economic transaction amidst higher third party regulations. For example, minimum wage laws were enacted as a way for the disenfranchised, i.e. minorities (who make up a disproportionate amount of the poor) and the youth, to negotiate wages more equitably. These policies, while being well-intentioned, are disastrous to those it seeks to help. In fact, minimum wage laws actually create and perpetuate institutional unemployment.
In 2009, economist David Neumark of the University of California, Irvine, wrote in the Wall Street Journal, that the then 70 cent increase in minimum wage would result in a loss of 300,000 jobs. As if on cue, the minimum wage’ increase to 7.25 in July caused employment numbers for teenagers to plummet in August and September of 2009, confirming Mr. Neumark’s assertion.
The teen unemployment rate for September of 2009 hit 25.9 percent (a quarter of all teenagers 15-20 years-old were unemployed), which was up from 23.9 percent in July of 2009. Of course a staggeringly high unemployment rate among the youth spells ruin for future generations because prosperity for individuals is accumulated over a period of time through a vast amounts experience in the work force; in other words, the longer the young are unemployed the more their experience will be retarded. Worse yet, the unemployment rate for black Americans during that same interval went up from 39 percent in July of 2009 to an astonishing 50.1 percent.
While the bad economy no doubt contributed to the high teen and minority unemployment numbers, the fact still remains that a terrible economy presents businesses with the opportunity to cut costs wherever necessary; the first cuts are, almost always, in the labor force. Setting aside the sagacity of minimum wage laws, it is never prudent to increase the cost of labor on business during times want and marginality. As highlighted above, any inorganic increase in the cost of labor begets a decrease in the labor force.
The contractual agreement between the employer and the employee is equipollent to the economic actions between the dentist and the baker. Without the third party regulator, the Labor Department in the minimum wage example, the employee is free to shop around for an employee who pays a wage that he considers fair; likewise, the employer must evaluate what he or she is willing to pay for the talents and skills of an employee. If the employee has very few marketable skills then said employee is unlikely to get paid prodigiously.
Rent control is another example of a third party, hoping to even out the fixed pie, intruding on a transaction between two actors. The intrusion was well-intentioned (helping lower the rents of renters) yet ill-conceived. Rent control for housing, which caps the amount of rent that an individual is obligated to pay to the landlord, creates a situation where, according to economist Thomas Sowell, landlords and builders of housing find the caps and controls so confining that they choose to build, supply and manage less housing overall. An Egyptian woman who lived through the rent controls that Egypt imposed in the 1960s reported this:
The end result was that people stopped investing in apartment buildings and a huge shortage in rentals and housing forced many Egyptians to live in horrible conditions with several families sharing one small apartment. The effects of the harsh rent control is still felt today in Egypt. Mistakes like that can last for generations.
The lack of erected apartments necessarily causes an influx in those waiting for available apartment buildings. The tenants who take up residence, or are grandfathered in before the rent controls take place, are, for a short time, in a better position than those who are clamoring for open domiciles. However, these tenants have to, over an extended period of time, contend with derelict landowners who, because of the large pool of future applicants and because there is no financial incentive to do so, choose not to bother with the upkeep of their properties.
The above mentioned interventions always seek to help the despondent at the expense of the opulent, but, as previously posited, the privations of a meddling intermediary results in a net negative value for all active sides, with the possible exception of the regulator, who, because he or she is seen as a do-gooder, actually benefits in the short term; the long term consequences are irrelevant to the publican who regulates because said person is concerned only with future political ambitions. The blowback affects him, but only indirectly.
As explicated in the above example of the baker and dentist, it should be abundantly clear to most thinking people that, indeed, a fully operational capitalist system (something for which the United States is only tangentially tied to), far from being a zero-sum game system where the producer benefits at the expense of the consumer, propels economic actors (Americans individuals), both producers and consumers, into exceptional feats of prosperity. In effect, they, both the consumers and producers (the two are interchangeable) in a capitalist system, benefit from the economic exchanges that they take part in.