The Zero-Sum Fallacy

February 11, 2010

“Well, I’ve previously defined profit as the notion that you could be entitled to reaping *more* than you input into a system. Recall that in a good ecosystem, work is shared between species and energy is conserved all around to ensure sustainability of said system. In a system whose goal is profit, on the other hand, energy is extracted for individual gain.”

-“(clarification)

“Food production has actually outpaced population growth, so in that sense Malthus was wrong. He was unable to foresee the effects of science, technology, and economic development — all of which have enabled us to sustain a growing population by accelerating our consumption of natural resources.”

-“Malthus was Right!

We’ve already established that Thomas considers it “baiting” to suggest that our views might be opposed, but I don’t know how else to set up this post.

A basic fact about the last 200 years of human civilization is that there are now six times as many people as there were in 1800, and the value of the goods and services consumed by the average person has risen by a factor of 8.5 (McCloskey, p. 16). That’s a dramatic change, and it seems natural to ask how this could have occurred. Why haven’t we all starved to death?

In explaining this very important change, economists and non-economists differ, and the fact that economists are right and non-economists are wrong in their respective explanations is where economics makes a contribution that is important and non-obvious.

In the centuries since 1800, people have developed what is in some ways an entirely new system, and that system has allowed them to increase the value of goods and services available for consumption. Capitalism accomplishes, on a scale too large for us to see clearly, something that is contrary to almost all of our normal experiences. It turns human interaction from zero-sum to positive-sum. Very, very positive sum.

As children at home or in school, we learn to see the world in zero-sum terms. There are a fixed number of cookies to eat or toys to play with, and so every time another kid eats one of my cookies, that’s one less for me to eat. And so as children we learn a set of morals, we learn to share with other kids and not to be selfish, and that it’s fair for everyone to get a turn.

But that is a moral system appropriate for children, who really are only consumers, and don’t have the opportunity to cooperate with each other to produce anything of value. The size of the pie is fixed when you are a kid, and you learn to think about the fair way to divide it up.

Our current wealth, however, is contrary to our experience and understanding of the world. Yet, trained in this mode, we see a lot of people gaining wealth, and think, “Who is getting poorer because of the wealth we are gaining?” And so we look at the “third world” or “developing countries,” look briefly at the history of colonization, and think “Aha! Our wealth is achieved at their expense!” Or, we see all these cars driving around, hear about all these chemicals and fertilizers people are using, and think “Aha! We are rich because every dollar gained for us is a dollar depleted from the capital of the Earth itself!”

When you try to explain the last 200 years of history this way, you’re making a huge mistake. You’re trying to find the culprit for a crime that never took place. And it’s all because you’re stuck in a zero-sum way of thinking carried over from your childhood, perpetuated in subtle forms by Romanticism, Marxism, and Environmentalism. We really are better off than our ancestors, because we have a system in which working together just produces more of value than we ever had before.

“Alright, so capitalism delivers material prosperity, but isn’t it eating away at our souls?”

No. Like the mythical hydra, this is just a newly-grown head of the same old zero-sum fallacy that was at the root of the problem before. Capitalism doesn’t, in general, encourage selfish individualism of the kind you learned was wrong when you were a young child. Capitalism encourages virtues, virtues appropriate to adults who are able to cooperate and create goods and provide services to one another. The morality of capitalism is not the morality of dividing pie; it’s much more respectable than that.

So there you have it. A bit of this was off-the-cuff, a lot of it was taken from Deirdre McCloskey (I have to say that every time I post or else it’s plagiarism), but on the whole, I’m more satisfied than I have been by previous attempts to express what was driving me to post on this subject in the first place.

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2 Responses to “The Zero-Sum Fallacy”

  1. tripinchina Says:

    Nah, I acknowledge that our views differ, and that differing views can make for fruitful debate among peers. I used the term “baiting” because I believed that you were coming up with an absurd conclusion and ascribing it to me apropos of nothing, i.e. that you were calling me a fool in a semi-public forum for no particular reason. I also just generally don’t like the feeling of being forced to chime in. In retrospect, it was a misunderstanding; your original post was somewhat misleadingly vague and I had a chip on my shoulder, for which I apologize.

    Plus, I suppose I have diverged from my “previous incarnation(s)” in that I recognize that the last 200 years of capitalism have created unprecedented wealth and human happiness. I’ll even admit that the “ecological” aspect of the economy, whereby consumers and producers depend on one another for mutual benefit, takes the steam out of my zealous “capitalism=individualism=evil” equation.

    I still believe, however, that wealth ultimately derives from the earth. And that history has produced an enormously complex yet observable “system” which functions through repressive, straight-white-male-centric institutions and operates at great (largely unmeasured) cost to the biosphere.

    Also, while I’m no longer morally opposed to the notion of profit in itself, I still can’t separate our current economic system from the political arrangements that shape it. And yes, sometimes this has to do with colonialism. For example, as Easterly points out, Europe’s arrogant determination to export its State model exacerbated many problems in the 3rd World and prefigured current insane World Bank/IMF policies. To take another example that I have used before, England built its empire largely by stealing cotton from India and processing it in Manchester and the like, thus forcing Indian capitalists out of business. In general, this hasn’t changed too much: “Development” is a power struggle in the course of which someone is always being silenced.

    Also, I’d maintain that State and corporate interests are intertwined and ultimately represent the very rich. Sure, things aren’t Zero Sum since companies of all different sizes depend on customers whilst states depend on citizens — and each party derives certain benefits from the other. But both corporations and States attempt to manipulate us ideologically, mainly through the use of stories to sell certain attitudes and ways of life. It pays to be skeptical of both.

    As to virtues, capitalism qua the act of Entrepreneurs doing productive business does involve understanding, mutual respect, creativity, hard work, etc. But how can these be separated from the vices also seen? Greed, selfishness, manipulation, slavish obedience, the need to “get ahead”? (The stuff of This American Life Mortgage Backed Securities episodes)

    At any rate, I’m still willing to argue with you, and I will try to refrain from accusing you of stating the obvious.

  2. Rrrobert! Says:

    Lots of places I think you’re wrong, here – so many, it’s hard to make them cohere into an argument on your terms. So here’s a smorgasbord of disagreement:

    Added value isn’t unique to capitalism, or the last 200 years. Since humans first started growing food from the ground, we’ve understood that applied human resources could increase our bounty. Similarly, people were trading for mutual benefit long before the joint stock company.

    In fact, I think the notion of zero-sum games, to the extent that it exists at all, first appears in a serious way in the last century at most, when post-industrial, resource-dependent societies started realizing that some resources were finite. Before that, the idea that profit must be at someone else’s expense was, I think, almost unheard of.

    Humans don’t create value out of nothing; they create it out of work and resource inputs. It might be tempting to think, looking at equations like “Initial capital + work = initial capital + profit” , that you’ve created something out of nothing – that we can go on doing this perpetually. But that initial capital can be traced back, eventually, to a nonrenewable resource. Whether transactions are a zero-sum game depends on what frame of reference is important to you. In the broadest view, physics dictates that the universe is an entropic system; practically, we may only be concerned about earth, where we get constant input from the sun that we can turn into stuff; still, there are a bunch of inputs that can’t be renewed by the sun on our relevant timeline; some transactions are, in fact, zero-sum games. Every time we burn a gallon of oil, it’s a gallon not available to anyone else, ever. We might create something neat with it; maybe even something more valuable than a gallon of oil; but still, that oil will never be there again.

    Moving on to places you’re REALLY wrong:

    A moral system that consists only of “share” isn’t even appropriate for children; as a component of a broader moral system, however, it seems entirely appropriate even to adults. And hundreds of generations of adults, I think, would agree in overwhelming majority. The extent and circumstances and level of obligation for sharing are, of course, in all manner of dispute and are serious moral questions, but charity, one way or another, has been a part of pretty much every culture ever, and is a strong plank in most people’s moral intuitions.

    The roots of charitable impulse are, of course, up for debate. But suffice it to say, I think it comes from principles outside of your pie-dividing scenario.

    A moral system that expects people to produce value isn’t unique to capitalism, either. “From each according to his ability, to each according to his needs” isn’t the same as you’re envisioned, childish morality of entitlement. Marx deeply misunderstood human nature, history, and economics, but that moral statement corresponds pretty well with our intuitions about what is right.

    “But that’s just what I’m saying,” you reply. “Your intuitions are wrong! The miracle of capitalism is that it turns people’s rational self interest into a system that leaves everyone better off! Greed is good – or at least rational, straightforward, respectful pursuit of your desires!” Well, first off, this isn’t true – not everyone is necessarily better off in this ur-capitalism, even if it optimizes value, and second, the miracles of capitalism are in no way exclusive of a moral system that expects and encourages “sharing”. Viz. American and European capitalism as practiced today, where we make a societal decision to (presumably) trade some of our aggregated wealth in order to ensure a distribution of wealth that more closely conforms to our moral sentiments. As a result, some people are better off, some people are worse off, but the people we’re most concerned about are (more or less) doing better and the people we’re least concerned about are still basically doing okay.

    Economic forces are like gravity. An object dropped from an airplane will fall to the ground, whether it’s a bomb or a crate of food aid. Two people will be better off if they each specialize and trade with each other than if they don’t, whether the profits go to feed the hungry or plate toilets with gold. A trust relationship lowers transaction costs, whether it’s between a local hardware store and its customers or two members of the Mafia.

    Like gravity, it’s absurd to say that economic forces encourage virtue. Economic forces, like physical ones, are conditions under which our conceptions are formulated, sure; if we didn’t have gravity, or if trust didn’t lower transaction costs, we might have different norms about human interactions. But conditions aren’t the source of our virtues.

    It’s at best a half-truth to say that capitalism “rewards” or “encourages” virtues. Capitalism rewards any strategy that creates wealth, regardless of its virtue. Our virtues have grown up in the circumstances created by economic forces, and virtue often parallels behavior that is rewarded by capitalism, granted. But capitalism also rewards the undiscovered, well-timed double cross (legal or illegal), and it doesn’t discriminate between the two. If we want to discriminate between them, we’re going to have to look to values outside of economics.

    I think the point of all this “virtue-encouraging” talk is to argue that capitalism is inherently a better system than others. This might be true, but only insofar as our values are inherent in us.

    Saying that capitalism, as an economic system, is virtuous is putting the cart before the horse. Capitalism is a tool – it exploits economic forces in service of the maximization of wealth, for good or ill. But it isn’t “good” independent of our values, any more than a hammer is good independent of a need to knock in some nails. We choose capitalism because we value wealth, and we diverge from ur-capitalism because we value other things too.

    Is capitalism eating away at our souls? Of course not. It doesn’t have the power to do that. We choose capitalism precisely because it’s broadly aligned with the state of our souls as they are. And if you hold different values than the aggregate “we,” it makes much more sense to say our souls are corrupted, and point to their reflection in modern capitalism as evidence, rather than looking to blame our weaknesses on circumstances other than human nature.


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