The Landlord’s Game

monopoly

“Buy land – they aren’t making it anymore.”

Mark Twain

You know how Monopoly games never end? A group of academicians wanted to know why. Here’s an article about them, and here’s their write-up. Their conclusion? Statistically, a game of Monopoly played casually (without strategy) could in fact go on forever.

I once played a game that actually ended. I had a strategy:  buy everything you land on, build houses and hotels as fast as possible, and always mortgage everything to the hilt to finance acquisition and expansion. I got down to my last five dollars before I bankrupted everybody else. It only took a couple hours. Okay, so the other players were my kids. Some example I am. Whatever economic lessons we might have gained from the experience, they certainly weren’t what the game’s creator had in mind.

While Andrew Carnegie and friends were getting rich building American infrastructure, industry, and institutions, American society was experiencing a clash between the new rich and those still living in poverty. In 1879, economist Henry George proposed a resolution in his book Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth: The Remedy.

“Travelling around America in the 1870s, George had witnessed persistent destitution amid growing wealth, and he believed it was largely the inequity of land ownership that bound these two forces – poverty and progress – together. So instead of following Twain by encouraging his fellow citizens to buy land, he called on the state to tax it. On what grounds? Because much of land’s value comes not from what is built on the plot but from nature’s gift of water or minerals that might lie beneath its surface, or from the communally created value of its surroundings: nearby roads and railways; a thriving economy, a safe neighborhood; good local schools and hospitals. And he argued that the tax receipts should be invested on behalf of all.”

From “Monopoly Was Invented To Demonstrate The Evils Of Capitalism,by new economist Kate Raworth.[1]

George’s book eventually reached the hands of Elizabeth Magie, the daughter of newspaperman James Magie and a social change rabble-rouser in her own right. Influenced by her father’s politics and Henry George’s vision, she created The Landlord’s Game in 1904 and gave it two sets of rules, intending for it to be an economic learning experience. Again quoting from Ms. Raworth’s article:

“Under the ‘Prosperity’ set of rules, every player gained each time someone acquired a new property (designed to reflect George’s policy of taxing the value of land), and the game was won (by all!) when the player who had started out with the least money had doubled it. Under the ‘Monopolist’ set of rules, in contrast, players got ahead by acquiring properties and collecting rent from all those who were unfortunate enough to land there – and whoever managed to bankrupt the rest emerged as the sole winner (sound a little familiar?).

“The purpose of the dual sets of rules, said Magie, was for players to experience a ‘practical demonstration of the present system of land grabbing with all its usual outcomes and consequences’ and hence to understand how different approaches to property ownership can lead to vastly different social outcomes.

“The game was soon a hit among Left-wing intellectuals, on college campuses including the Wharton School, Harvard and Columbia, and also among Quaker communities, some of which modified the rules and redrew the board with street names from Atlantic City. Among the players of this Quaker adaptation was an unemployed man called Charles Darrow, who later sold such a modified version to the games company Parker Brothers as his own.

“Once the game’s true origins came to light, Parker Brothers bought up Magie’s patent, but then re-launched the board game simply as Monopoly, and provided the eager public with just one set of rules: those that celebrate the triumph of one over all. Worse, they marketed it along with the claim that the game’s inventor was Darrow, who they said had dreamed it up in the 1930s, sold it to Parker Brothers, and become a millionaire. It was a rags-to-riches fabrication that ironically exemplified Monopoly’s implicit values: chase wealth and crush your opponents if you want to come out on top.”

“Chase wealth and crush your opponents” — that was my winning Monopoly strategy. It requires a shift away from the labor economy — selling things workers make or services they provide — to the rentier economy — owning assets you can charge other people to access and use. The scarcer the assets, the more you can charge. Scarcity can be natural, as is the case with land, or it can be artificial, the result of the kind of “regressive regulation” we looked at last time, that limits access to capital markets, protects intellectual property, bars entry to the professions, and concentrates high-end land development through zoning and land use restrictions.

Artificial scarcity can also be the result of cultural belief systems –such as those that underlie the kind of stuff that shows up in your LinkedIn and Facebook feeds:  “7 Ways to Get Rich in Rental Real Estate” or “How to Create a Passive Income From Book Sales and Webinars.” In fact, it seems our brains are so habitually immersed in Monopoly thinking that proposals such as Henry George’s land ownership  tax — or its current equivalents such as superstar economist Thomas Piketty’s wealth tax, Harvard law and ethics professor Lawrence Lessig’s notions of a creative commons, or the widely-studied and broadly-endorsed “universal basic income” — are generally tossed off as hopelessly idealistic and out of touch.

More to come.

[1] Kate Raworth holds positions at both Oxford and Cambridge. We previously looked at her book Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist  (2017).

Monopoly: The Ultimate in Upward Mobility

monopoly

The Horatio Alger rags-to-riches ideal was born in the Gilded Age of the Robber Barons. A century and a half later, it remains an enduring icon of the American Dream and still makes for inspiring stump speeches.

If only it were true.

Truth is, something more powerful than pluck fueled the Robber Barons, and continues to fuel today’s Meristocrats and Robber Nerds. Yes, things like ingenuity, vision, determination, and hard work have had a lot to do with it, both historically and currently, but the essential element for creating mega-companies (sometimes whole new industries) and staggering personal wealth has been none other than government policy, which by definition favors selected economic activities over others.

A trio of distinguished economics and political science professors[1] provide one of the more provocative summaries of this economic reality in their book Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History (2009). Harvard sociologist Steven Pinker described it this way: [2]

“The economists Douglass North, John Wallis, and Barry Weingast argue that the most natural way for states to function, both in history and in many parts of the world today, is for elites to agree not to plunder and kill each other, in exchange for which they are awarded a fief, franchise, charter, monopoly, turf, or patronage network that allows them to control some sector of the economy and live off the rents (in the economist’s sense of income extracted from exclusive access to a resource).”

Medici

This practice is sometimes called the “Medici Cycle,” after the famous Florentines:

“In Towards a Political Theory of the Firm, [ Luigi Zingales of the University of Chicago Booth School of Business] theorizes that firms use their economic power to acquire political power. They then apply that political power to achieve greater economic gains, which in turn helps them acquire ever more political power. It’s a cycle Zingales likens to the Medici dynasty of 15th-century Florence, Italy. The Medicis leveraged their lending relationships with the Roman Catholic Church into considerable political influence in Renaissance Europe.”[3]

As an example, consider how Andrew Carnegie made his money:

“The competitive strategy of the steelmakers in 1875 was simple:  Collude and fix prices…. Carnegie was invited to join the newly formed Bessemer Steel Association. The association was a cartel, and in the days before antitrust laws, completely legal. Rather than compete tooth and nail for every bit of railroad business, it made far more sense for the steelmakers to establish quotas to limit the total supply in the market. By agreement, each firm was to produce its quota and sell into the market at agreed-upon prices.” [4]

The upside is that Medici Cycle government policies have supported all kinds of timely innovation and inventions, social and cultural trends, and quality of life improvements. The downside is what happens when monopolistic are allowed to go unchecked for too long. Researching this article, I came across several recent expressions of concern that this is happening on many levels in the current U.S. economy:

1)         In their book  The Captured Economy:  How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality (2017), Brink Lindsey and Steven M. Teles[5] describe their concern with  “regressive regulation” — monopoly-perpetuating policies — especially these four types:

  • “subsidies for financial institutions that lead to too much risk-taking in both borrowing and lending;
  • excessive monopoly privileges granted under copyright and patent law;
  • the protection of incumbent service providers under occupational licensing; and
  • artificial housing scarcity created by land-use regulations.”

2)         Nobel Laureate Joseph Stiglitz and the Roosevelt Institute issued a 2015 report that lists numerous government policies that support or deter monopoly. You can download the full report here or read a Business Insider article published earlier this month that serves as a sort of executive summary of the report, and also brought it up to date:  Nobel Prize-Winning Economist Joseph Stiglitz Says The US Has A Major Monopoly Problem.

3)         This recent article from The Institute For New Economic Thinking describes the derivative problem of “monopsony”:

“Center stage in the meeting of the Federal Research Bank of Kansas City’s annual symposium in Jackson, Wyoming this August was a discussion of the repercussions of having a small number of companies dominating the labor markets where they hire workers–what economists call ‘monopsony.’”

In a nutshell, the problem with monopsony is that, “When a small group of companies can dominate a labor market, wages—and workers—suffer.”

4)         Finally, state-supported monopoly is also evident in the current “rentier economy,” which, as the Steven Pinker quote above indicates, is the result of government policy that grants “exclusive access to a resource.” This is another instance of “regressive regulation.”

We’ll be looking more at the rentier economy in the weeks to come. But first, next week we’ll find out about a surprising twist in the original version of the Monopoly board game. In the meantime, you might enjoy my latest LinkedIn Pulse article The Fame Monster: Rockstars And Rockstar Entrepreneurs.

[1] Douglass C. North is co-recipient of the 1993 Nobel Memorial Prize in Economic Science. He is Spencer T. Olin Professor in Arts and Sciences at Washington University, St Louis and Bartlett Burnap Senior Fellow at the Hoover Institution at Stanford University. Barry R. Weingast is Ward C. Krebs Family Professor in the Department of Political Science and a Senior Fellow at the Hoover Institution at Stanford University. John Joseph Wallis is Professor of Economics at the University of Maryland and a research associate at the National Bureau of Economic Research.

[2] As described in Enlightenment Now:  The Case For Reason, Science, Humanism, and Progress, Steven Pinker (2018).

[3] From this post on the CFA Institute’s Enterprising Investor blog.

[4] From Americana: A 400-Year History of American Capitalism, Bhu Srinivasan (2017). I’m not the only one who didn’t learn about this in my American history class. See this interview with the author of Lies My Teacher Told Me: Everything Your American History Textbook Got Wrong.

[5] The authors combine for one of the more unique economic collaborations I’ve come across in my research They’re a pair of political science professors at Johns Hopkins University who are also associated with the Niskanen Center, a libertarian think tank. Brink Lindsey is a libertarian, so no surprise there, but Steven M. Teles is a liberal, and together they offer an mix of perspectives that provides heartening evidence that not everyone of conflicting persuasions is so entirely polarized that they can’t tlk to each other or agree about anything.

The Pledge

andrew carnegie

19th Century Steel Baron Andrew Carnegie was (a) more than okay with the right to make as much money as you want; but he (b) was not okay with spending it any old way you like. He had some very specific notions about the latter:[1]

“By the late 1880s, Carnegie’s place as one of the wealthiest men in the United States was cemented… With the time afforded him as the controlling shareholder, Carnegie put forth theories on capitalism. the human condition, and the American Republic. In 1889, Carnegie wrote an article simply titled “Wealth” — it would soon become known as “Gospel of Wealth….” In it he offered an unapologetic defense of the system that enabled great wealth such as his.

“[Carnegie believed that] the price for… material progress — ‘cheap comforts and luxuries’ — was great wealth inequality… Any thinking person, Carnegie surmised, would conclude ‘that upon the sacredness of property civilization itself depends — the right of the laborer to his hundred dollars in the savings bank, and equally the legal right of the millionaire to his millions.’ But his defense of capitalism was a setup for a most startling conclusion.

“In the article Carnegie argued that the greatest of men, capitalists, should be unencumbered to accumulate wealth. But once great wealth was achieved, these men should, during their lifetimes, give it away. As the possession of wealth was proof to society of great achievement, aptitude, industriousness, and ability, it made little sense that it should be bequeathed to descendants. Inherited wealth would undermine the argument that those with wealth earned it, deserved it.

“Next, he held that if men waited until death to give the money away, less competent men unused to large sums would squander it thoughtlessly, however well-intentioned. While Carnegie viewed wealth as a symbol of intellectual mastery, the actual possession of it should be considered only a trust fund, with ‘the man of great wealth becoming mere trustee for his poorer brethren, bringing to their service his superior wisdom, experience, and ability to administer, doing for them better than they would or could for themselves. The man who dies thus rich, dies disgraced.’

“Carnegie was hailed by newspapers, socialists, workingmen, and, more discreetly, even his fellow capitalists… for such enlightened views.”

Carnegie’s legacy of endowments endures to this day. (I have clear childhood memories of our small town Carnegie library.) Carnegie’s fellow Robber Barons created similarly enduring legacies, such as those reflected in the following names:  Johns Hopkins, Leland Stanford, Ezra Cornell, Cornelius Vanderbilt, and James Duke.

Carnegie’s philosophy also endures today. albeit expressed in terms  more in tune with the ethos of our times. Consider, for example, the Giving Pledge, formed “in an effort to help address society’s most pressing problems by inviting the world’s wealthiest individuals and families to commit more than half of their wealth to philanthropy or charitable causes either during their lifetime or in their will.”

As of May 2018, 183 individuals or couples from 22 countries had taken the pledge, representing total net worth closing in on a trillion dollars. Some of the Pledgers are household names; most aren’t. I randomly clicked several of their photos on the Giving Pledge home page, which takes you to their statements about  why they took the pledge. Noticeably absent is Carnegie’s belief that capitalists are “that the greatest of men,” that “the possession of wealth [is] proof to society of great achievement, aptitude, industriousness, and ability,” or that wealth is a “symbol of intellectual mastery.” Nor is there an expressed fear that “less competent men unused to large sums would squander it thoughtlessly, however well-intentioned.” Instead, there’s a certain humility to many of the statements:  they often mention lessons learned from forebears or other role models, and often express gratitude for having been “blessed” or gotten lucky, such as this one:

“Allow me to start by saying that I am not sure I am a worthy member of this group of extraordinary individuals. I consider that I have been lucky in life.”

Other predominant themes in the statements are (a) a recognition that attaining great wealth is not solely a matter of rugged individualism, but that cultural and historical context deserve a lot of credit, and (b) a belief that giving back is a way to honor this reality. I.e., wealth made possible by historical and cultural circumstance ought to benefit all members of that culture, including the most needy. As it turns out, this isn’t just a kind-hearted philosophy of life, it’s a statement of the economic terms upon which much wealth has in fact been created and in the past and continues to be created today.

State-sponsored policies that favor timely and innovative ideas and technologies represent a significant type of societal support for wealth creation . We’ll look at that next time.

[1] Americana: A 400-Year History of American Capitalism, Bhu Srinivasan, (2017).

Meet the New Boss

Same as the old boss.

– The Who

Commentary about economic inequality often compares the situation today to America’s Gilded Age. Back then they had the Robber Barons. Now we have the Robber Nerds. Same dif? It depends who you ask.

A quick check of a list of the Robber Barons on Wikipedia reveals the names of several household brand names that still endure, plus numerous key universities and charities. And this article from a European source — The Truth About the Robber Barons from the Mises Institute ( “30 Years of Austrian Economics, Freedom, & Peace”) — says don’t be too hasty to condemn:

“The late nineteenth and early twentieth centuries are often referred to as the time of the ‘robber barons.’ It is a staple of history books to attach this derogatory phrase to such figures as John D. Rockefeller, Cornelius Vanderbilt, and the great nineteenth-century railroad operators — Grenville Dodge, Leland Stanford, Henry Villard, James J. Hill, and others. To most historians writing on this period, these entrepreneurs committed thinly veiled acts of larceny to enrich themselves at the expense of their customers. Once again we see the image of the greedy, exploitative capitalist, but in many cases this is a distortion of the truth.”

For more, consider the following articles, whose titles telegraph whose side they’re on. but they’re all worth reading:

Seven Myths about the Great Philanthropists:  The turn of the 20th century was a golden age of American philanthropy. It deserves to be better understood.  The Philanthropy Roundtable (2011).

The Robber Barons Weren’t Robbers. Here’s Why. The Learn Liberty project of George Mason University (2017).

Robber Barons. Economists View (2007, reprinting a 1998 article).

The Dark Side of the Gilded Age. The Atlantic (2007)

The Myth of America’s Golden Age. Politico Magazine (2014)

On the lighter side, see P.J. O’Rourke’s Up To a Point: Robber Barons Make Way For Robber Nerds. Rockefeller, Carnegie, J.P. Morgan: This country used to produce impressive if immoral captains of industry. Now we’re stuck with unrefined geeks like Mark Zuckerberg. The Daily Beast (2014).

One thing seems to be consistent in all these commentaries:  both then and now. soaring wealth for the haves and a commensurate decline for the have-nots occurred in a capitalistic, market-based economy. A second key point gets less consensus:  whether the Barons benefited then and the Nerds are benefiting now from government policy and financial subsidies (including tax breaks in our day) — i.e., whether the economy was then and is now truly a free market.

Satisfy yourself, but at this point, after examining far more sources than I can cite in a blog post of this length, and having interviewed a couple free market champion friends of mine, I can comfortably say, as they did, “There never has been a free market.” Instead, what we had then and what we have now was and is a skewed version of capitalism — a perfect political and economic storm that made economic inequality possible back in the Gilded Age and makes it possible again today. This is the missing piece that Econ 101 and its simplistic supply/demand curves doesn’t provide.

The result in both eras has been a new class system that morphs the Horatio Alger ideal into a Great Gatsby reality. When the new class system hits the job marketplace, the result is a vast worldwide demographic of the Angry Left Behind — unhappy, disillusioned, dissatisfied, depressed, and even suicidal workers suffering from meaning malaise. What bothers them is often equated to the same anger that has fueled worldwide political shifts such as Brexit, Trumpism, the move to the right in Germany and France, and a whole lot more. (See for example No Job Left Behind and Back to Work, and countless more initiatives and opinions like them.)

When the subject of economic inequality invokes those kinds of inflammatory developments, it’s no wonder we don’t want to talk about it. Which is precisely what we’ll continue to do, right here.  Stay tuned.

meet the new bossHere’s the original music video of The Who’s We Won’t Get Fooled Again. Watching it draws you all the way back into the turbulent, polarizing 60’s — if you remember them, that is — and the tone feels eerily similar to what we’re living with today. By the way, who said, “If you remember the 60’s, you really weren’t there”? Find out here

And who first called the Robber Barons era the “Gilded Age”? Find out here.