A Challenging Lesson from Money, Greed, and God (Chapter 3)

I’m currently teaching a Connections Class at The Crossing on Sunday mornings with Nathan Tiemeyer and Joe Haslag (an economics professor at MU). We’re using the book, “Money, Greed, and God,” by Jay Richards, covering a chapter per week in our class discussion.

This week, we’re discussing Chapter Three—“Doesn’t Capitalism Foster Unfair Competition?” This chapter seeks to explain and debunk “Myth no. 3” in the book:

“The Zero-Sum Game Myth (believing that trade requires a winner and a loser)”

Here is a selected portion of Chapter Three that I found interesting and will certainly challenge many people’s thinking on economics today. I’m sure this will be part of our discussion during our class this Sunday—

The author writes…
It was sixth grade. We played the “trading game.” I didn’t know it had a point. I figured our teacher was just distracting us on a cold snowy day, since we couldn’t go outside during recess to play something really useful, like kickball. The teacher passed out little gifts to all of the students: a ten-pack of Doublemint gum, a paddle board with one of those little rubber balls tied to it, a Bugs Bunny picture frame, an egg of Silly Putty, a set of Barbie trading cards—stuff like that. The teacher probably picked them all up in the dollar aisle at the local Kmart. After giving every kid one gift, our teacher split the class into five groups of five students each. She then asked us to write down, on a scale of one to ten, how much we liked our gift. That was it. We didn’t have to talk to anyone else. We just decided how much we liked our toy. Our teacher then compiled all the scores and added up the total. Then she said we could trade with the other kids in our group. No one had to trade, but if I had Barbie trading cards (which I did), and Sarah had a paddle board (which she did), and each of us preferred the other’s gift (which we did), we were free to exchange. Of course, a few students kept or got stuck with their original gift, but many ended up with a toy they liked more. Again, we graded our toys and the teacher added up the scores. The total score went up. Then she told us that we could trade with everyone in the room. Now we all had twenty-four possible trading partners rather than just four. Almost everyone, including kids who a minute before were as lively as a marshmallow, was suddenly cobbling together complex trades that would have made a game theorist proud. After everyone had a chance to trade, we again graded our toys and added up the scores. The total number had gone way up. Almost everyone ended up with a toy he liked more than the one he started with. No one had a score that had gone down. The only kids whose scores didn’t go up were the ones who happened to get gifts they really liked at the beginning. I got the paddle board on the first trade and kept it. I didn’t get the point of the game until I played it again twenty-five years later. As it happens, the game teaches some of the most important lessons of economics.

Lesson One: Trading freely can add value even though the traded items remain physically unchanged.

Lesson Two: Normally when trading freely, the more trading partners there are, the better. Notice that in the trading game, the total value of the gifts—that is, how much everyone liked the gifts they had—went up with the number of possible trading partners. Some of the students graded their final toy as a nine, while others graded theirs as a six. So everyone didn’t end up equal at the end. Still, almost everyone ended up with a gift they liked more than the gift they started with, even though nothing new was added to the game and the players were competing with each other.

Lesson Three: A free exchange is a win-win game. There are three kinds of games: win-lose, lose-lose, and win-win.

Win-lose games, like chess, checkers, poker, basketball, and badminton, are sometimes called zero-sum games.

Then there are positive-sum or win-win games. Nobody loses. In win-win games, some players may end up better off than others, but everyone ends up better off than they were at the beginning.

An exchange that is free on both sides, in which no one is forced or tricked into participating, is a win-win game. It’s a positive-sum game. Think about it. The trading partners wouldn’t trade if each did not perceive himself as better off as a result. In the trading game, I preferred the cool paddle board. Sarah preferred the stupid Barbie trading cards. Even though nothing new was added to the system, the outcome was still a win-win. Understand this one simple fact, and you understand economics better than most critics of capitalism.

Lesson Four: The game is win-win because of the rules set up beforehand. The players aren’t allowed to coerce or steal from each other. A free market is not a free-for-all in which everybody can do what they want. That’s anarchy, in which the strong can steal from the weak. That’s raw competition, survival of the fittest, nature red in tooth and claw. A free market isn’t like that. Any exchange must be free on both sides. The participants are free to exchange or not to exchange. Ideally, the players would be virtuous enough to play by the rules. But in the trading game, as in real life, you can’t count on the virtue of others. There’s a bully in every class. So you need an outside enforcer. In the game where I was able to unload the Barbie trading cards, the teacher played this role. In real life, it includes parents, teachers, churches, that old lady down the street with the steely gaze, and the government.

Lesson Five: Scarcity is almost always real. If there was a big bucket in the room filled with all the same toys, no one would bother to trade. But in most of life, there is almost always scarcity. The trading game is like the real world of trade in this respect. And where there’s scarcity, there’s competition. We can’t do anything about that. It’s how the world is. The peaceable kingdom of God with limitless plenty isn’t one of the options. The basic options are a win-lose society based on the laws of the jungle, a lose-lose society of coercive socialism (more on this later), or a market where win-wins are possible. The right rules can make the trading game win-win, even when there’s scarcity.

Lesson Six: Opportunity costs. When there’s scarcity, there’s always a trade-off. In the trading game, no one gets to have more than one toy. In the real world, if I have only ten grand, I can’t buy both a ten-thousand-dollar Chevy Impala and a ten-thousand-dollar first-issue Tales from the Crypt comic book. I have to choose one or the other. A trade-off is, in a sense, what something costs.

Lesson Seven: Economic value is in the eye of the beholder. For centuries, economists and philosophers were confused about economic value. This isn’t surprising. It took us centuries to unlock just a few of the mysteries of physics and biology. Economics is much more complicated, since it deals with the complex interactions of the most complex things in the physical universe—human beings.

[Then toward the end of the chapter, the author provides an interesting illustration of these seven lessons.]

In 1958, a man named Leonard Read wrote a little essay called “I, Pencil.” He wrote it from the viewpoint of “an ordinary wooden pencil” that was explaining its origins. We think a pencil is simple. And yet a single pencil requires what Read calls “innumerable antecedents,” involving millions of people, from Albania to Zimbabwe, performing all sorts of different tasks. First, there’s the cedar tree harvested from northern California. Then there are the saws and trucks and ropes and other equipment, all built in different places; the mill in San Leandro, California; the trains to transport the wood; the processing plant with kiln and tinting; the electricity from the dam to power the plant; the millions of dollars in equipment used to build the pencils; the graphite from Sri Lanka, mixed with clay from Mississippi and chemicals from who knows where; the wax from Mexico and beyond; the yellow lacquer with castor oil; the brass to hold the eraser, forged with metals from mines from around the world; the eraser made with factice from Indonesia and pumice from Italy. Finally, there are the trucks that deliver the pencils and the stores that sell pencils to the public for about ten cents each. All of this and much more is needed to make one yellow pencil. There are at least three marvels here. First, few who contributed to the pencil meant to a make a pencil. The miner in Sri Lanka probably doesn’t know that the graphite he’s mining will end up as a pencil, and the miners who mined the copper to make brass probably don’t know that the little metal thingy on pencils is even made of brass. Second, as the pencil in Read’s tale explains, “not a single person on the face of this earth knows how to make me.” That knowledge isn’t stored in any one place but is dispersed among millions of different people. Third, no (human) mastermind oversees the process. It’s all coordinated by people working freely in specialized jobs following the price of countless goods and services. This is one of the greatest wonders in the universe….

Imagine if Leonard Read had written the essay today and chosen an Apple iPod rather than a pencil. I have an iPod nano. I love it. I haven’t the slightest idea what makes the darn thing go, let alone how to make one from scratch. No surprise there. But the fact is, no one does.

Even the physical parts of the iPod are hard to describe. The layman is reduced to naming the companies involved. The regular iPod has a hard drive with spinning disks. My nano, which is about the size of five credit cards pressed together, uses something called flash memory, developed by Samsung in South Korea, which stores information in floating-gate transistors. It can hold billions of bytes—little units of information. The iPod’s sophisticated user interface, developed by a company called Pixo, is an ingenious touch pad shaped like a doughnut. You can find any file on your iPod simply by rubbing your finger on the circle and pushing it at different spots. You view the menus on a color liquid crystal display with an LED backlight. Dozens of engineers and designers contributed to this simple navigation tool. Its central processing unit—the chip that serves as the brain for the machine—is made by Samsung. The audio chip is made by Wolfson Microelectronics. The whole thing runs on a three-millimeter-thick rechargeable lithium polymer battery made by Sony. It’s covered in a stainless-steel and plastic casing, which rarely breaks when dropped. Little earbuds plug into the iPod and deliver sound to your ears. The iPod connects to computers, which are connected to the World Wide Web—a network of computers, satellites, fiber-optic cables, and other cool stuff that blankets the planet. In this way, my iPod communicates with a free Apple program and network called iTunes. iTunes lets me search for audio and video files and buy them with the click of a button, usually for 99 cents. (Boring lectures are usually free.) Tens of thousands of patents lie behind the technology. Millions of engineers, technicians, and other workers around the world work to make all this possible. None of them knows how to make an iPod from scratch.

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