About a month ago, I had written a blog on win-win business models. One of the comments I received on LinkedIn went like this:

Now, as a capitalist and a free market believer I thought this was a grossly misinformed statement. And therefore, I have tried to explain in simple words how trade does not have to be a win-lose (aka Zero sum game).

Let’s say, I have an apple and you have an orange and we both exchange. One way to think would be that we both had a fruit each before and after the transaction. So where is the value created?

But another way to think would be to look for consequences. Say, I take the orange and make juice out of it and sold it on a hot sunny day. My customers would be happy to quench their thirst in exchange for some money. I am happier too because I was able to make a bigger profit selling orange juice instead of just orange. You may have taken the apple and converted it to jam and sold it and made a profit too.

Since, both you and I made profits, we are both going to be motivated to repeat the transaction again. We ask: “why limit ourselves to exchanging one fruit each; why not exchange in larger quantities?” And therefore we invest those profits from the last transaction into expanding our respective capacities. We may also borrow from our respective banks to expand. The banks too gain as in exchange for the loan they would receive the principal and the interest and the accumulation of interest would allow them to write bigger loans in future. We both may hire more people too and therefore create more jobs. And engage suppliers for raw material. Those suppliers are likely to repeat the same transaction too by hiring more people, borrowing money and investing in capacity and so on. Since we are both going to manufacture in large quantities, our cost per unit would come down and therefore we can make profits by lowering the prices. My customers can now have the same orange juice and yours jam at lower prices than before. And hence they are better off too.

So, because of our transactions, a lot of people are getting positively impacted in the society. If we could sum up all the incremental positive impact that we have created, that would be the incremental wealth that we have created. As more such transactions take place in the society, more wealth gets created. If trade was a zero-sum game, then no new wealth would be created in the society. Yet, we know that this is not true. For example India’s GDP has grown from nothing to $2.7 T and is likely to keep growing for some more time as more trade takes place.

So, on the whole, trade in general is a positive sum game for the society.

-Cheers

PS: In one of my blogs on game theory, I had mentioned that buying-selling is a zero sum game. I now realize that I was grossly misinformed too. 

Featured photo by Renate Vanaga on Unsplash