Zero sum transfers occur when one person’s gain is exactly offset by some other person’s loss. Gains and losses in the transaction add to zero. Positive sum is when gains and losses of a transaction add to a sum greater than zero. The positive sum constitutes the creation of new wealth.
We should want to know which kind of transfers are zero sum and which are positive sum, so we can reduce or eliminate the zero sum transfers and encourage more of the positive sum kind. We should want this so that we, as a people, will increase our wealth.
A welfare check is the execution of a zero sum transfer. It is a transfer of money from one American to another American. The American from whom the money is taken is made poorer and the American who receives the money is made richer. The American from whom the money is taken bears 100% of the loss, but while the total gains on the other side add up to 100%, the welfare recipient, on average, receives only about 29% of the gain. The other 71% is spread out over the administration costs of executing the entire transaction.
When a capitalist gains favors from politicians in exchange for patronage another kind of zero sum transfer occurs. The capitalist, or usually some corporate entity, gains special treatment from government and is thereby able to put its competitors at a disadvantage and thus increase its profits. The gain to the crony capitalist is offset by the losses of its competitors incurred when forced to compete not only with its business rival but also the power of the government that is being used to give special privilege to the crony. This is a zero sum transfer because the gain to the crony capitalist is exactly offset by losses to its competitors and to its customers. The latter incur losses in the form of lower profits and higher prices, respectively. Customers are forced to pay more for products and services in the market place than would be the case if the crony capitalist had not been given an advantage over other firms for that business.
Another kind of zero sum transfer takes place when government mandates that we buy ethanol, and tax us to pay subsidies to ethanol producers. The taxpayers are forced to have some of their income redistributed to corn growers, and they get nothing but fouled fuel systems in their cars in exchange. This result is further aggravated by raising the price of wheat when more land is devoted to growing corn to be made into subsidized ethanol. Unlike positive sum transfers, these sorts of zero sum transfers destroy wealth by making a few rich at the expense of the many. This is all done to further an illusory benefit from reduced pollution and renewable energy. These unproductive schemes become entrenched so that even after it is known without doubt that the supposed benefits that were supposed to justify this madness are not really being achieved, the transfers continue apace, year after year.
These zero sum transfers create income inequality, and they do it in the worst way. In the case of the welfare transfer, some of the income of a richer American is redistributed to a poorer American. In the cases of corporate subsidies and crony capitalism, the opposite occurs. Income is redistributed from many poorer Americans to a cabal of richer Americans. Both are accomplished by using the force of government.
It should be noted that the government is much more efficient at redistributing income for poorer to richer than from richer to poorer.
In the welfare scenario the welfare recipients remain in poverty as long as they continue to received welfare.
In the crony capitalism or corporate subsidy scenario the cronies and subsidy drones can increase their wealth enormously. The resulting income inequality is starkly greater in proportion to the welfare created kind. Another word for this arrangement between politicians and business is plutocracy, government by the wealthy.
Positive sum transfers are those accomplished voluntarily between free market actors, each being aware of all relevant and material facts. If Susan sells her used car to Jerry it is because she no longer values that particular car as much as the amount of money it will bring in a sale. Jerry has the money for the purchase and values Susan’s used car more than the money. Assuming the car has no hidden defect known to Susan and not disclosed to Jerry, both have each increased their marginal utility without detriment to the other. The total gains add up to a positive sum more than zero.
The transaction between Susan and Jerry is completely voluntary and without force from the government. New wealth has been created and no income inequality has resulted. Millions of similar transactions occurring daily between wiling buyers and sellers, salaries and wages paid by employers to employees, business profits and net worth increases to both individuals and business, results in new wealth without directly creating income inequality. To the extent income inequality exists from the sum total of voluntary exchange in a free market it is organic, it occurs as a result not of any outside force. It is completely explained by the fact that human beings differ in their goals, aspirations, and natural abilities. There is another factor and it is fate. It is always what it is. Fate cannot be avoided because it is not caused by anything that can be controlled by human will.
Those concerned about income inequality would do better to work against the sort of zero sum transfers that are forced in the economy by government action. The most pernicious forms of income inequality are the result.