Zero sum game is conservation law

Zero sum game has a bad name in economic theory. If you mention the term zero sum too often, you are suspected of undermining the glory of economic theory. But zero sum is merely conservation law, the first law in thermodynamics.

From time to time, living systems learn to utilize new resources. This leads to a great increase in carrying capacity. Photosynthesis is such an example. Human societies have enjoyed great boom in the past several centuries due to our utilization of fossil fuels, the ancient biological deposits coming back to life to power the living world.

But even in a rapidly growing world today, most economic and social activities can best be understood as zero sum games, as first order approximations. For example, average GDP growth is about 2%. But average capital market gain is about 10% per year in US. GDP = GDI (Gross Domestic Income). Hence average GDI growth is about 2%. GDI has two components, income from capital and income from labor. Overall GDI growth rate is around 2%. The growth rate of income from capital is 10%. How much is the growth rate of income to labor? The stagnation of labor income is really due to the phenomenal growth of capital income.

Some argue that investment should be encouraged. Hence high return for the capital is warranted. However, everywhere is plagued by over capacity, or over investment; everywhere is plagued by weak demand, or lack of money by consumers. What the society lacks is not the money from investors, or rich people, but the money from ordinary people, or working class.

What causes the wealth divergence of the elites and the masses? Economists, who know little about technology, often attribute this to the change of technology. But the real reason is the change of tax systems. Warren Buffet once confessed, or bragged, that his tax rate is much lower than the tax rate of his secretary. It is the divergence of tax rates that causes the divergence of wealth. It is the divergence of the tax rates that causes the over capacity of production and under capacity of consumption.

Another example is the effects of the monetary policy. During the so called COVID pandemic, large amount of money was issued by the governments. The announced goal is to help the poor. The real goal, as always, is to help the policymakers themselves and their handlers. The poor can’t drive up the stock market. But during the so called pandemic, the stock market rose dramatically. This is because the rich are flush with new money from the government.

The mass printing of money pushes up the price of stocks and houses greatly, thus creating tremendous amount of wealth for the wealthy. At the same time, the inflation further impoverishes the working poor. When the governments generate huge amount wealth for some, they destroy huge amount of wealth for others who are less visible.

Some may accuse zero sum game being too negative. But zero sum game is Pareto optimal. Economists talk about Pareto optimal all the time. Talking about Pareto optimal sounds a lot more positive. But zero sum game provides a lot more clarity on understanding policy issues.

When the pain from a policy become too unbearable, the apologists will talk about unintended consequences. But unintended consequences are the results of intended consequences. That is obvious from zero sum game.

Zero sum is merely conservation law, the first law in thermodynamics. It should be the first law in economics as well.