Why Creating Value is Positive-Sum, and Extracting it is Zero or Negative-Sum

post by Sable · 2023-02-15T07:14:57.826Z · LW · GW · 7 comments

This is a link post for https://affablyevil.substack.com/p/why-creating-value-is-positive-sum

Contents

  Value as Pie
    The Thermodynamics of Pie
  Creating Value is Positive-Sum
    Engineering a Bigger Pie
    Relative vs. Actual
  Extracting Value is Zero- or Negative-Sum
    Extracting More Pie
  The Derivative of Pie
None
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Previously in this series:

Value Created vs. Value Extracted

Investment, Work, and Vision

 

Having talked about creating value vs. extracting value and who we credit with creating value from a given endeavor, we now turn to the moral implications thereof.

First we establish that creating value is a positive-sum interaction and extracting value is a zero- or negative-sum interaction.^[1]

Let’s discuss.

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Value as Pie

Imagine that everyone in society is seated at a table, and on that table is a single pie. Regardless of one's opinion on real pies, this metaphorical pie is delicious and everyone wants a piece of it, because this pie is a metaphor for all of the monetary value of a society. (We'll stick to monetary value for the moment.)

Since this pie represents the net worth of the society, an individual’s net worth will correspond to how big their piece of the pie is. A bigger slice means more money, land, stocks, gold, etc.; a smaller slice means less.

While it isn’t universally true in reality that everyone wants a bigger slice of the pie, for our purposes we’ll assume that it is.^[2] Even if there exists a subset of the population that genuinely doesn't, there are more than enough people who do that all arguments made here stand.

Here we see the problem: everyone wants a bigger slice, but there’s only so much pie to go around at any given moment. The good news is that the pie can get bigger. The bad news is that it doesn’t do so automatically.

The Thermodynamics of Pie

Because this pie is metaphorical and not real, it doesn’t violate any laws of physics for there to simply…be more or less pie, sometimes. The size of the total pie is not fixed; it changes because value (or in our case, the size of the economy), unlike energy, can in fact be created or destroyed. And it is, all the time!

In economics, freely made trades happen because they increase the value of each participant; if that wasn’t the case, the participants wouldn’t have made the trade. I pay a dollar for an apple because the apple was worth at least a dollar to me, and the apple seller accepts the dollar because the apple is worth less than a dollar to them. If there is X amount of value combined between me and the apple-seller before the transaction, then there is X + V afterwards, where V = Value to Seller ($1 - apple) + Value to Me (apple - $1). And V must be greater than zero, because otherwise I wouldn’t have bought an apple.

On the other hand, value can also be destroyed, just as pie can be eaten. If I own a car worth $5,000 and I total that car, no one else gets that $5,000 worth of value; it’s just gone.

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Creating Value is Positive-Sum

When someone creates value, the size of the pie itself is increased, and it isn’t bad that the creator of value has more pie after their efforts. They didn’t steal that pie from anyone else; them having more pie doesn’t mean that there’s less to go around.

The whole point of creating value is that there’s just more pie, period. Creating value is a positive-sum activity; creators have, through their efforts, enriched the world along with themselves.

Let’s operationalize this by returning to our engineer and our bridge.

Engineering a Bigger Pie

Our engineer created value through the construction of the bridge. Because barriers to trade between the two towns have been lowered, more trade takes place, increasing the surplus from trade and increasing the size of the pie as a whole. Yes, our engineer gets a slice of the pie, and so do her investors - perhaps even a bigger percentage of the pie than they had before. But the pie is bigger.

To put numbers on it, suppose the pie - the total net worth of both towns - is worth $1,000, and suppose the engineer initially possesses only a minuscule slice - 0.1%, or $1. The other $999 worth of slices is divided between the townsfolk, who collectively possess $900 of slices, and the investors (who are also townsfolk), who initially possess $99 of slices.

Let’s say the creation of the bridge doubles the size of the pie; the total value of both towns is now $2,000. Due to her contributions, the engineer gets a larger percentage of the value - a larger slice of the pie. Let’s say she now gets 5% of the pie, up from 0.1% (50 times more!), and the investors all get a handsome return on their investment; they go from 9.9% of the pie to 20% of the pie (doubling their shares, roughly).

How much is left for the townsfolk? Well, they’re left to divide up 100% - 5% - 20% = 75% of the pie, or $1,500, which is a lot more than their initial $900 (5/3 as much).

What’s key here is that even though the townsfolk’s percentage of the pie went down - 90% to 75% - the actual value that they possess went up: $900 to $1,500.

The townsfolk are relatively poorer, but actually richer.

Relative vs. Actual

I’d like to stress the previous point, because I see too much focus on the former and not enough on the latter.

There are domains where what matters isn’t an absolute quantity, but a relative quantity. Take football: what matters isn’t how many points a team scores in any absolute sense, but rather that they scored more points that their opponent. The same is true for every other sport I can think of, along with just about every competition humans have.

Winning the gold medal in the Olympic 100-meter dash doesn’t require any absolute time, only that the winner’s time is better than anyone else’s.

Relative success mattering is an aspect of any system that involves ranking; when there can only be one 1st place, doing better than others is what matters.

But life - real life, outside of a game or sport - is not ranked. There is no leader board, no gold medal for a life well-lived. For all that we humans judge and compare each other, reality is not a relative domain.

In the domain of the actual, what matters isn’t how well one is doing compared to others, but rather how well one is doing, period.

We tend to make wealth a matter of ranking - there is a leader board for the richest people in the world - but wealth rank has very little to do with the material conditions under which one lives. What matters when it comes to money is how much wealth one has, not whether or not one has more wealth than another. You can’t buy a sandwich just by having more money than someone else; either you can pay what it costs or you can’t.

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Extracting Value is Zero- or Negative-Sum

So we’ve covered the case where the pie is getting bigger - but what if it isn’t? What happens when the pie stays the same size, or worse, actively shrinks?

When someone wants a bigger slice of the pie but doesn’t create value - doesn’t make the pie bigger - they have only one option: take a part of someone else’s piece of the pie.

If the pie isn’t getting any bigger, then one person getting more pie necessarily means that someone else is getting less. This is a motivating injustice: how can a person’s attempt to take more pie be interpreted as anything other than theft, when their gain necessitates someone else’s loss?

Extracting More Pie

In our original example of extracting value, a troll named Rob came upon the bridge built by our engineer. Rob, by virtue of his very large club, decided to set up camp on the bridge, and charge those who cross it a fee for not getting splatted.

Now, Rob didn’t build the bridge, or contribute to either town in any way - but by extracting that fee, Rob is now taking a slice of the pie for himself.

If we go back to imagining the total value of the two towns - the size of the pie - as $2,000, then Rob has taken some of portion of that and left less for everyone else.

Going even further, perhaps there are members of the townsfolk that don’t want to pay that fee for using the bridge - perhaps the fee itself makes selling goods to the other town not worth it - and so there is less trade, and less value, overall.

Perhaps after Rob moves in, the total value of both towns is now only $1,800, still more than they were before the bridge, but less than they would be without Rob. If Rob were to extract a fee such that he would come to possess, say, 5% of the remaining value ($90), then the total value available to the townsfolk, investors, and engineer is only $1,710, when it ought to be $2,000.

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The Derivative of Pie

We claim, almost tautologically, that more pie is better than less pie. More value is better than less. And while that claim deserves more scrutiny than it will receive here, I think the idea that more wealth is better than less is relatively uncontroversial, given that said wealth can be used to trade for the other things we value in life - safety, comfort, freedom, etc.

But beyond the absolute size of the pie, the change in the size of the pie^[3] matters. Is the pie growing or is it shrinking? Because when the pie is shrinking, when the economy is in recession or depression, when the trolls take up residence under the bridge and extort travelers - it’s easy to believe that what’s there is all there can ever be.

It’s easy to forget about mutual wins when it feels like there’s not as much to go around as there used to be.

When the pie shrinks, it’s easy to regress into defending one’s slice at all costs.

After all, what if that’s the only pie to be had?

But when the pie is growing, when it feels like there’s plenty to go around, when it feels as though one will be richer tomorrow than they were today - all of a sudden, it’s easy to breathe. It’s easy to look for compromise and mutual gain and opportunity.

When value has been created, almost everyone benefits somehow. It’s a very common mistake to think that just because some people get the lion’s share of the new value that no one else benefits. Extracting value, on the other hand, is necessarily about taking value from others to line one’s own pockets, and impoverishes us all.

1. ^{^}

   For those unfamiliar with the terminology, a zero-sum interaction is one in which any participant’s gain is offset by another participant’s loss; for someone to win, someone else must lose. A positive-sum interaction is one in which most participants emerge better off (with more value) than they started with, and a negative-sum interaction is one in which most participants emerge worse off (with less value) than they started with.

   Almost all games, especially competitive ones, are zero-sum. In Chess, Scrabble, Monopoly, Call of Duty, Football, Baseball, Basketball, Settlers of Catan, and so on, one side winning means that another side must lose. While there can be ties, a tie is worth less than a win, so two teams tying distributes the same amount of points as one team winning and one team losing.

   Positive-sum games are rare; cooperative games often fit this mold, where all players win or lose together, but positive-sum interactions are more common in real life than in games or sports. Negative-sum interactions could include things like a game that makes you hate all of your friends, or a blood feud between two crime families that leave them both weak and easy prey for a third.

2. ^{^}

   There are plenty of non-monetary things to want, and money itself is less valuable the more of it you have. That being said, whatever non-monetary thing a given person might want, if it involves other people it’s usually its own pie (there’s only so much fame to go around), or if it doesn’t it can usually be traded for with money (inner peace might be free, but the time and space to pursue it can usually be bought, as can therapy, self-help books, and meditation retreats).

3. ^{^}

   For anyone unfamiliar with the terminology, a change in a quantity is called its first derivative.

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