Thursday, May 17, 2012

Monopoly and Modern Money Theory

This is a brilliant post by J.D. Alt on how the economy is like the game of monopoly. It is kind of long, but really understands how the economy works, particularly from a MMT perspective.

Full Post: Playing Monopolis Monopoly

Why does it seem like there isn’t enough money to pay for the things we really need? The headlines are filled with stories about our nation’s “debt problem” and dire warnings about our impending “bankruptcy.” As an architect who fills his waking hours thinking up all kinds of wonderful things we could be building, I’m alarmed by the idea there isn’t enough money to pay for any of them. Before wasting more time dreaming, I had to find out: Is it really true? Are we really too poor to put America back to work making and building the things we need to maintain a prosperous nation?

Searching for an answer, I discovered a small (but growing) group of economists (see here, here, here, here, here, here) who represent an emerging school of thought known as “modern monetary theory” (MMT). These men and women are valiantly trying to make us all understand a paradigm shift that occurred some forty years ago, when the world abandoned the gold standard. Their key insight shocked me: A sovereign government is never revenue constrained when it is the Monopoly issuer of its own pure fiat currency; it has all the money that’s needed to put its citizens to work building anything—and providing any service—that is desired by the public (provided the real resources are available). Even more remarkable, sovereign “deficits” in the fiat currency are just the accounting record of the surpluses that have been injected into the private economy. Eliminating the sovereign currency deficit by imposing austerity will not make the economy healthier; it will, in effect, bankrupt the citizens!

If this seems to defy logic, stay with me for just a few minutes. I’m going to propose a simple exercise that will help you “see” this reality for yourself. The exercise is simply that everyone join me in a familiar game of Monopoly. By the end of the game, I hope to convince you that MMT is correct
and that we could be doing better, much better – for ourselves and future generations—if we just understood and took ad vantage of our modern monetary system.

Let’s begin.

Playing Monopolis Monopoly

We’ll play by the normal rules (I’ll suggest some added features as we go along) except this time we’ll pay special attention to certain things that are happening. For example, you’ll recall that before the game can begin, one player has to agree to be the “banker” (a tedious task, but someonehas to do it.) But now choosing this person has a special importance: it must be done democratically, with the players voting to determine who will manage the game’s money. We’ll do this little exercise because we want to pay special attention to the fact that the Monopoly “bank” is an entity created by the players themselves for their mutual benefit. In fact, we won’t refer to it as the “bank” anymore, but instead will call it our “currency issuing government” (CIG). In a real sense, we all “own” CIG together, and taking a minute to democratically choose who will manage it heightens our awareness of this key fact.

To reinforce this awareness, the next thing we’ll think about, as we set up the Monopoly board, organize the Deed Cards, shuffle the Chance Cards and choose our tokens, is that what we are really doing is setting up, and getting ready to operate, a miniature nation-state. Let’s even give it a name: Monopolis. We, the players, are the new citizens of Monopolis. We have just established, through democratic consensus, our currency issuing government, and we are now getting ready to operate our economy. That’s what the game is about.

Issuing the Currency

As we get ready to play, we immediately discover an odd dilemma: CIG has all the money! We, the players, are ready to go but we can’t start the game until we have some of CIG’s money. This is an awkward moment, which is dispensed with so quickly in regular Monopoly we hardly notice it. (The “banker” is instructed to make initial cash distributions in the amount of $1500 to each player). If we pay attention, we can see that this moment raises some interesting and crucial questions.

The first question is: are we not playing the game backwards? Isn’t it us, after all, who have to give our money to government before it has any money to spend on anything? Politicians are telling us this all the time: “Your tax dollars are going to pay for this or that.” And, as will become clear, at the state and local level, this is certainly true. But at the federal level—at the level of the sovereign state—the game of Monopoly provides us with our first clue that something is fundamentally different now from what we habitually imagine it to be.

The CIG we’ve created for our nation of Monopolis, in fact, has exactly the same purpose, and exactly the same unique and special power as any government that issues its own sovereign currency: Its purpose is to issue and manage the money we are going to play our game with, and the special power we’ve granted it is the ability to create as much money as necessary for our game to go on as long as we want it to.

Indeed, the rules of Monopoly specifically state that while players can run out of money (in which case they are bankrupt and out of the game) the Monopoly “bank” itself can NEVER run out. In the event the game unfolds in such a way that all the pink and green and blue and gold bills that come in the box are absorbed by the players, the Monopoly rule book instructs the banker to get out a pencil, paper and scissors and create new money as needed. (This is the definition of “fiat money”—money that gains its acceptance simply by decree.)

So it appears we aren’t playing the game backwards after all. The currency does flow from CIG to the players, and when we give some of that money back—in the form of taxes, or fees, or fines— by logic it cannot be because CIG needs that money. In fact, the CIG could take all the money it receives (in taxes, fees or fines) and simply shred it and throw it away: it has no need for it, because when it needs money it simply “issues” the currency. The first time I tried to wrap my thinking around this set of ideas my primordial brain-stem resonated with knee-jerk objections. (I’m not alone. See here)

Indignant as I might get, however, Monopoly forces me to realize that if I want to play the game, I have to accept the fact that the CIG gets to create the money, and I have to use the money it creates. I could insist otherwise, demanding that each player bring to the table his own private stash of gold and silver. In fact, it was just forty years ago that the real world played the game in exactly this way, and the long history associated with that experience is what implanted our brain-stems with Neanderthal beliefs about what money is and how it works. But as will become evident (if we can ever get started) the game proceeds with much greater efficiency and potential for economic growth (prosperity for more and more people) if we use our CIG’s fiat currency, which has an unlimited supply, as opposed to the player’s “gold and silver” which has a limited quantity.

Monopolis Players have Jobs

As I mentioned, “plain-game” Monopoly glosses over all these issues by directing the “banker” to simply make initial cash disbursements of $1500 to each player. In our game of Monopolis Monopoly, however, we want to emphasize that people work for a living. So we begin our game by having our government buy something it needs from each of the players.

For example, I’m a writer-architect, and the government pays me $1500 to write the Monopolis rules. You are a builder, and the government pays you $2500 to build a network of roads that will allow lumber and materials to be transported to the Monopoly board properties. Sister Sue is an administrator, and the government pays her $2000 to create the Balance Sheet we’ll use to keep track of the game’s transactions. So now we’ve each done a bit of work, have modest cash positions, and we’re ready to begin the game.

Finally! We’re ready to roll the dice to see who goes first. As we play, we should begin to notice the fact that there are two different kinds of transactions occurring. One set of transactions takes place among the players themselves: I land on your property and have to pay you rent. Let’s say I land on Vermont Avenue and I have to pay you $50; then you land on Baltic Avenue and have to pay Sister Sue $75; then Sister Sue lands on Charles Street and has to pay me $150. Let’s think of these transactions as happening within something we can call the “private sector”, and update our Balance Sheet to look like this:

There are two things to notice here. First, the transactions within the private sector are a zero-sum game. That is, while the net balance in the account of any one player may change, depending on the play of the game, the total of these net balances will always add up to the total amount of currency in the game. The second thing to notice (if you hadn’t already) is that the total currency assets in the private sector—no matter how they are distributed based on the play of the game—are always equal to the debit account (the “deficit”) of our currency issuing government.

Horizontal and Vertical Transactions

MMT economists refer to the transactions within the private sector as “horizontal” transactions. These include all transactions between households, businesses, corporations and state and local governments. What they call “vertical” transactions are those between the private sector and CIG.

Our government’s initial procurements of services from Me, You and sister Sue were vertical transactions. We can observe another vertical transaction the first time a player passes Go. When this happens, Monopoly stipulates that the “banker” will pay that player $200; it will then continue with the same payment to each player each time they pass Go throughout the game.

We can think of these “Go payments” as being analogous to many different things in the real economy—the federal government paying someone to mow the front lawn of the White House, for example, or sending out a social security check to our grandmother. At this point, it doesn’t really matter. What we do want to notice, however, is what these “vertical” transactions do to the Balance Sheet.

What we can clearly observe is that while the Private Sector continues to be a zero-sum game, the “vertical” transactions generated by the “Go payments” have increased the size of that sum. And, once again, the new total of currency assets in the private sector is exactly equal to the “deficit” debit account of our CIG. (Indeed, how could it be any different?)
The full post is way more extensive and a great read!


  1. Ahh! this is so confusing! I'm used to explaining eternal truths to people. Systems that we did not create. But the question I keep asking myself is, "at what point does the system we create no longer work the way its supposed to?" The answer I guess is when nobody understands it. Nobody seems to understand this MMT including the president and treasury secretary. So if no one believes and treats the system we created doesn't it become something else? What I'm trying to say is at what point should we change the system to something that people can understand instead of trying to convince people that its something that works the opposite of their belief. It seems like a dangerous house of cards we are building.

  2. I'm not really sure what you're saying. I understand this may be difficult and goes against everything you may have heard about it, but just because people believe our economy works a certain way doesn't mean it does work that way. Yes, we 'created' our economy and yes it is continually changing and evolving, but that doesn't mean we can't understand it. MMT is about explaining monetary operations and after doing so it offers prescriptions, but it starts with descriptions.

    So just because the president doesn't understand it, doesn't mean MMT is wrong or a house of cards. MMT isn't saying this is how it should be, it is saying this is how it is. Other ideological view points like CST, say how it should be, but to get there we need to know how the system we created works. No small task, but MMT is attempting to do just that with a focus on money.

    Also, a system can work a certain way with no one understanding it. Why do we have to understand how fire works? It 'works' whether we understand it or not, but understanding it helps us utilize it toward our social goals. Same with money.

    People can understand this system and though you may think it is confusing, it really isn't all that difficult to someone who has studied accounting and economics. The more technical aspects are tough, but I understand all of this and I am no genius! I am trying my best to 'dumb it down' for those who haven't studied accounting or economics like I have, but MMT is being understood more and more. I am hopeful the important people will soon understand this and use it toward our social advantage/good.

    So I don't really understand what you're trying to say. I don't see a house of cards. I see the really important people either not understanding it or refusing to understand it, thus hurting our social good because they try to improve the economy without understanding how it works. They are either really trying and just don't get it, or they do get it and have ulterior motives. I know there are many bankers who get MMT and are using it to their advantage and then perpetuate the myths about money because it helps their pocketbooks.

    The people need to understand this so we can order it toward our social good, rather than not understanding it and letting those who do use it to their advantage.

    Hope this helps!

    1. Listen I understand it makes sense to you, but it doesn't make sense to me or anyone I try to explain it too, (prob the messenger I know.) But lets take the monopoly example. I know analogies are not 100% but how would bonds fit in? Why would the monopoly bank have to get China to buy a trillion dollars that it has to pay back with interest? Why does the Fed have to monetize the debt? Why Does the Fed own much of the public debt instead of the people would in a monopoly game? What does that mean when the government owes money to itself?

      My own analogy goes like this. If the economy operates like an airplane and the only thing people know to drive is a car then we have two options. teach everyone to fly an airplane or convert the economy into something that works like a car. I understand you want to teach everyone to fly that it will go better, I am just afraid that people will take what they know about driving cars and apply it to planes with disastrous results.

  3. Yes, I understand you better now, I think.

    What is happening now is exactly your analogy, I hope its okay if I borrow it. Our Fed bankers and politicians are trying to 'drive' a plane like a car with disastrous results. Half-truths are enabling a moderating economy, but if they fully knew how to fly a plane, we wouldn't be in this mess. I know flying a plane may be difficult for the majority of the people, but believe me, people on Wall St. and in government can get this stuff no problem. It really is mostly basic accounting, they were just taught over and over again how to drive a car, they accepted the fact that our economy must be a car, but I think they are beginning to find out otherwise. Whether our politicians will learn is yet to be seen I think, but this view of money is gaining steam.

    I am doing my best to 'dumb it down' for everyoneso that they can understand it better too! I want everyone to understand how to fly a basic plane. It isn't too hard, I promise!

    Your questions in the first paragraph are spot on, telling me you know more than you may think you know. Since you ask those questions, I will send you some links that you might be interested in that explain your questions more fully.

    I'm not sure how bonds fit in the monopoly analogy. Bonds confuse how money works for sure, and those driving a car really don't understand bonds and interest rates at all. Bonds are for interest rate maintenance, but in truth we don't even need bonds to do that. China is a whole different matter. I will try to explain it better in an upcoming post. The Fed 'owns' much of the debt for interest rate maintenance and because they are hoping it will stimulate the economy. But because they are attempting to 'drive' a plane like a car, they are screwing it up.

    Your final question is brilliant. What does it mean that the government owes money to itself? Pretty absurd right?! This is really where accounting comes in, but technically it can't owe itself money. If it appears that it does, its because of an accounting 'trick', but the overall result is the same, it really doesn't owe itself anything.

    Finally, if we try to make the economy a car, because people can't seem to figure out how to fly a plane, then we will be much like in the gold standard days or like the countries of Europe. I know you may like some things about the gold standard, but the fact is, that it produces a highly volatile economy with financial crises every few years. The Euro is basically a more relaxed gold standard that lasted a little over a decade but is falling apart. So either we learn to fly our plane, or we revert to a car with mechanical failure every few years.

    Hope this helps! Thanks for your questions!