What is the Zero Sum Fallacy?

What happens when you can't see what isn't right in front of your face...

Eric is carrying Sally’s doll around the house. “He stole my doll!” she says tearfully. You return the doll to Sally.

The next day, Eric is carrying Sally’s deck of cards around the house. You start getting ready to intervene again. But this time Eric protests, “She traded them with me! I gave her my stuffed animal and she gave me her cards!”

You would probably leave Eric alone at this point.

But what would you say to the parent who, said, "Eric! How dare you take Sally's deck of cards?" and made Eric return the cards to Sally but said nothing of the stuffed animal Sally was holding onto? Would this be a fair response?

And how might Sally begin to behave if she knew that she could benefit from others without giving anything back to them in exchange?

These questions are at the heart of Thomas Sowell’s “Zero Sum Fallacy,” or the mistaken belief that there is always one winner and one loser in an economic exchange. In essence, rather than seeing an economic exchange as a trade, the zero sum fallacy sees it as a form of theft – with one party exploiting or benefiting at the expense of the other.

Specifically, the fallacy claims that whoever is on the receiving end of money (or whoever is considered conventionally more powerful – like a business owner or an older brother) is always gaining something, while the other person involved, usually the one paying for the thing, is losing out.

Why is this a fallacy? Well…it’s easy to see that it makes no sense. Why would we keep spending money on things unless we got some value in exchange?

In reality, economic exchanges should be win-win situations. When I buy groceries, though I may be putting money in the pockets of the store and the companies stocking its shelves, I’m putting into my own pocket (or pantry) the food that I need to keep my family alive. When I buy clothing, likewise. And though there are still people who will point accusatory fingers at store owners for “exploiting” their customers by selling things to them, it’s very hard to make a zero sum argument about these cases.

Where you really see the zero sum fallacy coming into play is when a person pays for something that isn’t a good. For instance – when a person pays to rent a home or apartment. The person doesn’t take the property home with him. He doesn’t get to keep it at all. He’s not buying a good – he’s buying a sort of service – the semi-intangible benefit of being able to live in a place.

So perhaps the thinking goes: how dare you charge money to a person without giving him something back in exchange?

But is the person not getting something in exchange for his rent???

Shortly after we had to move out of our property (which we bought after many years of renting), we moved into an Airbnb while we waited out some of the construction. The airbnb was extremely expensive! And yet, we would have been without a proper home otherwise, and I was SO grateful for that space. I remember thinking how this property owner, by allowing my family to occupy the space that belonged to him and which he managed and maintained, had essentially given us a home that we could use while we were establishing a home of our own. That benefit was invaluable!

And yet the benefit of “being given a temporary home” is much less tangible than the benefit of a can of baked beans or a new dress.

So why does the zero sum fallacy happen? Why do people recognize Sally’s right to Eric’s stuffed animal, but fail to acknowledge Eric’s right to Sally’s deck of cards?

I think the answer is a sort of spiritual blindness.

Money either sits in your hand or appears as numbers in your bank account. But the value that you get in exchange for your money – though sometimes manifesting through a physical thing – is often intangible.

If Eric and Sally’s trade had been different, and Sally had given her deck of cards in exchange for the right to play with Eric’s Gameboy for an hour, you might second guess the trade. We tend to stumble when one side of a trade is less tangible than the other. And yet – if the two people involved in the trade find the terms acceptable, why not allow it to pass?

In truth, all value has an intangible aspect. What do I get when I take my children out for ice cream? Is it only the ice cream? Or is it the experience, the time together, the knowledge that I’ve given them a happy experience in the formative years of their lives? The intangible value is often greater than the tangible thing that I may have bought.

This ability to perceive value is in Hebrew called hakarat hatov – which is loosely translated as gratitude, but really means recognizing the good. And this ability to recognize good, and to recognize value is foundational not only to building a healthy relationship with money, but to building a morally good life.

What about people who are missing the ability to perceive value? Here’s the danger: when people in power are missing foundational moral principles, and then they create policies that stem from those deficient moral principles, those policies are very likely to have consequences that undermine not only healthy economics, but the moral behavior of their citizens as well.

But more on this for another post.

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