The Economics of Winning

By: Dr. M. Ray Perryman
Published in syndication July 26, 2017

The most fundamental thing that occurs in a market economy, no matter how primitive or how sophisticated, is exchange. Centuries ago, beads, shells, shiny pebbles, or deer skins (from which we get the word "buck" as slang for a dollar) were traded for goods or services. Even before that, goods or services were bartered for others to the benefit of both parties. In our modern world, digital impulses have replaced the beads, shells, rocks, and skins of days gone by, -- and even the more recent precious metals, token coins and fiat paper currency in many cases -- but exchange remains the essential element of the economic system.

Every transaction involves some type of bargain in which tangible or intangible things are exchanged. Consumers use cash or credit to purchase products and services from merchants. Workers provide their labor to employers in exchange for compensation. Borrowers pay interest to lenders in exchange for the use of funds through loans. Investors buy shares or equity in companies and receive dividends or other returns. I could go on and on, but you get the picture.

Even with the enormous diversity of types of transactions, they all have one basic thing in common: for these exchanges to be workable and sustainable, both parties must benefit. Consumers aren't forced to spend their money, but they do so for benefits in the form of products or services they need or want and prices they are willing to pay. Few employees would continue to show up and do their jobs if they weren't paid a satisfactory amount to do so. Contrary to rumors, banks do indeed lend money (trillions of dollars of it) in a responsible manner at rates that provide an appropriate return, and borrowers agree to terms that are consistent with needs. Investors provide needed capital resources to companies, who in turn are expected to deploy the funds in a manner that brings appropriate shareholder returns.

Because these exchanges are voluntary, they must be a "win-win." Otherwise, one party or the other will simply choose to opt out the process and it will grind to a halt. If circumstances do not permit that for whatever reason, then the outcomes are inevitably undesirable. Slavery is a primary and unfortunate example from our history.

There are clearly some instances where a win-win is not necessary. Games, meets, matches, and tournaments involve winning and losing, and often lead to one winner. In professional football, for example, that is the Super Bowl Champion, and that is as it should be.

In economies, however, one winner is generally known as an unrestricted monopoly, which is bad. There have been times in history where monopolies were common (such as what Mark Twain famously dubbed "The Gilded Age"), to the detriment of consumers and competition. Volumes of antitrust legislation, regulations, and case law are now in place (at least in the United States) to protect consumers when one company gets too powerful or there is some intrinsic reason that one firm would have a huge advantage (such as the case with electric power distribution, where the necessary wires are extremely expensive to construct and are built, maintained, and are generally owned by one company). Without such protections, consumer choices are more limited and prices tend to be higher.

Just as one winner is not ideal within an industry, neither is it appropriate to think of a single winning economy. Thus, we should not be talking about the economies of the world as if they were involved in a zero-sum game, with a "win" by America implying or requiring a "lose" by all others. The United States doesn't "win" in the global economy by "beating" other countries. It wins by using its competitive advantages and assets (and there are many) to trade with others who do the same. When that happens, all parties win and the process is sustainable and leads to ongoing economic growth. There are centuries of evidence to support this premise. The ideal policies not only benefit the United States, but its trading partners and allies as well. If the scales become too tilted, they will seek out other strategic relationships and, over time, all parties will be worse off. We recently saw a concrete example of this phenomenon when the withdrawal of the United States from the Trans Pacific Partnership was quickly followed by a new agreement between Japan and the European Union.

It is sometimes possible to force a "losing" position on one party for some period of time, but this approach is neither wise nor enduring. Employees who feel they are treated unfairly may stick around for a while, but will leave when an opportunity presents itself. Other countries may bend to the US will for a time if alternatives are few, but they will also be looking for ways to get out of the situation (building relationships with other nations, developing their own industries, or otherwise preparing to be free of a need for a "lose.")

The implications of this basic fact of economic life are not limited to global trade. Whether trade policy, immigration policy, labor-management relations, or any other aspect of business activity, we will never reach sustainable and desirable outcomes through a philosophy of winning at the expense of the other party. If we could just remember this lesson, a lot of economic policy would be much simpler and more effective.

As with most folks, I like winning. In a framework in which exchange is the basis for everything, however, we must remember that winning only works when it cuts both ways. Despite the rhetorical flourishes to the contrary which seem to proliferate these days, it is only when mutual benefits are realized that true progress is sustained.