Monopoly, Inflation, Cryptocurrency
Thanks Gwen for translation of this article.
You probably played or at least heard of the board game “Monopoly”. In this game, participants throw the dice in order and buy land(cities) of square spaces, and whenever an opponent passes this land you collect tolls. Only when there is a person that becomes broke, there can be a winner. In other words the more land you have, the more likely you are to win the game. To win you have to use your cash efficiently and effectively.
What’s interesting about this game is that every time your token passes a corner called “GO”, you receive a certain amount of cash called “Salary”. The source of cash comes from an institution called “The Bank” which is independent from the participants. The reason it’s independent is because the only way to get money out of the bank is to move the token around the game board and pass “GO” once more. None of the participating players can take out money arbitrarily from the bank. The amount of salary is already determined by the rules. It’s about $200 in game money which is a bit less than the tolls you have to pay when passing a city(Tokyo $320, Paris $300, Madrid $280) Thus, it’s hard to win the game with salary alone. The amount of salary is optimized.
What if we change the rules of the game so that you receive $2,000(not $200) when passing “GO”?
As the salary increased by 100 times you can now pay fees for 100 cities. However, as the winner is created only when the opponent becomes broke, it is almost impossible for the game to end when there is such generous salary. This is because the amount one gains from salary surpasses the money one loses from passing the opponent’s cities. When the salary is increased by 100 times, the only way to ensure the game does not continue forever is to increase the tolls. If the tolls are also increased by 100 times(Paris $300 -> $30,000), the balance of the game is restored and the real impact of the salary is the same as before.
When we change the game’s bank to each country’s “central bank”, the players to “economic subjects”, the game’s money to “fiat money” such as the dollar and the tolls to “inflation”, this game becomes a highly intuitive and explicit depiction of reality.
If the central bank suddenly increases its money supply, the value of it will fall(=inflation) and the market economy will not move according to the rules(the game will not end). However, the market increases the price level to maintain sustainability in such dire situations. Often in history we encounter situations where the price level increases rapidly and largely. The Dangbaekcheon of late Choson dynasty, Zimbabewean dollar, and German mark suffering hyperinflation are examples of it.
The reason for tolls increasing dramatically and the game being paralyzed in the process is because someone arbitrarily raised the fixed salary by 100 times(that’s why the bank in monopoly cannot be tampered with by any player) The same is true for hyperinflation.The reason money’s value falls until it’s almost worthless is because institutions with the right to issue money actively intervened and dramatically increased the supply of money.
What about Bitcoin which has Proof of Work? All matters concerning Bitcoin issuance are set in the source code, and those who agree with this can participate in the agreement process (using one’s computer to participate in computation or mining) If someone disagrees with this rule or creates a false rule, the Bitcoin protocol has an incentive structure that will naturally exclude him or her. The same applies for Proof of Stake. In the case of Ethereum 2.0, 20,000 nodes are already participating with a minimum token stake in the testnet. If participants choose not to follow the majority (supplying more or less Ethereum by not following the pre-specified supply function) they will be excluded.
Cryptocurrency systems which have consensus algorithms for proof of work and proof of stake have predetermined rules, and this is highly similar to Monopoly’s ‘bank’ which cannot be tampered with. You have to take only $200 if you go around one lap. You cannot take $300 or $2,000. However rather in the case of money issued by existing central banks, this rule is arbitrarily changed with.
Central governments are spreading astronomical amounts of money to the market to prevent the economic crisis caused by covid. The purpose, intention, and effectiveness of trying to prevent an economic crisis seems clear but is this the appropriate medium in the long term?
Will this cash and economic system we use in our daily lives be safe and sustainable in the future? Can we just simply enjoy the increased “cash” via various subsidies like the sudden increase of salary in Monopoly? Wouldn’t we suffer from high inflation like the sudden increase of cash? Even if there is no inflation, will the rules in this world be the same as the economic activities we have done before? And in this situation, what assets can guarantee my economic rights? It’s definitely food for thought.
