Caveat Emptor, Compliance Costs, Consumer Sovereignty, Drug Prohibition, Economic Rents, Energy subsidies, Farm Subsidies, Monopoly Rents, Mutually Beneficial Trade, Public Aid, Public goods, Public Lottery, Public Trough, Regulatory Rents, rent seeking, Social Security, Subsidies, Tax Deductibility, Zero-Sum Economics
Productive effort seldom goes unrewarded, but all too often rewards are directed to nonproductive activities and secured in ways that are outright takings of resources and rights from others. These are zero-sum propositions at best, as the rewards come only at equivalent or greater costs to others. Gains from zero-sum activities are often purely consumptive in nature and tend to foster more destructive behavior. A clear-cut example is outright thievery, but there are many cases in which, by matters of degree, the perpetrators are not even dimly aware that their gains bring harm to others.
Sadly, our society has undergone a transition to a state in which everyone collects ongoing streams of zero-sum rewards, which are, by definition, at someone else’s (and often our own) expense. The turbulence caused by this unnecessary and avoidable mix of costs and rewards is all too real for consumers and businesses, but again, they don’t always fully grasp its dysfunctional nature.
The Way To Positive Sums
Of course, there are winners and losers in almost any area of economic life. Even when two individuals engage in mutually beneficial exchange, an otherwise win-win situation, other traders might regret missing out on the deal. Pleasing buyers more effectively than one’s competitors might force those rivals to turn to other pursuits. That’s all for the best from a social point of view, unless they can come up with an even better idea to win back customers. In this way, things can keep getting better and better for everyone, even for the one-time losers who are free to compete in trades to which they are better suited. Winners, then, are defined by their success in creating value for others. These are the productive winners. But again, material success doesn’t always come so honorably.
Bobbing For Booty?
Purely “consumptive” or zero-sum winners might be simple crooks who are able to avoid apprehension, or perhaps they are dishonest business-people who sell goods with hidden defects or inferior workmanship. There are many degrees here: a talented salesperson with shoddy merchandise might compromise on price. A clever product manager might reduce the size of a package slightly without reducing price.
A simple gamble is zero-sum in a purely monetary sense, but both gamblers do it for enjoyment, so there are psychic gains involved. A successful gambler might be a zero-sum winner in a monetary sense, but luck usually runs out on honest players. A cheater qualifies as a zero-sum winner. Conversely, it’s not correct to say that casinos are strictly zero-sum winners, though the odds are always stacked in favor of the house and everyone knows it. Casino patrons enjoy the experience, including other amusements available in casinos, so they are often happy customers despite their losses. They are engaging in mutually beneficial exchange.
Private Affairs Made Public
A short-hand description encompassing much of our zero-sum havoc is “the public trough”. Many zero-sum rewards have arisen out of legislative battles, court cases, and regulatory actions restricting private decision-making and encroaching on private property rights. The unremitting tendency is for expansion of these kinds of actions. Where there are zero-sum winners at the public trough, or an opportunity to expand the trough itself, there are always more covetous seekers of zero-sum winnings, otherwise known as rent seekers. They are reliable promoters of “do-something-ism” relative to the outrage du jour through more legislation, lawsuits, and regulatory filings. The tragic thing about rent seeking is that the process itself consumes resources and undermines private incentives, thereby transforming zero-sum outcomes into wasteful, negative-sum outcomes.
Winners At the Trough
There are many kinds of zero-sum winners at the public trough. The winning and losing often occur separately and asynchronously, connected only by an enabling authority who sets rules and funds winners from proceeds taken from losers. For this reason, it is easy for citizens to lose track of the “zero-sumness” of the many benefits they receive. After all, the government can deliver things for “free”, right? And the connection between one’s obligations, losses, and the gains reaped by others is not always obvious.
All of the following involve some degree of zero-sum activity, and all attract rent seekers:
- Public aid in exchange for no contribution to output, funded by zero-sum losing taxpayers.
- Subsidies for politically-favored technologies that are otherwise uneconomic, funded by zero-sum losing taxpayers.
- Farm subsidies when too much is produced and the output is not highly valued, leading to an overallocation of resources to agricultural activity and rents for farmers funded by zero-sum losing taxpayers.
- Complex regulatory and tax rules generate income for compliance advisors such as attorneys, accountants, and consultants. Those are rents, pure and simple, paid for by parties who must comply under penalty of law.
- Regulatory advantage conferred upon firms sufficiently large or dominant to afford compliance. That penalizes smaller competitors and undermines their market position. The additional profit large firms may earn as a consequence is a rent, funded by zero-sum losing consumers and weaker competitors.
- The award of government contracts is often as much political as it is economic. Such a process is not subject to the market discipline imposed on private contracts, so there is ample opportunity for rents via cost-padding and graft, again funded by zero-sum losing taxpayers.
- More generally, government purchases of any kind are subject to weak market discipline, like any buyer spending someone else’s money. Thus, government has a tendency to pay prices not supported by economic value, offering rents to suppliers, funded by zero-sum losing taxpayers.
- The tax deduction afforded to employer-provided health care is a targeted subsidy that leads employees to over-insure. More fundamentally, these employees and their employers are zero-sum winners. It also creates profits for health insurers and drives up health care costs. The zero-sum spoils are to the detriment of other taxpayers and participants in the individual insurance market.
- Drug prohibition drives up black market profits, creating zero-sum winnings at the expense and safety of users.
- Social Security creates zero-sum winnings for those who will not or cannot save. But this is a mixed bag to the extent that some people are unable to save privately: their ability to do so is largely usurped via payroll taxes, both on them and on their employer. The many zero-sum losers would otherwise have no difficulty earning better returns on private investments.
There are many other examples. And almost everyone ends up on one side or the other of many different zero-sum outcomes. Show me a government action and I’ll show you zero-sum winners and losers. This is not to say there are no welfare gains associated with government action. Public aid, for example, is intended as social insurance and surely has some value in mitigating the risks of personal economic calamity. Nonetheless, the overextension and poor incentives of aid programs create a significant zero-sum component. Likewise, government spending on public goods creates social benefits, but government is insufficiently incented to economize, creating a zero-sum win for contractors and losses for taxpayers.
Not Zero Sum
While zero-sum winners collect economic rents, the existence of economic rents does not imply a zero-sum winning. For example, members of the so-called rentier class collect passive investment income. Those investments represent a supply of current resources to other parties hoping to transform them into a greater supply of future resources. That’s productive, and so the gains enjoyed by rentiers are not zero-sum winnings, but payments for the use of transformational capital.
Economic profits are those exceeding the owner’s opportunity cost, and they too are called rents. They should not necessarily be classified as zero-sum gains, however. Only sometimes. Successful innovators and first movers often earn economic profits as a reward for their efforts, as do alert entrepreneurs deploying their resources where they are most demanded. This “positive-sumness” applies to monopolists with a hot product just as surely as it applies to a firm facing nascent competition. But economic profits gained through political connections, outright graft, and government-enabled monopoly are zero-sum, enabled by non-market, authoritarian forces. Members of the political class tend to share in these zero-sum gains, and there are many losers.
Unfortunately, zero-sum thinking is deeply ingrained in the human psyche, despite our transition to a higher plane of social cooperation via markets. Even in those markets, certain outcomes might seem zero-sum in the moment. Witness the widespread denigration of the profit motive, which produces efficient outcomes in the long-run. As noted above, over time, the biggest winners tend to be those capable of creating the most value.
If you ask school children today how to get rich, many will say “win the lottery” without hesitation. I know, I know, government-sponsored lotteries are a relatively new phenomenon, and some of the lottery proceeds may benefit schools or other public programs, but the idea that a game of chance is so indelibly ingrained in the minds of children is a manifestation of the psychology of zero-sum success.
The Tangled Mess
So we have the zero-sum winners: successful gamblers, thieves, and rent seekers. The latter root deeply for gains made possible by government intervention in private affairs, actions that always leave room for enduring rents. They always lobby fiercely for new public interventions that might confer private advantages. And then we have the hapless public, stumbling through a series of zero-sum gains and losses made possible by the Leviathan they know and obey. They should look in the mirror, because every law and every program they have allowed their political leaders to hatch, reliably sold as good and just, creates more zero-sum activity to the detriment of long-term economic welfare. Roll it back!