IS ECONOMICS A ZERO SUM GAME?

Economics Economics Questions
1

Hi

Can someone please explain to me the whole principle of economic growth in a world where money is represented 100% by gold, as well as whether there is always a winner and loser in economics - zero sum game.

To keep things really simple lets say that all the gold in the world has been discovered and is equal to 100. So the size of the economy and all that it represents is 100 and it is made up of 1 hectare of land, 1 worker, 1 machinery and 1 entrpreneur. The economy therefore cannot get bigger than 100, all that can happen is that the 100 can represent more land 2 hectares, 2 workers, 2 machines and 2 entrepreneurs the result being devaluation in the gold currency or less land, machinery… meaning gold value appreciation.

Surely in such a system there are no net winners or losers, all that happens depending on the supply and demand for each different factor of production is a shift in the allocation of value but the circuit remains closed to 100. Therefore whatever has been gained needs to have been lost.

By extension you can take my same logic and apply it to the factional reserve system, the only difference is that there is a growing nominal value to the size of the economy, the end result should not be different though, as the increase of money supply will usually devalue the currency in which the money supply has been increased and result in the same case of winners and losers.

Am I completely missing the point that economics by deductive reasoning is a zero sum game.

2

Yes

3

The economy is not a zero sum game. As humans improve the means to satisfy other humans in mutually beneficial exchanges (They Improve Technology), then the total wealth of the economy increases. In this process of improving the lives of other humans the producing humans find it beneficial to to do their magic so more and more other humans will want to purchase their products. Socialists incorrectly call this trickle down. I call this process improving humanity. The end result is that all the humans conducting these exchanges with other humans improves their lives (They increase their wealth.).

Note I have not mentioned money!!! Money is just a medium of exchange where humans can make comparisons about values of things. In your world the value of gold will increase but in the world of free banking on commodity money, the humans will simply switch commodities to ones that make more sence as the medium of exchange. For example, in the most free banking system to ever exist, Scotts used gold for large transactions and silver for small ones. The advantage to commodity money is that the volume does not change. So it is easier to predict future profits from attempts to improve the lives of other humans.

As for paper money, this is particularly awful as there is no limit on the amount that banks (especially central banks BOO!!) can create. So future predictions are much more difficult as estimates of future profits are effected by the value of the money.

4

  1. Gold grows by 2-3% p.a. IIRC. Even if it didn’t, it’s divisible, and besides, it will be accompanied by platinum, silver and perhaps copper. The fact that prices adjust to changes in the money stock and that gold is, as was said, divisible, means the quantity does not matter. So there’s no zero-sum game involved from this aspect.

  2. If that were truly a problem, a free market in banking would move to the most suitable form of currency.

  3. All voluntary economic interaction is, from an ex ante point of view, mutually beneficial, given that for a transaction to take place there must be a reverse valuation of goods by the two parties in the exchange, i.e. A must want what B has more than what B does, and vice-versa. Increases in efficiency allow for more to be made with the same resource, moreover, or even allow for the usage of new resources, which also makes wealth-creation positive sum.

-Jon

5

Zero sum game = when one person benefits and another person is hurt by the same amount that the other benefits.

Positive sum game = when all “players” benefit.

Free markets are positive sum, since both buyer and producer benefit, as the buyer values the good more than his money while the producer values the money more than the good he sells.

As for gold: if all the world’s gold were discovered, people would just switch to silver, copper, or some other kind of money. High price deflation simply isn’t good, but neither is high inflation. Let the market determine what kind of money we use.

6

Wealth isn’t money, but goods and services. Goods and services (and thus wealth) increase whenever people increase their productivity. Money is a good, but is only one among many: money is the good used as a medium of exchange for other goods. All other things being equal, an increase in the money supply devalues the money (inflation). But if goods and services increase while the money supply stays the same, then the value of money would increase (deflation). As the others have already suggested, gold could be divided into smaller amounts, or other forms of money like silver and copper could be used in conjunction with gold (or even instead of gold, if worthwhile). Even paper money would work, if its supply were strictly controlled. The problem with our current dollars is that the government has little reason to limit the supply of money.

7

The main fallacy here is thinking that the supply of money should equal all the wealth existing in the economy.

The common intuition about economics that people have is thinking that if there is 1000 homes in the country, and each home cost 200k $, then that means it exist 200 millions dollars in the economy.

People will then conclude two things:

  1. When new stuff are produced, money somehow come into existence to make up for the extra goods.

  2. If the money supply is fixed, no new goods can exist, and no growth is possible.

This is profoundly wrong.

To understand why, in short: Economic growth means more goods are produced in the economy, not more money.

Increasing the supply of goods confer a social benefit but increasing the supply of money confer no social benefit.

In an economy with a fixed money supply, the price of goods gradually falls with the increase in productivity, while wages stay constant. Everyone’s standard of living increases.

When you talk about winners and losers, you talk as in the person who gets the money wins, and the one who gives the money loses. How can you justify that? Obviously, if there’s a voluntary exchange, both participant benefit.

If I exchange you 100$ for your house, do I lose because I don’t have 100$ anymore? Obviously not. The same is true for every exchange.

Entrepreneurs don’t get rich by hoarding money, they invest - spend their money - in capital goods, and increase their productivity.

Bill Gates, for example, isn’t rich because he has a lot of money, he is rich because he owns millions of Microsoft shares, and the marginal share is traded at 25$.

For example, do you think that if suddenly all shares on the NYSE, to take only that, would be for sale there would be enough money to pay for it? Obviously not the NYSE market cap is about 25 trillions, while the US money supply is only 5 trillion (TMS estimate). That’s without counting all other stock exchanges, capital goods, real estate, etc…

The total money supply doesn’t represent the total valuation of all goods in the economy, it’s only the marginal monetary unit that is traded against the marginal good unit that determines the price level of that good.

I highly recommend the following book Introduction to Fourth Edition to lean more about money.

8

Why not ?

9

No, because you are not trading one amount of gold for a different amount of gold. You are trading gold for products and services. The number of products changes. An oz of gold today will buy you much more than an oz of gold 100 years ago(the opposite of a dollar bill)

Economic growth does not mean growth in the supply of money. What would happen today if the amount of money doubled? Everything would cost twice as much.

What would happen if the amount of money stayed the same but the number of products doubled? Everything would cost half as much.

10

High deflation means very little lending. Since people want available credit to borrow and banks want credit to lend, it’s likely that people would switch to silver, copper, or some other kind of metal.

11

When you go to the grocery store to buy some groceries who is being made worse off? You or the store? Or do both of you get what you want more(food for you, money for the store)?

12

High reduction of the general price level level (i.e. mainstream deflation) of consumer goods because of productivity increase doesn’t cause a shortage of loanable funds, at all. In such condition, wages stay stable but prices naturally fall.

It’s only a deflation in the money supply that causes a shortage of loanable funds. In this case, both wages and consumer good prices fall.

Mainstream economist always confuse the two: reduction in price caused by deflation of the money supply and caused by increase in productivity.

13

This is a fantastic answer to my question and I am truly grateful.

Let me say that I am a futures trader and the world I live in, what used to be somewhat of a free market before all the government intervention, is a winners and losers = zero sum. If I buy a contract and make money someone has to be on the other side of the contract and therefore lose what I make.

The mistake I have made is think that money supply equals total wealth.

I have learned a lot from these responses so thanks to everyone.

Mickson

14

thanks for the link to the Book.