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Thursday
Nov102011

The Pie

The notion of The Pie has been very helpful to me on various occasions. I have encountered it in the theory of negotiations as well as in a broader economic context. I believe that the notion of The Pie is the single most important concept to understand when capitalism works and when it doesn't.

Zero-sum and negative-sum games

The Pie is defined by the overall value present within the context of a game — the game being a market, a competitive situation, or even a negotiating table. Should this collective value remain more or less the same during the course of the game, the pie is fixed. Should the overall value decline during the course of the game, the pie is shrinking.

A fixed pie corresponds to a zero-sum game and a shrinking pie to a negative-sum game. These games are dangerous ones to be in. Think of a poker table where chips get taken out of the game on a continuous basis — you would have to win rather quickly just to get your own stake back.

I believe that zero-sum and negative-sum games are precisely the economic situations where capitalism fails to deliver on its promise, where it fails to do its magic. Negative-sum games and creative destruction don't go well together — because there is little creation and lots of destruction.

In a negative-sum game, players tend to focus on capturing value — the value that is left — instead of innovating and creating new value. Because the rich get richer, such games result in massive inequalities and often stagnant and strongly monopolized markets.

Positive-sum games

Positive-sum games correspond to an expanding pie. An expanding pie corresponds to markets — and, in more general terms, economic situations — where value is being created constantly along the way. Positive-sum games are good games to be in and capitalism works best with them.

Think of capitalism as a catalyst for these kinds of games. It generates strong incentives for a diverse range of players to innovate and create value, and thus accelerates the overall process of expanding The Pie. In positive-sum games, every participant can be a winner — a fact that is incredibly important to understand.

I believe that positive-sum games are the ones where technology generates the most leverage. Because technology allows more value to be created with less resources, inventors of technology — if we neglect intellectual property for a moment — magically expand the pie.

The Pie and entrepreneurship

Good entrepreneurs don't play negative-sum games. They try to expand The Pie. They constantly innovate and develop new technology to increase the amount of value available to all. When markets turn negative-sum, they leave and look for the next opportunity to create — instead of capture — value.

Negative-sum games typically yield lose-lose situations — no matter what happens, it's bad for everybody. Zero-sum games generate win-lose situations — not much better. Only positive-sum games allow for win-win situations, the kinds of situations a smart entrepreneur is after.

I know that the concept of The Pie is simple — almost too simple to take it seriously. Nevertheless, it has been an invaluable guide to help me decide which ventures to embark upon rather light-heartedly and which ones to approach with caution.

On a side note: The naive or unprepared mind rarely thinks about The Pie when judging the outcome of a game. The movie "The Social Network", for instance, portrays the founding days of Facebook as a zero-sum game, with an evil winner (Zuckerberg) and a poor loser (Eduardo Saverin). In reality, everybody involved with that company has benefited tremendously. Eduardo Saverin today has an approximate net worth of US$ 2.75 billion — not exactly the definition of a loser last time I checked.

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