FREE NEWSLETTER
MARCH MADNESS IS upon us, with millions of sports fans rooting for their favorite college or university basketball team. For your team to win, all other teams in the tournament must lose—a zero-sum game. We accept this as part of the sport.
What’s that got to do with finance? Household economics can be a similar win-lose tournament. But it’s a zero-sum game that’s rarely acknowledged.
Relative purchasing power. In the U.S., we have some 130 million households that collectively possess roughly $150 trillion in wealth. We hear a lot about macroeconomics and government spending. But ultimately, all wealth is held by individuals.
Arguably, what matters is relative purchasing power, meaning your wealth compared to the rest of society. We compete against each other for the ability to purchase goods and services. Winning in life’s money tournament means you’ve managed to increase your very tiny percentage of national wealth.
Players on your team. Your household may have four players on your money tournament team.
First, all of us participate in the economy as consumers. We must deal with the constant changes in the price of goods and services. Second, we may participate as workers, vying to get a paycheck that keeps up with a growing economy.
Third, we might be stockholders, which means we take on the business credit risk that can drive share prices up and down. Finally, we might also be bondholders, so we’re subject to interest rate risk, with bond prices going up or down as rates change.
Play-by-play coverage. The players on your household team are winning and losing all the time. Indeed, if you listen to the news, you’ll often hear play-by-play commentary that tells you how your players are faring.
For instance, if the latest news indicates economic strength, you might be winning as a worker and a shareholder, while the resulting inflation and higher interest rates might hurt you as a consumer and bondholder.
What if the economy weakens? The roles are reversed. You might be winning as a consumer and bondholder, but suffering as a worker and shareholder.
Similarly, tax law changes and new government spending programs create winners and losers. Are others benefiting from tax cuts or new spending programs? You may find your relative societal position has deteriorated.
Cultural denial. The win-lose, zero-sum nature of sports tournaments is considered normal. But it strikes many folks as unsettling when it’s applied to the economy. With economic issues, it’s more comforting to use terms like “we” or “win-win,” while ignoring the potential losers inherent in any economic change.
How much to play? Once people have satisfied basic needs, they’re free to choose the degree to which they play in the money tournament. Some are willing to put in long hours or take high risk to advance in the tournament. Others prefer less work, less stress and less risk as they try to increase their relative purchasing power, and they might even be willing to see their share of the economy’s bounty shrink. It’s a decision each of us must make.
But whatever we decide, we should think carefully about the composition of our money tournament team. A worker may also want to be a bondholder, thus hedging against the risk of recession and possible layoffs. Meanwhile, a retiree may also want to be a stockholder, thereby hedging against the risk of inflation.
Tom Welsh is a certified management accountant in Raleigh, North Carolina. He has been the chief financial officer at several manufacturing companies and is founder of Value Point Accounting, where he helps businesses manage product and customer profitability. Tom can be reached at tomgwelsh@valuepointaccounting.com. Check out his earlier articles.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
I think I get what you’re saying. Money itself has no intrinsic value, it’s a medium of exchange. The actual goods and services available in our economy (from an old word meaning household–the world in which we live, if you will) are redistributed from willing sellers to willing buyers at a negotiated price, so in some sense we are in a zero sum game when we buy and sell in our economy at any given moment.
That’s easy to forget when we value things in dollars, which are themselves fluctuating in value all the time as well.
I’m sorry, Tom, but unless I’m completely missing the point of the strained sporting metaphor, I must say that I think you’ve missed a lot of shots here.
All wealth is certainly not held by individuals — government and corporate entities hold a great deal of it.
I do not believe that the acquisition of purchasing power is a competitive sport, or that our personal economics constitute a zero-sum game.
Where I think the metaphor falls short is that it ignores that fact that a zero sum game assumes a fixed economy. When our economy is growing new jobs are created that are wins for both the hirees and those whose profits are increased by the additional labor. This can even be related to the March Madness by noting that for many years the tournament was limited to 32 teams. As college enrollment expanded the number of basketball leagues increased as more schools offered basketball scholarships and fielded competitive teams. As a result, the tournament field was increased to 68 teams. While the zero sum game rule obviously still holds among the field of 68, the number of teams that win the opportunity to participate in March Madness has more than doubled.
Ultimately government and corporations are individuals, they have no existence of their own.