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Zero-Sum Game

2009 Jan 20

Economics is a zero-sum game. What do I mean by this? It is another way of saying "there is no such thing as a free lunch". Everything we do has far reaching implications and repercussions. This is like the butterfly effect where a butterfly flapping its wings in one part of the world can have a profound effect on the weather on the opposite side of the globe.

Companies manufacture their products and conduct business without taking into account the true and full costs of doing business. Hidden costs that appear to have no immediate impact on the companies' pricing structure are called externalities. Society eventually pays for all externalities, whether in the short term or long term, in the form of depleted resources, destruction of the environment or in social inequity.

The economic, environmental and social implications are together the one and same problem.

Scientists talk about open and closed systems. Imagine a shoe box with a dozen marbles in it. If we put the lid on the box we call it a closed system. We can shake the box around as much as we like. When we open the box we should expect to still find twelve marbles inside.

We can turn the box of marbles into an open system by removing the lid. As we shake the box we may lose a few marbles, or someone may have added a few extra marbles while we weren't looking.

Economics is somewhat like our box of marbles. Initially we can consider the money supply as a closed system. A gain of monetary wealth must be balanced by a loss to someone else somewhere.

We see this in the game of "Monoply". All the players begin with the same amount of cash. If we ignore the rewards and penalties arising from "Chance" and "Community Chest", we observe that players exchange cash and property amongst themselves and the bank as if it were a closed system. However, the money supply and monetary wealth increases because players collect $200 every time they past GO. This changes the economics of the game into an open system.

Money is created in the form of credit by banks and financial institutions. This is just an accounting exercise. Eventually when the loan is repaid the amounts are reduced to zero in the accounting books, or a computer record in our modern times. This is the closed economic system.

The problem is that interest on the loan must also be paid. Where does this interest come from? This is the equivalent of Monoply players collecting $200 every time they each pass GO. The money for the interest payments must come from increasing the money supply, turning the economics into an open system.

There are only two ways to increase financial wealth, (1) by shifting money from one person to another and (2) by increasing the money supply. In our current monetary system we are doing both things at the same time, as in the Monopoly game.

Now let us go back to the analogy of our box of marbles. If we tip the box slightly towards one side, the marbles have the tendency to collect towards that side.

This is what happens in the real world economic system. The system is tipped in favour of the elite few, the rich, the powerful and the corporations at the detriment of the poor, the underprivileged and the working class. The current economic system that we live in is an open system where more money is being created to cover interest demands. The system is skewed so that the already rich and powerful have an unfair advantage and therefore they usurp any additional wealth pumped into the system. The rich get richer and the poor get poorer. And yet in the final analysis the whole of society pays for all externalities. It is a zero-sum game.

There is no such thing as a free lunch.

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