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Source link: http://archive.mises.org/8756/what-we-learn-from-a-play-money-auction/

What We Learn From a Play-Money Auction

October 13, 2008 by

A play-money auction, writes Bart Fuller, serves as a good example of what we now face. With the passage of the Emergency Economic Stabilization Act of 2008, the Fed is poised to accelerate the redistribution process at a rate not seen in our lifetime. Those who will be hurt the most, of course, will be those who do not receive the new money. FULL ARTICLE

{ 14 comments }

Tim Kern October 13, 2008 at 9:25 am

Great example. We see it in Monopoly (the board game), too, when the rules are changed in the middle of the game. Someone thinks it would be a swell idea to get, say, $2000 for passing “GO” instead of $200, as usual. The players agree that, once the last person has gotten the “raise,” all prices on the board and in inter-player transactions will also go up by a like factor. (Boardwalk will cost $4000, Baltic $600, etc.)

Of course, the first one to pass “GO” has a huge advantage — low prices and a “liquidity infusion.” If there is a sufficient time gap between the first and last player to pass “GO” for the $2000, those players who cross last are wiped out.

Inflation benefits those who inflate: governments and banks. The “trickle down” effect never goes to private creditors. Thus more power accrues to the government and the banks. People like it, because they can “spend more” and “borrow more,” since the money they’re using is cheaper — so they vote for more of it, even though it’s the financial equivalent of drinking sea water: the more they drink, the more they need, and it eventually kills them.

Drink up, America: the Fed and your Congress are giving away all the sea water you want!

Maturin October 13, 2008 at 9:30 am

Elegant!

This “experiment” should be done in every junior high classroom across the country.

J D October 13, 2008 at 10:20 am

I’d like Mr. Fuller to insert a brief description of what his auctioner school taught the fuction of an auctioneer to be.

Do they function as advertising?

Is it considered wrong to be easily understood?

Is “tricking” bidders into higher bids considered normal?

I’ve attended few auctions — and have made no bids other than sealed — but have a gut feeling that many bidders have no idea of retail value for items at auction.

When the “auction” is applied to central fractional banking fiat money, who is the auctioneer?

DT October 13, 2008 at 10:35 am

Good illustration.

Regarding a policy response to the financial crisis please criticise my idea below:

How about if / when a bank fails the depositers (individuals, small businesses etc) get given the money they have lost directly from the government. This way the money does not go to the bank – which goes where it deserves to go – and the money supply effect is neutral because created money = destroyed money.

I’m sure this is an impractical suggestion but can you explain why?

J D October 13, 2008 at 10:42 am

With regard to Maturin’s recommendation for junior high schools I quote Mises (with CAPS added for emphasis:

From Mises “Human Action” pdf, page 900/876:

5. General Education and Economics

In countries which are not harassed by struggles between various linguistic groups public education can work if it is limited to reading, writing, and arithmetic. With bright children it is even possible to add elementary notions of geometry, the natural sciences, and the valid laws of the country. But as soon as one wants to go farther, serious difficulties appear. Teaching at the elementary level necessarily turns into indoctrination. It is not feasible to represent to adolescents all the aspects of a problem and to let them choose between dissenting views. It is no less impossible to find teachers who could hand down opinions of which they themselves disapprove in such a way as to satisfy those who hold these opinions. THE PARTY THAT OPERATES THE SCHOOLS IS IN A POSITION TO PROPAGANDIZE ITS TENETS AND TO DISPARAGE THOSE OF OTHER PARTIES. (end quote)

The function of US public schooling (not education) is to produce adults with little ability and no motivation for critical thinking, particularly about government. Unfortunately they have been more than successfull.

Maturin October 13, 2008 at 11:24 am

@JD>>The function of US public schooling (not education) is to produce adults with little ability and no motivation for critical thinking, particularly about government. Unfortunately they have been more than successfull. < <

Which is why my suggestion will never happen.

See http://blog.mises.org/archives/008750.asp

Inquisitor October 13, 2008 at 11:47 am

Great article. The assumption would change crucially, though, if the money was earned via production. Then passing it on to others is akin to inheritance and represents real wealth. Just important to remember this.

Eric October 13, 2008 at 12:17 pm

One thing puzzles me, namely, that the example did not involve any new money being created. Instead, existing money was transferred between players.

This is not how the FED operates. The FED creates additional money, and then spends it; it does not find someone leaving the economy that transfers their small holdings to the FED – or to anyone else. What was left unsaid in the example was that the transfer acted like a good will gesture, which would pay off later in reciprocation – for example by preferential treatment in a board game of monopoly.

I realize the author was making other points, namely about the behavior of the players in this particular situation, and how they compare to behaviors that are described in Austrian Economic Theory. The auction game then becomes a model which is used to explain behaviors in the economy at large.

However, although there might be similarities, this is as if building a computer model that is claimed to mimic economic behavior. While it may do so in some specific area, extrapolating that result to other areas is suspect.

We see this problem with mainstream economic models all the time. They find that a,b and c (in the model) correlate to A, B, C (real world) and conclude that d will also match up with D without any proof other than the model – and this is scant proof. Climate change modeling is in this same situation.

So, I am not sure how to view this little experiment. Perhaps the experiment could be altered, namely, those leaving the bidding would be thought of as hoarders, or maybe just someone leaving a will. Then we add a dishonest banker who begins making counterfeit play money and surreptitiously begins using that new play money to bid on the items in the auction. That would be closer to the actual situation, though what we could glean from that is far from clear.

Inquisitor October 13, 2008 at 1:04 pm

I agree with Eric.

Joe October 13, 2008 at 1:21 pm

Eric makes a good point; there is no new money created in this scenario. That being the case, I’m not sure it is a good explanation of inflation. On the other hand, it is a good example of how inequality is created.

billwald October 13, 2008 at 2:02 pm

Good essay!

The other lesson from MONOPOLY is that if no one passed GO then one person would own the entire city in the first hour.

Reynolds Coxe October 13, 2008 at 2:42 pm

The traditional robbery is almost vanishing from sight because of Joe’s family short of cash and deposit.
A typical I-robbery:
Target at Rogers family from careful research;
Moody-down their neighbour to scare them;
Buffet Rogers some money to convert the family to utility.

Bart October 13, 2008 at 5:48 pm

@J D

>>Do they function as advertising?

Usually auctioneers do advertise their sales.

>>Is it considered wrong to be easily understood?

I’d say the opposite. An auctioneer’s chant should always be understood and tailored for his audience. The same auctioneer would have one chant for an estate sale and a different chant for a cattle auction where professional buyers are the bidders.

A chant always has two numbers: the bid and the ask price. Everything else is filler to give rhythm.

>>Is “tricking” bidders into higher bids considered normal?

I don’t know what you mean by “tricking”. A professional auctioneer would not want to trick or deceive his bidders. It’s his fiduciary duty though to maximize the sale price. The seller is his customer.

>>I’ve attended few auctions — and have made no bids other than sealed — but have a gut feeling that many bidders have no idea of retail value for items at auction.

I don’t mean this harsh but “Buyer beware”. The buyer has to know what he’s buying or he shouldn’t be bidding. The auctioneer tries to create an atmosphere of urgency and competition to maximize the sale price. That’s his job.

@JD Et al

>>When the “auction” is applied to central fractional banking fiat money, who is the auctioneer?

I didn’t really have in mind a direct analogy or model; just trying to create an example from an observation, with the audience being someone who normally doesn’t give a whit about economics.

Thank you all for the comments. It’s always good to be appraised by rigorous thinkers.

Arend October 14, 2008 at 4:52 am

The writer of the article makes the point that in an action where bidders that do not have enough playmoney to engage in the bidding process, infuse money to other bidders while leaving the bidding process alltogether.

I think that all the points Eric made apply, especially those about the model-reality link are key in my opinion. The auction experiment is a static economy, i.e. there is only one seller, there is no production, transactions are not concluded between buyers and seller, but in a bidding battle between buyers. I think that one cannot extrapolate an auction bidding process to a real economy, or alternatively, will obtain an auction bidding process when abstracting down from a real economy.

The mentioned wealth transfer of not-able-to-bid partcipants is unrealistic. Super scarcity (because no production exists) is unrealistic in the sense that the prices do not rise because of inflation but because of the wealth transfer (which is unrealistic) in combination with the fact that no production exists to abide to the price signal of intensely bidded objects.

If there were a lot of objects to be auctioned relative to the bidders, or not, one can anticipate that if all the bidders are able to spend all their money, the average price for the lot of objects to be auctioned will always be the same. Some highly wanted objects will of course be auctioned at a high price, but this is compensated with lower prices for the reamining objects, because the money supply is fixed.

What one can learn from this auction is that highly valued objects will be priced higher. Secondly one can infer that when people have more wealth, they are able to assign a higher value to an object than before (which in a real economy would send off a signal to produce more of the good).

With inflation in the Austrian sense, and the sense happening in our big bad world, it has not much to do with.

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