Acton Institute Powerblog

Why the economy is not a zero-sum game: a simple explanation

Oral Roberts University competes in NCAA basketball. (Photo by Russell Hons/CSM (Photo credit: © Russell Hons/CSM via ZUMA Wire) (Cal Sport Media via AP Images)

What do these two statements have in common: “Poverty is caused by overpopulation,” and “The rich get richer only as the poor get poorer”? Answer: They both inaccurately presuppose the economy is a zero-sum game. Understanding this misconception is important when thinking through many moral, economic, and policy questions.

Zero-sum games are win-lose scenarios. When losses are subtracted from gains, the result equals zero. Sports are zero-sum games. If the Kansas City Chiefs play the Pittsburgh Steelers, it is impossible for one team to win without the other team losing. At the end of the NFL season, the sum of every teams’ wins will be equal to the sum of every teams’ losses.

Suppose a blueberry pie is cut into eight pieces, and one piece is given to each member of an eight-person family. If one hungry member of the family wants more pie, he may try taking some from his brother’s plate. This is a zero-sum game; the only way one person can get more pie is by taking it from someone else.

Since competition is a key feature of the economy, it may seem like the economy is also a zero-sum game. After all, if I buy a loaf of bread, the amount of money the baker gains is equal to the amount of money I lose in the exchange. Employees compete for a promotion only one of them will receive; restaurants compete for customers who only need one dinner; and countries trade with some nations more than others.

Even so, the economy as a whole is not a zero-sum game, because the economic pie is growing. The average wealth of a person today is much greater than in any other age in human history. Economist Deirdre McCloskey has pointed out that since 1848, the average person’s real income has risen “by anything from 2,500 to 5,000 percent.” Graphs of per capita GDP over human history look like hockey sticks, with huge upward spikes after the Industrial Revolution, even though the world’s population has greatly increased since then. The percentage of people living in extreme poverty was once more than 89% but is now less than 9%. If the economy were a zero sum game, none of this would be possible, and we would become less and less prosperous as the world’s population increased.

So, how is this possible?

It’s important to understand that the ingredients of the economic pie, fundamentally, are not dollars, euros, or bolivars, but the goods and services for which those currencies are traded. Suppose the amount of paper currency in the world instantly doubled, with every person now having twice the amount of paper currency as they had before. Would the world be any more prosperous in the long run? Prices would quickly rise to meet the new amounts people would be able to pay, and each paper note would end up with close to half its former value.

On the other hand, what if all available goods and services instantly doubled in quantity and quality? In this case, the purchasing power of the existing currency would greatly increase, and the world would prosper.

The economic pie grows, therefore, as society makes goods and services better and more available. How does this happen?

Imagine a dozen people are stranded on an otherwise uninhabited island. With no hope of immediate rescue, they begin developing their own society. On day one, their economy is quite meager, but some innovations occur over the next few weeks.

Alice discovers a hidden grove of blueberry bushes. Brandon then figures out how to plant and grow new blueberry bushes. Carmen uses thread from agaves and other island resources to fashion a fishing rod that greatly increases the number of fish the group can catch and consume. Damien invests some time each day making mud bricks, which Elise uses to build shelters. Finally, MacGyver, who is one of the dozen people, creates inhalers for two group members with asthma in an ingenious use of the indigenous plants.

Each of these innovations improves the quality of life for this stranded tribe and grows their economy. In the same way, our economy grows from innovation and the free exchange of goods and services. An entrepreneur can profit while also benefitting society by implementing more efficient production methods, or by creating new valuable products and services, and making them available to other people. These innovations, often discovered by entrepreneurs while competing against each other, generally create wealth and improve the quality of life for all.

While every person in the economy will experience wins and losses, the market as a whole is not a static set of resources constantly changing hands, but a growing pie of goods and services that in the long-term, generally leads to a higher standard of living for everyone. This simple lesson contains one of the keys to developing more prosperous societies: We must enable and encourage innovation.

Nathan Mech

Nathan Mech is a project manager for the Acton Institute's executive staff.