When are economic transactions zero-sum games?

Many people seem to think about economic exchanges like they’re a zero-sum game where one side wins, and the other loses. If a company makes a big profit, some assume it must have come at the expense of its workers or customers. If a country runs a trade deficit, some think it must be losing out to its trading partners. But this is not how the economy works in most cases, including the examples I just gave.

Let’s start by defining zero-sum game. A zero-sum game is a situation where one person’s gain is exactly another person’s loss. No new value is created.

Gambling is a classic example of a zero-sum game. If you and I each bet $50 on a coin flip, one of us will walk away with $100, and the other will walk away with nothing. The total money in the system hasn’t changed—just who has it.

Some economic situations can be zero-sum too. If two companies are bidding on the same government contract, one will win and the other will lose. From the companies’ point of view, the situation is a zero-sum game. The total amount of money the government is spending doesn’t change; it just goes to one company instead of the other.

But now let’s consider the government’s and winning firm’s points of view in this same setting. Here, we’re not in a zero-sum world anymore. The money spent is (hopefully) exchanged for valuable goods or services that benefit society. The winning firm also benefits by receiving payment for providing these goods or services, which can help them grow, create jobs, and reinvest in their business. This transaction creates new value for both sides.

In fact, most of what happens in the economy isn’t zero-sum. Voluntary transactions usually create value—meaning both sides are better off after the exchange.

Take trade, for example. Suppose a farmer in Brazil grows coffee beans, and a coffee shop in the US buys them. The farmer gets money, which they value more than keeping the coffee beans. The coffee shop gets beans to sell, which they value more than the money they paid. Both sides benefit.

Or think about a simple purchase. If you buy a phone for $500, it’s because you think the phone is worth at least $500 to you. And the seller is happy because it values the $500 more than keeping the phone. Again, both sides win.

Even wages aren’t zero-sum. A company doesn’t “lose” when it pays workers. It pays them because their work generates even more value than the wages paid—otherwise, hiring them wouldn’t make sense. And workers take the job because it’s better than their next-best option. Both benefit.

Why does this matter? Thinking of the economy as a zero-sum game leads to bad policy and bad decision-making. If we assume that trade only benefits one country at another’s expense, we might try to limit trade—even though it benefits both sides. If we assume that businesses only profit by exploiting workers, we might overlook the fact that they’re creating goods, services, and jobs that people value.

This isn’t to say every transaction is always fair or beneficial. There are cases of fraud, deception, and exploitation. But the key takeaway is that, in a well-functioning economy, voluntary exchanges create value rather than just shifting it around.

So the next time you hear someone talk about the economy like it’s a zero-sum game, remember—most of the time, it’s not. And that’s a big reason why economies grow and living standards improve over time.