Learning Economic Concepts Through Monopoly
A fun take at the popular board game of Monopoly and how it can be translated against real life
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Monopoly is a classic board game where players buy, rent, and trade properties to accumulate wealth and bankrupt opponents.
It offers a glimpse into the ruthless world of real estate and finance. The game’s core lessons on investment, strategy, and negotiation translate well into real-world economics. It involves grasping the concept of value, managing assets, making calculated risks, and steering through the dangers of debt. Essentially, it's an overstated yet perceptive emulation of capitalism. Consider this: the equilibrium between opportunity and catastrophe, rivalry and collaboration... it's all present.
So how can we learn from it?
Monopoly serves as an excellent tool to demonstrate various economic principles that apply in real life. Let’s start with a few basic principles:
Supply and Demand: The availability of properties (supply) and the players’ desire to buy them (demand) can affect property prices and rents.
Inflation: If the bank in Monopoly keeps giving out more money, the value of money decreases, leading to higher prices for properties and rents.
Economic Cycles: The game oscillates between periods of rapid property development (booms) and financial strain (busts) as players land on costly properties.
Market Competition: Players compete to buy properties and build monopolies, similar to businesses competing in the real market.
Bankruptcy: When a player runs out of money and can’t pay their debts, they go bankrupt, similar to real-life financial insolvency.
Taxation: The game includes taxes and fees, which can be compared to government taxation in the real economy.
Investment: Players invest in properties and improvements (houses and hotels) to increase their income, similar to real estate investment in the economy.
Opportunity Cost: Every decision, whether it's purchasing property, constructing houses, or saving money, entails evaluating the opportunities you forego by not selecting the alternatives.
Risk Management: Deciding whether to mortgage properties or build hotels involves assessing risks and potential rewards.
Who are the players? You. The average citizen.
Who is the bank? A mix of the 1) The Federal Reserve, and 2) The Government.
The central bank controls the money supply, manages the distribution of funds, and oversees financial transactions.
The government establishes regulations, such as laws and policies, and is responsible for tax collection.
Who are the ‘real’ monopolies? Think of the two largest asset management companies.
Vanguard and BlackRock.
They have massive influence and control over the market.
The Power Shift: What do you Own?
Have you ever pondered the impact that institutions have on the decisions of large corporations and governments? Have you thought about who governs the substantial flow of money in global financial markets? It might be worth considering.
Exploring other economic principles applicable to this game, interest rates in Monopoly, akin to those in the actual economy, would sway players' choices regarding borrowing, investing, and spending, thereby shaping the game's dynamics.
Interest Rates - In Monopoly, mortgaging a property provides cash but prohibits rent collection. To lift the mortgage, one must pay the original amount plus 10% interest, reflecting the borrowing cost. Envision a scenario where players can take loans from the bank for purchasing properties or constructing houses and hotels. A low-interest rate encourages players to invest, boosting the game's economy. On the other hand, a high-interest rate makes loans costly, deterring players from borrowing and decelerating economic growth.
Central Bank’s Role - In the real world, the central bank sets interest rates to influence economic activity. In the Monopoly analogy, the game's bank can modify interest rates to either promote or deter borrowing and spending, akin to the way central banks regulate economic growth and inflation.
Taxes are another part of the economic landscape that can be explained through the game.
Income Tax - Landing on the Income Tax space requires you to pay either $200 or 10% of your total assets, which includes both cash and property. This operates as a common progressive tax system, meaning that the wealthier you are, the more you end up paying if you opt for the 10% choice.
Consumption Tax - Landing on the Luxury Tax space requires a flat payment of $75. This acts like a consumption tax on high-value items or services, similar to how luxury goods are taxed more heavily in real life.
All this tries to achieve one objective - redistribution. Taxes temporarily remove money from circulation, which effectively reduces the money supply. This prevents excessive cash accumulation by any single player, thereby extending the duration of gameplay.
Fundamentally, taxes facilitate the redistribution of wealth, promoting a more equitable economy and mitigating inequality. This mirrors their role in games, where they maintain balance by redistributing funds from the wealthier players. Yet, this challenge is more pronounced in real life, as evidenced by the increasing disparity between the wealthy and the poor.
Now what about bankruptcy, or in essence, an economic crash? An economic crash results in financial instability, reduced spending, and significant challenges for individuals and businesses. Here are some scenarios:
Mass Bankruptcy - Imagine multiple players running out of money and being unable to pay their debts. This leads to bankruptcies, similar to businesses and individuals going bankrupt during an economic crash.
Property Devaluation - The value of properties and rents could plummet, making it difficult for players to generate income. This mirrors the decline in asset values during a real economic crash.
Liquidity Crisis - Players might struggle to sell properties or raise cash, leading to a liquidity crisis. This is akin to financial institutions facing liquidity issues during a crash.
High Unemployment - If players can’t afford to buy properties or build houses and hotels, the game’s economy slows down, similar to high unemployment and reduced economic activity in a real crash.
Now, Monopoly comes with a fixed set of money. Those who own more tend to accumulate even more. Those who deplete their funds may either declare their assets to the bank, which might auction them off, or hand them over to other players (citizens). However, in reality, it's often the players who already possess substantial assets who benefit at the expense of the less fortunate.
Nevertheless, bankruptcy is not the end of real life; there are ways to bounce back. The central bank can assist in this recovery by managing the economy through the adjustment of the money supply available to individuals. This explores our next economic terms:
Quantitative Easing (QE) - In Monopoly, players can earn extra cash through various means, such as passing "GO" or selecting certain cards that offer cash prizes. This extra money allows players to buy more properties, build houses and hotels, and generally stimulate the game’s economy. Similarly, QE involves the central bank injecting more money into the economy to encourage spending and investment.
Repurchase Agreement (Repo) - Imagine that players in Monopoly are short on cash and need extra funds. The central bank can provide you with funds by buying an asset from you with the agreement of a future repayment plus interest. This action temporarily boosts the money supply in the short term by injecting liquidity into financial institutions.
Once the economy has made a substantial recovery, we can shift our focus to additional economic concepts.
Quantitative Tightening (QT) - Now, imagine the bank in Monopoly starts taking money back from the players, either by collecting higher taxes or reducing the amount of money in circulation. This makes it harder for players to buy properties and build, slowing down the game’s economy. Similarly, QT involves the central bank reducing the money supply to control inflation and stabilize the economy over the long-term.
Reverse Repo - Envision a scenario where the central bank possesses properties on the board and opts to sell them to players under an agreement to buy them back later at an increased price. As players acquire these properties, they hand over cash to the bank, which diminishes the circulating money supply. This mechanism bears resemblance to the Federal Reserve's use of reverse repurchase agreements to regulate liquidity in the financial system in the short-term through issuance of government securities like bonds.
And don’t forget folks, the bank never “goes broke.”
The Federal Reserve, that is.