Zero-Sum Economics

Zero-sum Economics

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Steven McAtee

2021

Published by: Splat Concepts Australia 2022

All rights reserved

No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other non-commercial uses permitted by copyright law.

Cover Art by Agata Broncel

Bukovero - Book Cover Designer

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bukovero@gmail.com

On my world, there are books, thousands of pages, about the power of one mind to change the Universe. But none say it as clearly as this.

Delenn (re: Japanese stone garden) in Babylon 5, played by Mira Furlan.

Cover art Description:

I wanted to have something funny. This is kind of a serious book, which is depressing. I found an image of Fortuna a Greek goddess of fate. The wheel of fortune image which is from des Cas des nobles hommes et femmes by Jehan Boccace or Giovanni Boccaccio, (1313-1375) … I think!

https://gallica.bnf.fr/ark:/12148/btv1b10532640k/f7.item#

The wheel of fortune has broken and crushed Fortuna, along with other cartoon figures either crushed by the wheel or running from it. One other figure is on top of the wheel running away with the money. The idea is that a few people have broken the wheel are is attempting to run off with the money, while ignoring the damage done by the process.

The other features in the picture are the arrow chart representing growth, green because growth is good even if it crushes everyone else. Finally, the Sigma symbol is the symbol for sum in math and the broken wheel (a zero) represent Zero sum.

Contents

Preface. xxii

Acknowledgments. xxv

Overview.. 1

Part I 4

1 Introduction. 4

1.1 What is a ‘Zero-sum Economy’?. 6

1.2 Theories of Value. 8

1.3 Money and value. 9

1.4 What is zero-sum in economics?. 13

1.4.1 Money. 13

1.4.2 Trade. 13

1.4.3 Time. 13

1.4.4 Budgets. 14

1.4.5 Markets - Work. 15

1.5 What is not zero-sum in economics?. 16

1.5.1 Production. 16

1.5.2 Consumption. 16

1.5.3 Value. 16

1.5.4 Knowledge. 17

1.6 Zero-sum and Non-zero-sum Economics. 17

1.7 Barter versus money. 19

1.8 Economics and psychology. 19

1.8.1 Survival 20

1.8.2 Local optimisation: the fog of war 22

1.8.3 Value. 23

1.8.4 Free choice and systemic behaviour 24

1.8.5 Changing Behaviours or changing the system.. 25

1.8.6 Corporate momentum.. 26

1.8.7 Summary. 27

1.9 Mechanical economics. 27

1.9.1 Money. 27

1.9.2 Income. 28

1.9.3 Tax. 28

1.9.4 Technology. 28

1.9.5 Summary. 28

1.10 Microeconomics. 28

1.11 Macroeconomics. 29

1.11.1 The Circular Flow of Money Model 30

1.11.2 Gross Domestic Product 31

1.11.3 Business cycles. 31

1.11.4 Inflation and interest rates. 31

1.11.5 Wealth distribution. 32

1.11.6 Global labour 32

1.12 Zero-sum Economics. 32

1.12.1 CP Model of an economy. 33

1.12.2 Business cycles. 34

1.12.3 Inflation. 34

1.12.4 Wealth distribution. 35

1.12.5 Global labour 35

1.13 Summary. 36

2 A brief history of economic theories. 37

2.1 Classical Economics. 37

2.2 Neoclassical Economics. 38

2.3 Capitalist Economics. 42

2.4 Marxian Economics. 43

2.5 Socialist Economics. 45

2.6 Keynesian economics. 46

2.7 Modern research. 48

2.8 Summary of economic theories. 49

3 Economic theory. 51

3.1 Microeconomics. 51

3.1.1 Supply. 51

3.1.2 Demand. 52

3.1.3 Supply versus demand. 53

3.1.4 Elasticity. 55

3.1.5 Marginal utility. 55

3.1.6 Product substitutions. 55

3.1.7 Consumer surplus. 55

3.1.8 The ‘bandwagon effect’ 56

3.1.9 The ‘snob effect’ 56

3.1.10 Monopolies. 56

3.1.11 Profit maximisation. 57

3.1.12 Market equilibrium.. 57

3.1.13 Market Saturation. 58

3.1.14 Government interventions: price controls. 59

3.1.15 Summary of microeconomics. 59

3.2 Macroeconomics. 59

3.2.1 Circular Flow of Money. 59

3.2.2 Shocks. 60

3.2.3 Business cycles. 61

3.2.4 Inflation. 62

3.2.5 Gross domestic product 65

3.2.6 Wealth distribution. 65

3.2.7 Exchange rates. 67

3.2.8 Balance of trade. 67

3.2.9 Monetary policy. 67

3.2.10 Global labour 68

3.2.11 General Economic Theories. 70

3.2.12 Summary of macroeconomics. 76

4 Zero-sum Economics. 78

4.1 Transactions. 79

4.2 Systems analysis. 82

4.3 Control Theory. 89

4.4 Boundary conditions. 89

4.4.1 Mathematical boundary conditions. 89

4.4.2 Real boundary conditions in economics. 90

4.5 Zero-sum supply. 97

4.6 Zero-sum demand. 98

4.7 Spending priorities. 103

4.8 Loans and debt 106

4.9 Zero-sum entities. 109

4.9.1 Consumers. 109

4.9.2 Producers. 110

4.9.3 Governments. 110

4.10 Zero-sum supply versus demand. 110

4.11 Zero-sum equilibrium.. 111

4.12 Employment and unemployment 113

4.13 The Problem with GDP. 118

4.14 Growth vs Bloat 119

4.15 Everyone can be productive. 120

4.16 Can everyone be rich?. 120

4.17 Summary. 120

Part II 122

5 Zero-sum Economic Simulation. 122

5.1 Zero-sum Modelling. 122

5.1.1 Zero-sum CP Economic Model 123

5.1.2 CPG Model 128

5.1.3 Business cycles. 134

5.1.4 Inflation. 154

5.1.5 Cash Distribution Model 164

5.1.6 Global Labour Model 172

5.1.7 Real-world economic model comparison. 180

5.1.8 Properties of Zero-sum Economic Modelling. 189

5.1.9 Unemployment and poverty. 190

5.1.10 Summary. 193

Part III 195

6 Stabilising economies. 195

6.1 Zero-sum Economic Stabilisation methodology. 196

6.1.1 Stabilised CPG Model 196

6.1.2 Stabilised Cash Distribution Model 201

6.1.3 Stabilised Global Labour Model 204

6.1.4 Supercharging an economy. 206

6.1.5 Stabilised money flow.. 208

6.1.6 Flexible Government expenses. 211

6.1.7 Properties of the Stabilised CPG Model 212

6.1.8 Comparison with social values. 214

6.1.9 Money Supply versus Velocity of Money argument 217

6.2 Implementation of economic stabilisation in the real world. 218

6.3 Income Tax. 224

6.4 Why will stabilisation work?. 225

6.5 Why will supercharging work. 226

6.6 Universal Income or Universal Jobs. 227

6.7 Limits of stabilisation. 230

6.7.1 Inflation. 230

6.7.2 Unemployment 231

6.7.3 Limit of profits. 231

6.7.4 Market saturation. 231

6.7.5 Population growth. 232

6.8 Limitations of economic stabilisation. 232

6.8.1 Employment 232

6.8.2 Education. 233

6.8.3 Inflation and deflation. 234

6.8.4 International Stabilisation. 234

6.8.5 Drugs and criminal organisations. 235

6.9 Non-zero-sum Economics. 236

6.9.1 Knowledge. 236

6.9.2 Research. 236

6.9.3 Entertainment 236

6.9.4 Exploration. 236

6.9.5 Production. 237

6.10 Pro-Con analysis of stabilisation. 237

6.11 Summary. 238

7 Summing up: Fixing economics. 239

7.1 Supply vs Demand. 239

7.2 Net Money Flow.. 241

8 Conclusions. 243

8.1 Zero-sum Economics. 243

8.1.1 The Velocity of Money Theory. 244

8.1.2 Value of Money Theory. 244

8.1.3 Trickle-down Theory. 244

8.1.4 Money is exogenous to the economy. 245

8.2 Zero-sum Models. 245

8.2.1 CP Model 245

8.2.2 CPG Model 247

8.2.3 Business cycles. 247

8.2.4 Inflation. 247

8.2.5 Wealth Distribution Model 247

8.2.6 Global Labour Model 247

8.2.7 Real-world Data Model 247

8.3 Zero-sum stabilisation. 248

8.3.1 Stabilised CPG Model 248

8.3.2 Implementation of the CPG Model in the real world. 248

8.3.3 Worldwide implementation. 248

8.3.4 Non-zero-sum Economics. 249

8.4 Properties of Zero-sum Stabilisation. 250

8.5 Now what?. 250

8.5.1 Visions of the future. 251

8.6 Final thoughts. 252

9 Bibliography. 254

Figures

Figure 1: Inherent problem in the Economy. 5

Figure 2: Economy System Design. 20

Figure 3: Circular Flow of Money Model 33

Figure 4: Zero-sum supply-versus-demand curve.44

Figure 5: Example of a basic supply curve.57

Figure 6: Example of a basic demand curve.58

Figure 7: Example of a basic supply-versus-demand curve.59

Figure 8: Consumer surplus. 61

Figure 9: Market equilibrium.. 63

Figure 10: Market Saturation. 63

Figure 11: Circular Flow of Money Model 65

Figure 12: Circular Flow of Money. 89

Figure 13: Circular Flow of Money with Government 89

Figure 14: Farm Model 91

Figure 15: Farm Gantt chart 92

Figure 16: Manufacturing Model 92

Figure 17: Manufacturing Gantt chart 93

Figure 18: Mining Model 94

Figure 19: Mining Gantt chart 94

Figure 20: Movie Model 95

Figure 21: Movie Gantt chart 95

Figure 22: Generalised Business System Analysis.96

Figure 23: Raw US GDP versus M1 + M2 money supply.101

Figure 24: US GDP versus M1 + M2 money supply.102

Figure 25: GDP per capita versus Inflation Australia. 104

Figure 26: Double Supply Model 106

Figure 27: Demand curve from Constant income. 108

Figure 28: Demand curve from Survey. 109

Figure 29: World annual income distribution 2000. 110

Figure 30: World continuous demand curve for 2000. 111

Figure 31: Product priority. 114

Figure 32: Australia Total Debt Vs Money Supply. 117

Figure 33: Zero-sum Ideal supply versus demand.121

Figure 34: Supply vs demand equilibrium.. 122

Figure 35: Unsatisfied demand. 123

Figure 36: Supply Chain Vs GDP. 129

Figure 37: Basic Zero-sum CP Economic Model 134

Figure 38: Zero-sum CP system response.137

Figure 39: Zero-sum CPG Economic Model 139

Figure 40 CPG system response. 143

Figure 41: Control system diagram.. 145

Figure 42: CP Consumer system with business cycles.146

Figure 43: CP System with business cycles.148

Figure 44: Consumer distress with business cycles.153

Figure 45: Zero-sum CPG system response with business cycles. 154

Figure 46: CP system response with lock-in after one business cycle. 155

Figure 47: CP system distress with lock-in after one business cycle. 156

Figure 48: CP system response. 157

Figure 49: CP system distress. 158

Figure 50: CP System with Business Cycles.159

Figure 51: CP System Distress. 159

Figure 52: CP System with Asymmetric Business Cycles.159

Figure 53: CP System with Asymmetric Business Cycles Distress. 160

Figure 54: US Unemployment 160

Figure 55: US Unemployment with CP System Response Overlay. 161

Figure 56: Legacy of transactions. 166

Figure 57: Supply Chain Zero-sum CP Economic Model 167

Figure 58: Inflation versus unemployment graph from the CP Model 168

Figure 59: CP Economic Model with unemployment 169

Figure 60: US Inflation rate (yellow line) peaks coincide with recessions (indicated by blue lines) 171

Figure 61: Zero-sum CP Economic Model with inputs.175

Figure 62: Cash distribution in Australia 2013–2014.177

Figure 63: Wealth distribution in the Zero-sum Economic Model 178

Figure 64: Cash distribution in the Zero-sum Economic Model response. 179

Figure 65: Cash distribution at T = 100.180

Figure 66: Cash Distribution Model: Consumer balances.181

Figure 67: Cash Distribution Model: accumulative cash.183

Figure 68: Cash Distribution Model: cash distribution histogram. 183

Figure 69: Global Labour Model 187

Figure 70: Global Labour Model outcomes.188

Figure 71: US GDP vs M1 + M2. 189

Figure 72: Zero-sum CPG Economic Model 191

Figure 73: US Economic Model 192

Figure 74: US simulated and real profits, with distress.193

Figure 75: Australian Economic Model 194

Figure 76: Australian simulated and real profits, with distress. 195

Figure 77: Australian distress versus percentage population employed. 196

Figure 78: Employment versus simulated employment 197

Figure 79: Adjusted employment versus simulated employment 198

Figure 80: Stabilised CPG system response.208

Figure 81: Stabilised CPG system response: Consumer distress. 208

Figure 82 Australia Demand curve with Estimated Equilibrium 2019. 210

Figure 83 Australia UBI Integrated Demand curve with Estimated Equilibrium 2019. 211

Figure 84: Stabilised cash balances with investment 213

Figure 85: Stabilised global labour system response.213

Figure 86: Stabilised global labour Consumer distress.214

Figure 87: Effect of supercharging on supply and demand.216

Figure 88: Proposed Government funding structure.218

Figure 89: Stabilised CPG with Multiple Cash Tax rates.220

Figure 90: Stabilised CPG Model with random Government expenses. 221

Figure 91: Stabilised CPG Model with random Government expenses

Figure 92 Australia Demand curve 2019.231

Figure 93 Australia Demand curve 2019 232

Figure 94 Australia Income Distribution with a Basic UBI 232

Figure 95 Australia Demand curve with simple UBI 2019 233

Figure 96 Australia Income Distribution curve with Integrated UBI 2019. 234

Figure 97: Australia Demand curve with Integrated UBI 2019. 235

Figure 98: Non–Stabilised progressive cost 236

Figure 99: Stabilised progressive costs 237

Figure 100: Non – Supercharged vs Supercharged progressive cost 238

Figure 101: CP System Response. 238

Figure 102: Consumer distress. 238

Figure 103:Stabilised CPG system response.239

Figure 104:Stabilised Consumer Distress.239

Figure 105:Stabilised progressive costs.240

Figure 106: Consumer surplus. 251

Figure 107: Demand curve. 252

Figure 108: Net Product flow vs net Money flow.. 253

Tables

Table 1: Traditional economic analysis. 9

Table 2: Zero-sum Economic analysis. 10

Table 3: General transactions. 11

Table 4: Zero-sum time analysis. 13

Table 5: Zero-sum budget analysis. 14

Table 6: Zero-sum market analysis. 15

Table 7: Game theory of a water shortage. 21

Table 8: Game theory of a famine leading to revolution. 21

Table 9: Free will vs Systemic Behavior. 25

Table 10: Zero-sum transaction analysis. 79

Table 11: Constant income Demand. 99

Table 12: Customer price survey. 100

Table 13: Australian employment by industry. 114

Table 14: UK employment by industry. 116

Table 15: USA employment by industry. 117

Table 16: Dates of peaks and troughs of business cycles in the USA, 1854–1997 [128] 139

Table 17: Profit-investment ratio. 140

Table 18: Cost of living comparison (from Numbeo.com [134]). All values in equivalent $AU. 173

Table 19: Wage Load for various Countries and the World. 193

Table 20 Summary of Government Costs 4% Cash Tax. 210

Table 21: Summary of Government Costs Balanced Cash Tax. 210

Table 22 Summary of Government Costs. 219

Table 23: Australian Government Budget 2019 219

Table 24: UBI Comparison. 219

Table 25 Pro-Con for Stabilisation. 237

Table 26: Cash distribution. 240

Preface

Initially, as an Engineer, I was interested in developing a game like SimCity™ (Electronic Arts) and playing around with economics. It was fun, but not exactly a world-changing project. Then I started looking into economic theory. After a few months, I came to one conclusion: economics is incomplete and therefore ineffective at explaining what happens in the real world.

I have a Master’s degree in engineering. What I am good at, as an engineer, is developing simulations. So, naturally, that’s how I approached economics. The same mathematical techniques that are used for simulating the current and voltage in an electronic device, or the mechanics of a machine, were used in the research for this book.

The key constraint I followed was that money behaves in a zero-sum fashion throughout its flow through an economy, much in the way that energy and momentum are conserved in physics. This meant that money in an economy should behave like a physical entity within a physics or engineering simulation, and that I could create similar simulations for economics. With the zero-sum constraint, the simulations demonstrated phenomena occurring in the real world that economists find difficult to explain!

I had hoped to do a PhD on Zero-sum Economic Theory, but after speaking with economics professors at several major universities, I quickly concluded that the academic community would not accept a PhD thesis (or even a research paper) on this topic. I thought they might be interested in the idea itself, especially as the way I was doing this research actually included a method for stabilising the economy, and a method for getting prices to deflate … in theory at least. It was extremely disappointing, but not surprising. Professors are busy people, and radical change is not going to happen overnight.

Many said: This is not how we look at economics. Go study economics, and then you can do it our way. While in general I agree with this idea, I see a problem with the way economics is taught and practised. Starting with the same body of data, economists frequently arrive at varied conclusions, which suggests there is a need to look at the subject in a new way—hence, this book!

On to plan B C D!

Write a book on the topic—it’s not as formal an approach as a PhD thesis, and doesn’t claim the same credibility, but it’s a first step towards getting the idea into the public arena so people can start thinking along these lines. This book is somewhat like a thesis, having an academic style of writing supported by many references, calculations, formulae and diagrams. While it is not officially a university thesis, I have sought to maintain the quality of research required by a thesis.

As I commence writing, I have been looking at ‘Zero-sum Economics’ for over 2 years—collecting statistics, developing the theory, and writing software, i.e. conducting the dogged and potentially mind-numbing research that now allows my ideas to be presented formally.

I encourage the reader to persevere on the journey through the landscape of diagrams and mathematical formulae to be found within. Wherever possible, I have included complete mathematical derivations of the final formulae. It was important that I demonstrated that solid mathematics underpinned the major features of the theory, but if you don’t have a maths background, you may prefer to skip the derivations and focus on the significance of the formulae in terms of the theory.

The book does not have to be read from front cover to back, but I recommend reading the Introduction first, as it explains the premise of the theory. Then, if you want to skip to the end and see how to stabilise the economy and solve poverty, go straight to Part III. I note that in doing so you would miss all the arguments supporting Zero-sum Economic Theory and the methodology of its applications, but if you do skip ahead, you can always refer back when necessary.

So why am I writing a book instead of doing an economics degree in the traditional way? It’s very simple: this book concerns a theory that shows mathematically that it is possible to solve poverty and economic instability. This is not what mainstream economics teaches, but this book is for the broader community. In this arena, I can write a book without being restricted by what other people believe is relevant to economics. So far, the academic economics community has not come up with a theory that can solve poverty. I believe this theory does.

The main point of making a book is to get my idea out and have other people ‘review’ it. A PhD involves having your work ‘peer reviewed’, which is why a thesis has more credibility than a general literary book. If nothing else, I hope this book will create enough interest in the topic so that I (or someone else) can do a PhD and write some research papers on the subject. The outcome I hope for is that the ideas presented here will be formally introduced to the broader community. Peer review and acceptance by the academic community can come later.

It doesn’t hurt me in any way to introduce these ideas to the public. The work I have done here is mathematically rigorous and should be able to stand up to scrutiny. Even if Zero-sum Theory is disproven, in the words of Edison, I have not failed. I’ve just found 10,000 ways that won’t work. All we need is one way that does solve poverty, and two to three billion people will have happier lives. If this book gives economists a few new ideas to work with in this quest, I’ll be fine with that.

Best of luck!

Steve

Acknowledgments

Thanks to my Master’s degree supervisors, Romesh and Michelle, who with patience and encouragement, guided me to completion of my thesis. They gave me the confidence to start this book.

Many thanks to Tonghua for assistance with the differential equations.

Thanks also to my awesome editor, Jeanette, for making the thousands of edits required to get this into print.

Overview

The purpose of this book is to present a new economic theory—a theory not currently used by economists, but one which I hope can be used to improve our understanding of how economic systems operate. For many economists, I suspect, a leap of faith will be required to be able to accept this theory.

My key observation is that the entire economy is limited by the zero-sum nature of monetary transactions. Many economic theories suggest that money is ‘exogenous’, i.e. the amount of money in the economy is determined by factors external to that economy. This creates the impression that money is not a determining factor in the general operation of an economy, and as a result, many economic theories entirely avoid examining the flow of money in an economy. In contrast, the Zero-sum Theory presented in this book is mainly concerned with the movement and distribution of money.

The main premise of a zero-sum system is that for any profit made by one entity in the system, there must be a corresponding loss somewhere else in the system. Many economists disagree with this idea. I have concluded, from my research, that most economists believe everyone should be able to have a reasonable standard of living as long as they are willing to work hard. Zero-sum Economics shows that even if everyone works hard, some or even most of the people involved will lose money and thus will not have the same opportunities and standard of