Tonight I had a great conversation with a bunch of people in San Francisco, starting from “what books are you reading?” and including the war in Iraq, economics, how to make corporations ethical and much more. But as a part of the conversation the topic of whether or not economics is zero-sum came up. With the specific claim that “economics is defined as being zero-sum”.

Certainly if you start with the definition of Economics in Wikipedia you see that economics has historically be defined as a study of scarcity (with alternative definitions as to what is scarce and what this mean).

I argue that economics is NOT inherently zero-sum - that is, you can study economic activities from a perspective that allows for non-zero-sum activities and indeed, if you do not do so, you are missing crucial aspects of economic activities (both future cases, current cases and even I would argue historical cases).

My view of economics, which I do not think falls into ANY of the classical (or even neoclassical schools) is that economics can be defined as the study of the flows of value. And value, in turn, can be defined as being created by agreements between entities - a series of links and relationships over time. (entities for this purpose being perhaps recursively defined as “any person or legal body that enters into agreements and can hold value” - so people, trusts, corporations, churches, co-ops, communes, governments, central banks, families, villages etc are all entities for this type of analysis.

I usually describe this as the study of economics AS networks. I represent all economic relationships as links between entities over time. Then to study economic activity is to look at the patterns, structures and flows of value across a web of entities.

I claim that through this structural analysis a great deal can be explained about issues that economists have studied for centuries - how prices are set, how wealth is created (and what “wealth is”), how corporations and other organizational structures work and interact (and why/if they add value).

But underlying this analysis are also a number of other perhaps more controversial claims. The first of which is that there is NO intrinsic value - a bar of gold is not inherently worth anything. It is only when that bar of gold gets enmeshed within a network of relationships that value is ascribed to the gold. And likewise, it is only when a person places there time (and mental and physical effort) into a web of relationships that it is ascribed a value. Currency/specie also does not inherently have value, though it can be thought of as being a physical embodiment of a link - between whomever holds (owns) the bill and the central bank that created that bill - and since in most cases there is a large number of people also holding similar bills and thus creating together a fairly common for a given period of time value for that currency. But this is not always the case - consider a gift card/certificate - which is a link between the holder of the gift card and the issuer - but unlike say a $50 bill (US) a gift card often has many more restrictions (a small universe that accepts it - perhaps just one store) and may have a time limit (expires in 30 days) etc. Some gift cards (American Express perhaps, Visa/MasterCard as well) might have a more widely held acceptance and thus might have value outside of a direct transaction (i.e. I have accepted a VISA gift card from a company in lieu of a check from them and was not too unhappy with the swap).

But to get back to the question - is Economics Zero-sum?

From my network centric perspective I would say NO. Value, net across the world (or the boundaries of the economy being studied) is not fixed - instead it fluxates over time and many forms of human activity change the sum of value available to the economy at any given point in time. Thus transactions around that time - and transactions across time - do not have to be zero-sum. Further, there are many cases - historical as well as present or future - where all parties in a given transaction gained value - indeed were this not the case I would argue that society would be vastly different and many fewer agreements between people would take place.

In part I agree with the definition of value as being in part captured time, though I also agree with the idea that value is also encapsulated energy (and might argue that time and energy can be converted in some creative ways). But I also think that a better definition of “value” is to relate it to the network around a given unit of measurement and transaction.

So if economics is not zero-sum why has it historically been defined as being about scarcity? (and not abundance, indeed many make the claim that economics can’t deal with and indeed explicitly ignores anything that is abundant - such as energy from the sun, air, etc)

I argue that this is due to the focus on the exchange of physical units (specie) historically - now shifted to the movement of digital bits but still driven by accounting and balancesheets - a focus on either/or, on who owns what (and an assumption that if I own it, you do not).

A network perspective, however, thinks of interactions as collections of links over time. Links in my model are single directional, so the entity linked to may not link back (for example the central bank does not know that I have a given bill, while I when I hold that bill in my pocket could be thought of as having a link to the central bank). This also means that links while they can and are transferred from one entity to another do not preclude the creation of other links. This is a critical point - the number of links between entities is NOT finite.

New links can be created WITHOUT the transfer or destruction of old links. A link may have a denomination associated with it (often implying a related link to a given central bank) but the summation of all of these links is not finite, nor is it fixed at a given point in time. Some links imply relationships that are very short term (immediate purchases for example) but many others represent very long duration relationships (30 year mortgages for example). As you introduce time into the equation it becomes inherently (I argue) non-zero-sum.

Further, since agreements and relationships can be created and evolve over time, with a group defining the value, what starts as an isolated relationship, separate from existing central banks, can evolve over time into something that denominates value for a large number of people and may even be exchangeable with currency from other central banks. Recent examples of this might be airline miles or Linden Dollars (the currency of Second Life)

This entry was posted on Saturday, July 29th, 2006 at 6:54 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.