Zero-Sum Versus Wealth Creation

Original Post (with comments)
I keep thinking about Wilkinson’s article on Capitalism and Human Nature. I spent some time on his blog site, The Fly Bottle, and I noticed a trackback to a blog (Mixing Memory) that is, you might say, less than impressed with his work, and with evolutionary psychology (EP) in general. The writer, known only as Chris, asserts that Wilkinson’s reliance upon EP is unfounded at best, and illogical at worst. This is no surprise to me – there are lots of folks, many of them reputable academics, who think EP is a farce, mainly because they think you can’t prove any of it. I’ll put aside my response to the naysayers at large for now and deal directly with one of Chris’ statements against Mr. Wilkinson.

A central point in the Capitalism and Human Nature piece is that humans in the ancestral environment lived in relatively small groups, which led them to be coalitional (proned to in-group prejudice), hierarchical (aware of and in pursuit of status), and envious zero-sum thinkers (that is, they conceived of a finite pie and felt enmity toward individuals who amassed too much of it). This is standard fare for EP. Wilkinson’s point, however, which is a very good one, is that this kind of nature does not bode well for the invisible-hand type of economy. Chris, of Mixing Memory fame, however, sees this aspect of Wilkinson’s article as bordering on the nonsensical.

He writes, “In fact, it is the coalitional and hierarchical nature of human groups that makes economic and power hierarchies so natural, and readily accepted by most individuals.” Really? In my view, the only thing natural and readily accepted by humans is the tendency toward reciprocity. Getting from small-group trade to a free-market economy, complete with free-market financial systems, is not just a series of baby steps, all easily navigated by our default DNA. Chris’ statement, in my mind, betrays his misunderstanding of the depth of Wilkinson’s insight here. I’m not at all shocked that one who understands science, or appears to, would be less erudite in matters economic. Indeed, I’d say most people don’t understand the difference between having a zero-sum economy and an economy that creates wealth. Allow me to oversimplify it. It all comes down to where the money is kept.

The concept of wealth creation is sometimes difficult to grasp, but at its most basic level, it has to do with the relationship between the aggregate amount of money the country would have if each person kept his or her portion at home under the mattress (we’ll call this real money) and the aggregate amount of money the country has when most money is kept in banks (call this funny money). To understand this, we need only understand the fractional reserve system, which is the system used by all banks in the US. The idea is that banks only keep a fraction of their deposits on hand. When you deposit a dollar into your bank, it may only add 15 cents to its cash. The rest is loaned out to other customers. The borrowers may then deposit the money in that bank or another bank, and the process is repeated again and again. The effect is the creation of a huge difference between real money and funny money. This was made possible the moment the US went off the gold standard, but we need not digress.

(Update: Jan 2010: I have since learned that a fractional reserve system is possible, nay probable, even with a gold standard, so I retract this statement.  It doesn’t impact the point of the post, but I thought it was worth noting.)

The point is that when money is kept in banks, the economy as a whole has considerably more money than it would have if everyone kept their money at home under their mattress. Wealth is created. In a zero-sum economy, there is a finite pie that can only be divided so many times. In a wealth-creating economy, there is what is normally a finite pie, and then laid over it is this artificial pie that miraculously expands the pie below as it grows. Don’t worry if it’s hard to visualize – your genes have no frame of reference for this, because it occurs nowhere else in nature. The wealth-building economy (also known as the free-market economy and the capitalist economy) is the brain-child of men who were so far outside the box, they couldn’t even see it. How about a more practical example?

(I think I’ve heard Neal Boortz use this example.) Suppose two people win the lottery, five million cash for each of them. One guy buys himself a big, nice house. He buys lavish gifts for his friends and family, and generally lives it up till the money runs out. The other guy uses his money to buy a Waffle House. He ends up hiring 20 people, taking out a loan for a piece of property, and staying in business for years to come. The question that is usually asked is, who is better? Both guys are rich, so if you hate the rich, should you hate them both equally? I’ll sidestep that and use this example to point out the difference between zero-sum and wealth creation. The first guy lives in a zero-sum world. He takes his money and spends it till it’s gone. The second lives in a wealth creation world. He takes advantage of the fractional reserve system that underlies our economy and he creates a money machine that ends up bringing in far more revenue than his original five million. It cost no one anything for him to do this. No exploitation involved. No cheating involved (we may assume). In fact, he created jobs in the process. He expanded the pie for everyone.

So, to get back to Mr. Mixing Memory, Wilkinson’s point is that our nature is not inherently equipped to grasp a wealth-creating economy – an economy that is not finite, an economy that is not zero-sum, and economy that is not hierarchical (at least relatively speaking), and an economy that is not coalitional (our Waffle House lottery winner did not know about, nor did he care about, whomever might benefit from his choices). But…as the invisible hand concept evokes, man has no need to grasp the mechanics of this kind of economy. It does its job – it satisfies individual small-scale demands; the rest takes care of itself. Indeed, Wilkinson is saying that capitalism works well with human nature, even if humans are not wired to understand it. Am I the only one who sees the irony in guys like Chris at Mixed Memory not understanding it either?


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