Ben Bernanke, Mervyn King and D Subbarao ought to play more Monopoly. That would teach them a thing or two about the perils of an expansionary monetary policy.
I learnt about the dangers of monetary expansion last weekend, when my daughter challenged me to a game. I nearly lost inside half an hour. I landed on three houses at Oxford Street and had to mortgage King’s Cross and Liverpool station to survive; the end seemed nigh. But then I picked up £200 as I passed Go, then another £150 from Community Chest, and an hour later both my daughter and I were in rude financial health.
In effect, I’d been bailed out by an expansionary monetary policy.
Monopoly has fixed nominal prices (i.e. a hotel room on Pall Mall always costs £625). However the real price of that hotel room is constantly declining. The Bank pumps £200 per player into the economy every round, so money supply is constantly increasing, so “sticky” prices keep getting smaller compared to the money in the game, so, on average, everybody feels richer.
Hotels on Pall Mall and Vine Street are life-threatening early on. As the game develops, the board fills up with houses and hotels, and landing at a hotel on Pall Mall is a mere flea-bite. By now the action has shifted to Mayfair and Park Lane. If the dice roll such that all players survive long enough, even a hotel on Mayfair stops being life-threatening.
From that point on, the players are no longer playing Monopoly, they are playing Comfortable Oligopoly. In this game, the veneer of competition is maintained, but the Bank ensures that nobody actually goes bust, despite the fact that nobody is taking any real risks or making valuable things. There is no natural way of ending this meaningless game. My daughter and I stopped our game only when higher authorities stepped in and decreed that it was lunchtime.
So, policy makers, play a few endless games of Monopoly. Learn that in the short term, monetary expansion can save a few dads from going bust. Learn also that monetary expansion that goes on and on and on robs the world of meaning, until the real economy finally breaks through and produces lunch.
PS: I wonder if the great monetarists Milton Friedman and Robert Lucas suffered through a few endless games of Monopoly?
2 comments:
From Liquan Ren, by email:
I have to give some feedback, mainly because I think your analogy is wrong. It is true that in the Monopoly setting, your logic is correct: monetary policy's only effect is inflationary. But the Monopoly setting had a fundamental flaw: It assumed full employment. That is, you and your daughters take turns to throw the dice, which means you are all employed. The one who has capital in Monopoly couldn't fire another (forbidding the poor to throw the dice). And sometimes you may go to jail, but it is completely exogenous: your luck of not able to throwing the dice is the same as hers. Of course in this setting, monetary policy wouldn't help unemployment since there is no demand shortage induced unemployment to start with in the Monopoly game.
Anyway, I have not played Monopoly for a long time so maybe the rules have changed. I am open to discussion. But just want to share my point of view!
Thanks Liqian.
I actually agree with your interpretation, with full emplyment being a condition that differentiates helpful from destructive monetary expansion. There is a period in a Monopoly game that reflects this condition.
Early on in the game, when there are a lot of un-built properties, an expansionary policy actually helps fill the board up. The wasteful expansion happens much later in the game, when the board is already full. A couple of (playful) real world implications we can take from that analogy:
(1) having the freedom to loosen or tighten policy depending on the condition of the game is essential. The problem with Monopoly is not that Monetary policy is too expansionary, but that it is rigid.
(2) An expansionary policy works when the economy is not at full-employment, and when there are a number of shovel-ready projects around. One nice thing about Monopoly is that entire hotel chains get constructed in a couple of minutes. In real-life, building infrastructure to stimulate growth takes decades. Here in the UK, the coalition's "signature" plans to invest in high speed rail are not going to come to fruition for over twenty years, which makes the analysis much more tricky.
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