Wednesday, November 30, 2005 - The Progress & Freedom Foundation Blog

Zeroing in on Innovation and Entrepreneurship

Rich Karlgaard makes his nomination for the world's worst disease: thinking about wealth as a zero sum game.

The idea takes its name from the concept that in a two player situation, if A loses out then B must win in equal proportion. Zero sum systems are closed and Newtonian in their logic. Every action has a reaction. Loss and waste do not exist. Likewise, and this is the key to the fallacy of zero sum thinking in economic matters, there is no potential to introduce new ideas, new products, or new resources. With zero sum thinking, it is never possible to make everyone better off. Every gain must have a corresponding loss.

The mathematics behind zero sum thinking are the core of game theory and are very useful in the development of strategies for complex situations. However, zero sum situations must be tightly controlled and although not rare, are relatively less prevalent than non-zero sum games. Why is this so? Markets emerge wherever people get together. These markets serve as institutions where voluntary trade is possible. After a trade - labor for wage, wage for consumption etc. - each participant is better off. How are the participants better off? They are better off because they have more of what they want.

Sure this stuff is a bit dry and abstract. Karlgaard does a nice job of bringing it alive with brief examples from political markets, the environment and media. As a result, he drives home the idea that innovation and entrepreneurship count for a lot in the digital marketplace because they are the sources of new resources. Without innovation or the entrepreneur, we would always be allocating – and arguing over the allocation – of today's resources. Instead, new wealth is created every day and (largely) distributed through markets. Where is this new wealth created? It is found throughout the economy but especially in the information technology based sectors. To borrow just one example from The Digital Economy Fact Book, IT contributed more than 27 percent of the total real GDP growth in 2003.

Link via Newmark's Door.

posted by @ 6:45 AM | Economics , Innovation