In the thread Let’s talk about capitalism again., the following statement was made:
Evidently, I misunderstand the terms zero sum game, non-zero sum game, or competitive markets (or some combination of them). If “each transaction generates value or wealth”, how can any economic transaction be viewed as a zero sum game?
A zero-sum game most correctly refers to a closed system, like a poker game with a fixed number of players. Any win or loss by any player requires an equal and opposite win or loss by the other players. If the sum of the contents of all players wallets was $100 at the start of play, money can change hands for hours and the total will still be $100. No value is added. Economic transactions are usually not “zero-sum”, value is usually added, the system is not closed, wealth is increased.
The responses I’ve gotten in the other thread (before I had a chance to open this one) are as follows:
As to my understanding of utility theory, any agreed upon price is, by definition, an agreement of equal value. Therefore, no economic transaction (at least, in this view) can be anything but a zero sum game. Where am I going wrong?
To clarify, both agents finish the transactions with at least as much value as they started with assuming that indifference yields a transaction.
Certain voluntary economic transactions are zero-sum. Suppose I am playing blackjack in a casino. If I win, house pays and vice versa. There is $10 on the table, and both parties bet $5 apiece. If I win $5, the house loses $5.
Suppose I purchase a contract to sell a bond from Acme Corp at $50. Someone else somewhere has purchased the opposite contract, to purchase this bond at $50. Suppose the bond yield drops, rendering the bond worth less than $50. I decide to cash out, and some poor sod ends up buying a bond for greater than its present value. I win; he loses.
This is a very crude and simple example, but I hope it is at least illustrative.
A more typical transaction in a competitive market is not zero-sum. I am walking down the street on a very hot day with a few bucks in my pocket. There is a man selling shaved ice for a dollar apiece. I rarely pass up the chance to buy shaved ice, especially when it’s blazing hot. The dollar in my pocket has value, but it sure doesn’t cool me down or taste like anise, so I value the ice more. It only costs the seller $.35 per unit he sells. I buy the ice.
Producer surplus is generated because the seller made $.65. Consumer surplus was generated because to me, the shaved ice was worth more than $1. In fact, since I am a sucker and a New Yorker, I might have paid $3 for it. The difference between the price I paid and the value of the object to me is my consumer surplus. In this transaction, value was generated because both parties ended up with more than they started with.
Hope this helps.
This is not quite right. In a voluntary transaction, I pay $1 for the shaved ice. In this transaction I agree that the value of the ice is at least $1, not exactly. The seller could take a chance and try to sell it to me for more, but this would be offset by the increased probability that I would walk away and buy it from someone else.
Thanks Tim Staab and Maeglin. As I said in the other thread, I’m not trying to be obtuse, but I still don’t get it. Here’s why:
In both these instances, someone is assigning worth to an object/activity. That is, the blackjack player puts value on the possibility of winning money (not to mention the enjoyment of gambling). The shave-ice eater (Mmmm…shave-ice.) puts value on having a tasty treat. Why is the first considered a zero sum game, while the second is not?
Quoting from the link for clarity:
Does it? Really? In just the same way that “buying in” fixes the time frame of the game, so does a negotiation between buyer and seller. In either case, we’re talking about a fixed set of “products”.
As another example, I trade my time and effort for money. It’s an equal trade (although I wish it was more equal in my favor 
). I then go and buy groceries with some of my paycheck. It’s an equal trade; if it weren’t it would indicate that either I’d not make the purchase or the vendor would not make the sale. The only place I see here for actual creation of wealth is when one gets something for nothing – for instance, crops growing due to the radiance of the sun.
I’m not really sure what to make of the closed vs. open system distinction…
You are confusing the utility people receive from gambling and the payoff they receive from one particular instance of the game.
In the game of blackjack we discussed in the other thread, there are two outcomes: you either win $5 or you lose $5. At no time is there ever more than $5 on the table. You may believe that in the long term, you will win more frequently than you lose, so you continue to put your money on the line. There may be positive utility to you for continuing to play the game even if your payoff in one of the game’s iterations is negative. Gambling in general may maximize your utility, but when you lose, you still lose. Your negative payoff is exactly the same as the dealer’s positive payoff.
In the tasty treat example, no one loses. Both parties gain some surplus, and the surpluses are not necessarily symmetrical. If I get a bad deal on the shaved ice, I may get a little surplus and the seller may get an enormous one. His competition is thick and margins are razor thin, the reverse may be true. I get a great price, and the seller practically cuts his own throat. However, if the transaction is voluntary, both parties end up with at least as much value as they had before.
Any better?
Simply put: because different individuals place different values on the same economic element. In a game like poker, for instance, this is not the case. A $5 chip is worth exactly $5 to all players at all times[sup]1[/sup]. In a free economic transaction, the relationship of value need not be exact. If you and I both value the shaved ice at exactly $1 we may make the exchange (but really, why would we?). However, if I value the ice as > $1 and you value it as < $1 then we should make the exchange, and we will each perceive (which is functionally identical to *receive[/] in this case) an increase in value.
[sup]1[/sup][sub]Actually, this is a bit of an oversimplification if you subscribe to value-bet theories of play, but I think it works for illustrations’ sake.[/sub]
[QUOTE=Digital Stimulus]
Quoting from the link for clarity:
Does it? Really?
[\QUOTE]
Yes. The market creates new chips when productivity grows. As more goods can be produced at fewer cost, greater surplus is created for both producers and consumers, which in turn can be invested to create further productivity growth. The amount of wealth in a capitalist, competitive-market system is not limited nor exogenously fixed.
Because it makes the math easier in formal theory. 
Glad you are still around btw, Spiritus.
I think this may be the core of your misunderstanding. Neither of the above examples are equal trades. In a free market, an equal trade is actually quite rare. Why, after all, would you choose to exchange one thing for another if you truly valued them both equally? Sure, one might do it for the sake of sentiment, building relatioships, etc? But think about it in purely representational terms: would you trade me a $1 bill for a different $1 bill? Would you do it over and over and over and over?
In most free market transactions, both parties trade for a perceived increase in value. This is a free trade, nat an equal trade. The important thing to realize, here, is that value (in a free market) is not an objective quality of a good/service. Value is only and always defined by a subjective human process. You value the groceries more than the money you pay for them, or else you would not go out of your way to exchange the one for the other.
Now that is a spectacularly lucid point. I’ll have to mull that one over. Thank you.
Thanks Maeglin. Circumstance conspired to keep me away for a while, but like all ocnfirmed addicts I never lost the urge for another hit.
That’s a great way to make the distinction!
The “new chips” are created by doing something better than someone could do it himself. You can do something better than I can and vice versa. Let’s say you can build houses better than I can and I can write computer programs better than you. When we trade a house for a computer program (even using money as a proxy for the barter) we both end up with better houses and better computer programs than we otherwise would. You can only use so many houses yourself, so once your housing needs (or wants) are met, building another house has no value to you. To me, though, it has lots of value. Without the ability to trade to me, that next house would never get built.
You are very welcome. If it helps, I find that a practical illustration at teh grocery store is often usefule. Say you have a pile of groceries and the clerk totals your bill to $47.86. You decide to pay that amount for the groceries. Now imagine that the total came instead to $47.87. Would you still pay? If the first exchange were in fact “equal”, then you should decline in the second case, since it would now be disadvantageous to you. If you value the groceries at > $47.86, though, the exchange would still make sense for 1 penny more.
Don’t extend the example too far, though, or else we will get into the realm of cardinal vs. ordinal theries of value, and that way lies madness.
Consider this example.
Alice and Bob live in a society. Alice has $90 and Bob has $10. The total amount of money in the society is $100. Bob goes to the society next door and buys $10 worth of wood and nails. The society now has $90 ( Alice ) plus $10 worth of wood and nails ( Bob. ) Still $100 total.
Bob spends the weekend using his new wood to build a beautiful dining room table. Alice sees the table and agrees that it is worth significantly more than the $10 Bob spent on the wood. She gives him $50 for the table. Now Bob has $50, and Alice has $40, plus a table worth $50!. Now the total amount of wealth in the society is $140.
So by taking raw materials, adding labor, and selling the result, in addition to creating profit, we are creating wealth for society as a whole.
Let me try a different tack:
[ul][li]A game is a situation with three things: 1. A set of players. 2. A set of strategies for each player. 3. A set of payouts to the players for every set of strategies chosen by the players.[/li]
[li]If a game is such that the sum of all payouts is not equal to zero, then the game is not a zero-sum game. For example, the ultimatum game: Two players are offered a sum of money. Player one chooses how the sum is to be split. Player two chooses whether to accept the split. If the split is not accepted, neither gets any money. That is not a zero sum game because the sum of the payouts to all the players can be greater than zero. (Generally #2 rejects a split she considers to be unfair.)[/li]
[li]A zero-sum game is a game where the sum of all payouts is equal to zero, by design. Poker is a zero sum game because when you add up all the winnings and losings, it nets out to zero. If you and I play poker, and you win $10 and I lose $10, the payouts sum to zero. Hence, it’s a zero-sum game. If new people come to the table, (check my math on this) it’s still a zero-sum game because all the winnings and losses should add up to zero. There are no chips left on the table when everybody goes home and there are no chips created from nothing, so it must be a zero-sum game.[/li]
[li]To be a zero-sum game, being open or closed is irrelevant. What matters is whether the sum of all the payouts necessarily equals zero. If they do, then it is a zero-sum game.[/li]
[li]Notice how we are defining the payouts strictly in terms of poker chips won or lost. This is a simplification used to illustrate a concept. Don’t get hung up on it; you’re not engaged in creative lateral thinking if you do.[/li]
[li]If you want to consider all welfare gains and losses, poker is not a zero-sum game because, even though the money exchanged sums to zero, people enjoy playing poker and that enjoyment is worth something.[/ul][/li]
One could hypothesize a market transaction as a game; however, that’s probably not the best tool for the job. Suppose that you have a pair of gloves that I want and I have a DVD that you want. I’d rather have the DVD than the gloves; for you, vice versa. So we exchange. The gain comes from the fact that I wanted the gloves MORE than I wanted the DVD; that is, the price that I paid (the DVD) was less than the goods I received (the gloves). For you, it’s the reverse, where you gain comes from wanting the DVD more than the gloves; yet, you still gain because the price you paid is smaller than the value of the goods you obtained.
Do you see how it isn’t a zero-sum gain? We are considering our preferences, and both of us are better off after the exchange even if the gloves and the DVD might cost the exact same price in the market.
I hope that helps. I’ve got to run.
Typo gnome…
I’d rather have the gloves than the DVD.