Every transaction can be viewed as zero-sum, where one person gains wealth while another gives it up in exchange for a product or service. Following this reasoning, one might conclude that the economy doesn’t expand but remains constant, like mass or energy, with money just changing hands without increasing.
However, this conclusion is flawed. Can you explain why?
If you have a pile of wool thread, it’s valued at $2. After transforming it into a shirt, it’s worth $20. The economy has increased by $18.
“All transactions might seem zero-sum, where one person gains wealth while another loses some, but receives a good or service in return.”
However, since that good or service has value, the situation isn’t truly zero-sum.
Precisely. The shirt maker values the payment more than the shirt they created, while the buyer values the shirt more than the money they spent. In their exchange, both parties end up with something they value more than what they gave up.
This isn’t a zero-sum situation—both sides benefit from the trade.
Labor generates value, so activities like mining, farming, manufacturing, or providing services create value that wouldn’t otherwise exist. The economy grows as work contributes more to it.
However, economic growth isn’t the same as the distribution of wealth between the rich and poor, which can be zero-sum. It also isn’t the same as stock market performance. In practice, measuring a healthy economy often involves looking at living standards, relative living standards, and the stability of those standards, as well as purchasing power.
Additionally, some people measure economic growth relative to other nations, but this is less common as a primary metric for growth.
Transforming raw materials into processed food involves labor and time, which have value. For example, iron ore alone isn’t very valuable, but a cast iron pan is worth significantly more. This processing adds value to the economy and isn’t a zero-sum game.
Another aspect is the perceived value of the goods. If I can’t make furniture but can bake bread, I place less value on the bread compared to someone who can’t bake but can make furniture. When we trade, I receive a chair and the furniture maker gets enough bread to feed their family for a week. Both of us benefit from the exchange, so it’s not zero-sum; we both gain from the trade.