Arnold Kling  


Nonlinear Thinking... Campaign Season Economics...

People with what Bryan Caplan calls "pessimistic bias" see the world in zero-sum terms, or worse. Kevin Brancato points out a pattern in Bill Gates' thinking that is just the opposite:

"China and India are the big change agents for the years ahead," Gates told students at the University of California Berkeley. "We have to go into the risky new areas. That's what's going to allow the United States to stay at the forefront..."

"It's a little scary to me that people are thinking of this as a zero sum game," Gates said, referring to criticism of outsourcing and growing overseas tech markets.

"We're at the start of a process where the whole world is getting into this virtuous cycle," Gates said.

Whoever wrote that Reuters summary picked out excellent quotes. This "virtuous cycle" language is not unique to Gates, of course; but it occurs again and again in Gates' speeches, regardless of topic.

A well-hyped new book by Kay Redfield Jamison touts Exuberance as a personal quality that promotes creativity.

Pointer from Lynne Kiesling. Of course, my book says that economists are rationally exuberant.
And there is a whole book on Rational Exuberance, from Business Week's Michael Mandel.

For Discussion. Does it require exuberance to believe that economic processes are positive-sum?

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COMMENTS (5 to date)
Mark Horn writes:

I don't know if it requires exuberance... but at least something in the direction of optimism. Since beginning my study of economics (thanks Arnold), I've had discussions with people who think one or more forms of restricted trade is good. They tend to be very pessimistic about economic processes. One guy consitantly referred to the power of the markets as "conspiricies". And he was replete with example after example. Along with a feeling of ignorance, I was left realizing that I generally felt significantly more optimistic about the role that markets have. I even mentioned that most "conspiricies" can't last long in the presense of a free market. Of course, his response is that I was overly optimistic. From his perspective I was probably exuberant. From my own perspective it feels more like cautious optimism.

That being said, I think it takes active pessimism to think that markets have no power. Or, put another way, it takes ridiculous amounts of optimism to assume that any small group of people could consistantly dupe the market.

spencer writes:

I would call it being realistic. A positive sum game is what generates our improving standard of living. The pre-capitalist world was essentially a zero sum world.

Mark Bahner writes:
Does it require exuberance to believe that economic processes are positive-sum?

I don't think it requires "exuberance" or "optimism."

I don't consider myself either an optimist or a pessimist. I try very hard (partially quoting Rhett Butler), "to look things in the eye and call them by their right name."

It simply makes logical sense that people who make economic transactions (that aren't forced by law) make such transactions because they think the transactions will benefit them.

And if all economic transactions are zero sum, that means that ***every time*** one person in the transaction is being fooled by the ***exact same amount*** that the other person is benefitting. The odds of one person being fooled by exactly the same amount that the other person is benefitting in every single transaction are very small.

Therefore must be SOME transactions where both people are making a correct evaluation...that they are *both* gaining from the transaction.

Similarly, if I write that world per capita economic growth in this decade is likely to average more than 3%/year, and more than 5%/year from 2010-2020, and more than 7%/year from 2020-2030, and more than 10%/year thereafter, it's not that I'm being "optimistic." I'm trying to make a prediction that has a 50% chance of being too low, but a 50% chance of being right.

On a similar note, I think there is a better than 50/50 chance that some city somewhere in the world is going to be destroyed or partially destroyed by terrorists using a nuclear bomb in this century. It's not that I'm being pessimistic. I'm simply observing that nuclear bombs are becoming more and more easy to obtain, and that there are people who don't care at all how many innocent people they murder.

Ann writes:

As Mark pointed out, it would be an amazing coincidence if all economic activity was zero-sum. This essentially was the idea behind communism - that there's only a fixed amount of endowed wealth and so, if one person has more than another, that person must have somehow taken from the other person and it's only fair to take it back.

But the many attempts at communism have shown that some economic systems are negative-sum games. And the massive increase in living standards over time show that it's possible to find positive-sum solutions.

Bill Stepp writes:

Economic processes are not zero-sum, as this would imply that costs and benefits are objective and can be summed, and that every economic exchange results in zero net benefit to both traders.
A subset of this fallacy is the pervasive view that securities trading is a zero-sum game. Michael Covel emphasizes this in his otherwise estimable book "Trend Following," one of the best books on investing I've ever read.
Suppose XYZ opens at $50/share. Trader A sells his stock to Trader B at 50.5, who in turn sells his stock Trader C at 51, who then sells to Trader D at 51.5, who completes the trading session just before the bell with a sale to Trader E at 52. Five traders make four trades with a net gain to the group of $2/share.
Of course, the process can work in reverse, resulting in a net loss of $2/share, if they were shorting XYZ from $50 to $52, or if they bought and it fell from $50 to $48. Trading could also result in a zero-sum finish. This of course ignores trading costs (commissions and the bid-ask spread) and looks only at the money changing hands, not at the total subjective costs and benefits; but the idea that trading on Wall Street is a zero-sum game is wrong.

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