Tuesday, July 15, 2014



The essence of free markets is good-good exchanges, or what I like to think of as seduction. Exchanges of this sort are featured by the proposition: “I’ll do something good for you if you do something good for me.” Game theorists recognize this as a positive-sum game—a transaction where both parties, in their own estimation, are better off as a result. When I go to my grocer and offer him the following proposition: If you do something good for me—give me that gallon of milk—I’ll do something good for you—give you three dollars. As a result, I am better off because I valued the milk more than I valued the three dollars and he is better off because he valued the three dollars more than he valued the gallon of milk.

Of course there’s another type of exchange not typically, voluntarily entered into, namely good-bad exchanges, or what we might call rape. An example of that kind of exchange would be where I approached my grocer with a pistol, telling him that if he didn’t do something good for me (give me that gallon of milk) I’d do something bad to him: blow his brains out. Clearly, I would be better off, but he would be worse off. Game theorists call that a zero-sum game. That’s the case where in order for one person to be better off, of necessity the other must be worse off. Zero-sum games are transactions mostly initiated by thieves and governments, both are involved in what is euphemistically called income redistribution. The only difference is one does it under the color of the law and the other doesn’t.


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