This post explains why wealth is not a zero sum game and why we should celebrate each others’ financial success.
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Over the past few years, I’ve noticed some hostility in the world of personal finance and investing. Some of it’s been directed towards me, since I’m very open about my finances. (I do this to show people what is possible to attain with a good income and smart investing.)
A lot of my family’s financial growth has come as a result of real estate investing, and a lot of the hate has been directed towards this part of my overall portfolio. The ethics of real estate investing are debatable, but today I want to address the overall concept of wealth.
Wealthy people are often painted as evil or undeserving of their wealth. This is certainly true for some wealthy people, but certainly not all of them. A lot of this negativity is just good old fashioned jealousy, but I think there’s also something else going on here.
To figure out this mess, let’s talk about how new wealth is generated. Let’s discuss how our market economy really works, and the magic of business. But first, why all the hate?
I believe the origin of this hate stems from one basic misunderstanding: Many people are under the mistaken assumption that wealth is a zero sum game.
Zero Sum games
In the year 1832, senator William Marcy was criticizing American politicians and said “They see nothing wrong in the rule that to the victor belongs the spoils of victory.” This is the origin of the phrase, “To the victor go the spoils,” which applies to situations where one person or team gets all the upside when they win.
Many games are “winner take all” situations, where there is one winning and one losing team. The Superbowl, like many championship games, yields one winner with no tie possible. Similarly, in card games like poker, there’s a clear winner at the end.
A “zero sum game” is the geekified, formal term used in game theory for contests like this, where the winner’s gain is equivalent to the loser’s loss.
We can explain this economic theory with a simple example:
- John has 10 apples, and is in a room with Sandy.
- For Sandy to walk out of the room with 7 apples, they have to be taken from John.
- He only gets to walk out of the room with 3 apples after Sandy is done with him.
- For Sandy to “win” this game of apples, John must “lose.
Let’s start tying all of this together.
Wealth is not a zero sum game
When it comes to businesses, some people only see the simplistic transaction of sales and extrapolate this to the entire concept of wealth building. For example, you might think, “If I pay $10 for this Big Mac meal, McDonald’s is getting $10 dollars richer. If only they charged less for this meal, I’d have more money and McDonald’s would have less money.”
When it comes to general wealth, the simple way to perceive this is to think: “Since that girl is rich, her success is coming at my expense.” You can see how this thinking might create a lot of hostility, especially in a society where social media encourages people to show off success like never before.
But here’s the truth about business and wealth that belies this simplistic way of thinking: Business is magic. It has the power to create money and wealth out of thin air.
Below, I’ll explain how this is possible, and how this fact makes it obvious that wealth is not a zero sum game.
The magic of business
Let’s dive into human history to help explain the magic of business. Before business existed, it was only “eat what you kill.”
Quite literally in hunter-gatherer societies, you ate what you killed that day. If you didn’t kill a deer, you might go hungry. Your gain was that deer’s loss.
But as soon as human civilization got to a point where people were trading goods or working with or for each other, we gained the magical ability to defy the laws of physics. Through effort and intelligence, people could all of a sudden create situations where value could be created out of thin air.
This magic became more common after the industrial revolution, but human beings have been using this special economic power for thousands of years. The magic is in our ability to create value add businesses.
Value add businesses
Most businesses create much more value for society than meets the eye. This is why the government encourages businesses with tax incentives. It’s not just some evil plot by the government to make the rich richer. (I really believe this.) It’s to incentivize people like you and me to create business and benefit our society as a whole.
Read more: Tax benefits | Why I’m investing in real estate over stocks
Value add businesses are the secret sauce that allows wealth creation to be a net gain for the average person, not just for privileged groups of insiders.
Let’s go back to that example above with that Big Mac meal. There are endless steps along the way that your purchase of that meal is creating value for our society via the McDonald’s business:
- Buying raw materials for the sandwich supports farmers and ranchers.
- Transporting all the materials supports truckers and the railroad industry.
- Packaging and selling the sandwich supports McDonald’s workers.
- Creating the advertising supports the advertising and media industry.
- Building the McDonald’s restaurants supports the construction industry.
- Buying the meal (instead of cooking) frees up time for you to do other things.
At each point in this chain of events, people are gaining wealth from the McDonald’s corporation. The economic activity necessary to create that Big Mac is creating tons of economic growth for the country. Those economic benefits translate into a higher quality of life for people working in the supporting industries.
Your purchase is worth much more than the $10 that comes out of your pocket. For our society, this is very much a positive sum game.
As for the magic, here it is: All of the infrastructure and systems behind modern businesses create companies with market values much greater than the sum of its parts. When Ray Croc put together the McDonald’s corporation, he created money out of thin air.
I can already hear people grabbing pitchforks, so here’s the disclaimer. Obviously this assumes a free society where people are being fairly compensated at each point along this chain of events.
Wealth can be zero sum, but why?
When it comes to money, it certainly can be zero sum. Here are a couple of examples of zero-sum games that are essentially bad businesses in disguise:
- A bully in third grade beats up your kid and takes their lunch money. The bully just got richer, and your son’s going hungry that day.
- A man with a gun walks around and accosts people, taking their money.
These are both zero sum businesses, but you could imagine that this type of business model won’t survive over the long term. In the real world, the local community will learn to avoid these unlawful “businesses”, or law enforcement (or a good vice principal) will shut them down.
This will probably never happen to McDonald’s, because it’s such a beloved company. It adds value to society by providing great benefits and entry level jobs, as well as an awesome product that delights billions of people worldwide. Employee satisfaction at McDonald’s is 73% for a reason.
What about the stock market?
A lot of people cite the United States stock market as an example of a marketplace where there are only winners and losers. This might be true at a simplistic level if you’re a stock trader. For you to make a big profit, the only way to do this is to turn your stock into cash by selling it. By doing so, you’re saying that the stock isn’t worth holding onto, and you’re looking for some chump who disagrees with you and will buy the stock.
To an certain extent, I can understand this characterization. But I think this also ignores the beauty of the free market and is too focused on the short term. One person’s gains aren’t necessarily another person’s losses over time. There’s a good chance that over time, the buyer of your stocks will make money in the long run (especially if they’re using index funds to buy the stock).
Also, when you buy a stock, you aren’t just investing in your own wealth. You’re also supporting a company by giving them the ability to raise money and use that money for financial gains for investors, expansion, or further investment. Again, it’s a value-add action.
What about taxes?
I complain about taxes a lot, especially after living in California for 12 years. As I mentioned recently, we paid over $50k of state income taxes last year. (Read more: The Amazing Power of Geoarbitrage)
But I can readily admit that taxes aren’t just some tactic of California liberals to annoy the wealthy. They play a big role in making sure the overall distribution of resources remains equitable. Taxes pay for a lot of social programs that try to blunt the negative impacts of poverty. This reduces income inequality. As you might know, countries with the highest levels of income inequality have unique problems as a result of this situation.
Wealthy people ironically play a large role in reducing income inequality by paying a lot of taxes that support social support programs.
In fact, data shows that the rich pay the majority of income tax revenue in our country. The progressive tax system ensures that the more you earn, the more you pay. There are obviously ways to get around paying income taxes. I’ve enjoyed the short term rental business tax incentive, but again this is another example of a tax incentive that exists to encourage businesses.
You don’t have to love wealthy people, but I wouldn’t automatically assume that they became wealthy at your expense. Unless we are talking about pure inherited wealth, financially successful people are likely to have contributed greatly to the economic development of our country. The contribution might have come via the magic of businesses, by supporting the stock market, or simply paying taxes.
If you’ve become wealthy, I’m here to absolve you of some of your guilt. (Use charitable giving for the rest of your guilt!)
After all, wealth is not a zero sum game.
Do you agree with me, or am I way off the mark here? Let me know in the comments below. And please subscribe to my newsletter so you don’t miss another post!
Taking housing units off the market to rent out on AirBNB is not a noble pursuit, no matter how much hand waving and contorting. Wannabe AirBNB tycoons are the scum of the Earth and make life worse for the vast majority of people who just want to earn an honest living and now can’t afford to put a roof over their children. The funny part is that this has been a crowded trade over the last 3 years as every “real estate investor” is convinced they are endowed with some special genius insight that will allow them to retire early and live off the hard work of others. But you have never invested in a recessionary environment or during the reign of a hawkish Fed. We love watching naive landlords flounder as they bleed cash and people stop renting shitty overpriced AirBNBs as supply turns to glut and demand plummets. The next few years will be fun.
Thank you for providing a great illustration of the vitriol out there!
Assuming that this is a real comment, I do have a response. The next few years will certainly pass some of these AirBNBs back to the open market if this method of investing loses popularity and hits more regulation. But when has it ever worked to tell people not to invest into a profitable venture on moral grounds? It’s a losing proposition to debate the morality anyway, since people tend to only see their side of the argument. I think it’s much better to incentivize increasing the housing supply. There’s been chronic underbuilding of homes ever since the Great Recession.
I’ve always thought that luxury Airbnb investing is higher risk, which is why the majority of my portfolio is in long term rentals.
Who exactly is the “we” in your comment, by the way?
Nice response and agreed. I think the original comment was from someone that has not taken a financial risk of any sort to understand wealthy people diversify so if something crashes we don’t panic we have alternative sources of income including our work to remain productive and assets increasing, but you have to take a risk and then reinvest those profits as we know the tree doesn’t grow forever but you must keep planting.
I like that analogy, thanks! I definitely need to “keep planting.” I might need to do a bit of fertilizing as well to get everything optimized heading into the fall.
Ha dude awesome article never thought Big Macs had such a great effect on our economy! I love Big Macs! Unfortunately my future heart attack likely will stimulate the healthcare economy, but I guess I have to keep paying my gym membership to prevent the heart attack that might occur after eating all those big Macs I paid for!
here’s to the big Mac supporting American economy! 😄
Thanks Rikki! Big Macs are my favorite McDonald’s sandwich, and my go to meal at midnight when I’m on call. They’re probably a big reason why I need to sign up for an exercise plan. Glad you love them too! 🙂
I am really heavy in real estate because it’s such a wonderful investment over the long run. But I can’t really argue against the proposition that, at the moment, we are in a zero-sum game-like environment. Labor and material costs are still through the roof. There is a historic level of supply/demand mismatch. So every house I take off the market, is one fewer house for a family that’s actually looking to buy a starter home. When I first started investing in real estate (around 2012), I was comfortable with the arrangement because in the markets I was investing, it was feasible for my tenants to save 10% of their paychecks for 1-2 years and buy an equivalent home with an FHA loan. The fact that they didn’t, I could feasibly tell myself, was their choice. Now those properties have doubled or tripled in value, and the “market rent” my management company wants to charge is 50 – 100% higher. I try not to raise rates on existing tenants, but wages have lagged inflation for so long, I suspect it will take them much longer to save up. And if they are stuck paying the market rent, they won’t be able to save anything. I am an investor with similar goals as you, and as an investor I will chase good investments and generally make self-interested decisions. But I can’t pretend what I do isn’t harmful to others, at least in this moment in time.
Maybe as the above commenter notes, we are in for a rude awakening. The supply-demand curve indicates otherwise, and the average FICO score of outstanding mortgage loan borrowers has never been higher, but sure we can all indulge the fantasy. But if you learned anything from the last housing crash, it’s that the middle class and working class families lost their jobs and their homes, and the cash rich investors (both institutional and retail, like the DD and myself) came in to grab all the good deals. So wishing for a crash just so you can enjoy some good old fashioned schadenfreude at the expense of naive investors seems… short sighted.
LMAO… this is classic midwit 110 IQ analysis. Imagine thinking this will look anything like 2008. Different Fed, different USD, different CPI, and at the terminus of a long term debt cycle. Imagine thinking DD is “cash rich” when he is over leveraged with multiple 10% down mortgages, multiple HELOCs, and almost overdrafted the checking account. This is nothing like 2008. This is more like the 1970s with a sprinkle of Weimar 1910s around the world. The govt will not be on the side of the landlords, and leverage will get wiped out. Good luck.
I guess we agree on one thing – this is nothing like 2008.
People like DD are “cash rich” because they have exceptionally high paying, recession proof jobs, where they can always grind more to make more. And the loans tend to be non-recourse and the properties are segregated in asset protection vehicles. Sorry to say, my own profession is not recession proof, but I’m more conservative for that reason.
I have made my choices and I live with them. You seem to have made yours as well. Feel free to pick up the pieces when we get wiped out. Join the scum class. The water’s just fine.
Imagine going to medical school, which truly is a zero sum game in that you took a spot away from someone else, just to realize a decade into practice that patient care is too onerous and instead you are going to focus on blogging, making tik tok videos, publishing ebooks, and investing in real estate. Anything to make a quick buck and retire from these annoying patients. Instead of spending your time improving your practice and reading medical literature, you spend your time painting a house that you will rent out on AirBNB and then blogging about it. Imagine the medical student version of yourself seeing this version of yourself. These are symptoms of a degenerating society. No longer does the selfless, disciplined surgeon of the past exist. We now have surgeons spending all their free time researching tax loopholes and maximizing the leverage they can take from any willing fintech company to speculate on homes that used to exist to provide shelter for families. F*cking embarrassing and shameful.
I love the discourse, but let’s try and keep profanity out of the comments, please. The visceral reaction I sometimes encounter when it’s revealed that I have passions outside of medicine is so fascinating to me. This “stay in your lane” mentality is so 20th century, in my opinion. I love that we now have an exciting wave of physician entrepreneurs with online communities that welcome diversification of talents and interests.
Do you also feel this negatively towards Dr. Glaucomflecken?
And if you read my posts, it’s not the patients who are annoying. It’s things like uncompensated overnight call and the demands of the
medical billing systemelectronic medical record system. I have a lot of patients that I really love and am sad to leave behind here in SoCal. And there are a lot of patients in Memphis that I look forward to serving as well.
See here for a part of my practice that I don’t love, though:
The Comedy of “Home Call”
Everyone is entitled to one’s own opinion, but a commentary (especially on someone else’s blog) should not spew degrading personal attacks.
Practicing medicine is not what it was decades ago.
1) Patients are now “customers” that have to have “satisfaction.” Sometimes they scream and threaten to complain to admin or write bad online reviews, if you don’t do elective procedures and bill insurance as medically necessary or discourage them from seeking risky but unproven treatments. Not all patients are like this, of course, but there are enough, and that can ruin your days quickly.
2) How about all the regulatory rigmarole that has doctors and their staff waste time clicking away for every patient visit? And the criteria for meeting whatever is considered quality practice keeps changing. How do you like the charade around prior authorizations now required for most mundane prescriptions? Unreasonable claim denials that will eventually get approved, but only if a doctor gets on phone with a forever hold to get a live insurance doctor for discussion?
3)Growing Medicare Advantage members (insurance companies entice seniors with TV ads to make the switch but patients’ doctor/hospital network and treatment options will shrink) that make billions for insurance companies but reduce doctor payments at the face of ever increasing overhead costs?
4)How about being held hostage to increasing EHR costs? Once they have you as a client, EHR companies will keep increasing fees, because surely you’re not going to stop running your practice to switch to yet another EHR. EHRs were supposed to be able to communicate to each other, so we don’t have to duplicate lab tests and prescriptions, but did that happen? No, EHR companies don’t want that and they’re protecting their own interests.
5)How about these “selfless” doctors who practiced in the heydays of medicine and made a ton of money but are now selling their practices to private equity and deny junior associates a chance to become the owners of the practice?
6)How about disappearing staff – some quit to run their own artistic nail painting business; some nurse practitioners are HIRING retired (previously selfless, I’m sure) doctors as “supervisors” while they open their own Botox clinics.
If doctors are making sure they have a back-up plan, maybe we shouldn’t blame them. Instead, we need to try to figure out how to make the system better for everyone – doctors and patients.
I see a degenerating society in almost every field, not just medicine. Companies nowadays only look after their executives and major shareholders. It’s not just in the corporate world. There is noticeable decline in the quality of journalism. There is decline in the quality of students everywhere. For-profit universities are taking advantage of students and federal government.
There’s a lot of problem in real estate, but where can we or should we cast the blame? Why do we build $240 million houses? Why do we have so many luxury condo buildings and houses and not enough affordable houses? If a small time investor like DD doesn’t but vacation homes to rent out, then will middle class folks move to vacation resorts to buy them to live there? How about rental apartments – will transient college or grad students, training residents and fellows want to buy apartments near hospitals for a few years?
This is pure nihilism and degenerate apologia. God help us all if this is the medical field of the future.
I am genuinely interested to know what you are doing to change the system.
Saw a tweet recently. Every McDonald’s creates jobs for 10 cardiologists, 10 dentists, 10 dieticians, not to mention gyms as noted in another comment. Ethics aside it’s the value add business par excellence
I don’t doubt this. They’ve honed their food to be incredibly addictive!