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B. Venkatesh

MY FRIEND is a disappointed man. The index options he bought expired worthless on May 26. The amount he lost is the gain for the person who sold the options. Financial economists refer to such situations as zero-sum or constant-sum game. Is the economy a zero-sum game?

Consider this. You set up a factory in your hometown to manufacture bicycles. You offer competitive prices because of production efficiency. You get rich, but so do your employees and suppliers. In fact, your suppliers are so pleased with you that they set up shop adjacent to your factory.

Business activity improves the income levels in your hometown. The increase in your wealth is not at the expense of some other persons. Of course, every successful business will have some casualty. Perhaps, your competitor, who is not so cost effective, may go out of business. That is the cost but the gains from your business are higher. Your business is, hence, a positive-sum game, not a zero-sum game.

It can sometimes become a negative-sum game! Suppose you set up another factory. Labour is difficult to find. You are, hence, forced to offer higher wages to the workers at the new factory.

Naturally, the existing employees will agitate. Suppose they go on strike for a week. What are the costs? The loss in production for a week leads to lower business revenue. You will obviously be furious and decide to cut the workers' wages for those days. So, you and your employees lose in this situation. Who wins? Your competitor may wean away some business because you cannot meet deadlines. But the total loss from the strike is higher than the gains. Of course, such situations are exceptions. In general, the economy is not a zero-sum game.

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