December 31, 2014

Horse 1811 - How and Why "Monopoly" Works

The game of Monopoly has its origins back in 1903 when an Illinois lady, Elizabeth Magie, first published "The Landlords' Game" to teach "a practical demonstration of the present system of land-grabbing with all its usual outcomes and consequences."¹
Monopoly went through a few changes before Parker Brothers published the game in 1935 but from that date has remained largely the same. For the purposes of this post, I will refer to the British Edition with street names from London.

At the beginning of the game, each player receives £1500 to start with. Assuming that no-one ever bought any property, never landed on Chance or Community Chest, never landed on Income Tax or Super Tax and never went to jail², then the economy would grow initially at 13.33% as people passed Go and collected a salary. As each £200 from passing Go is added to the total economy, then the economy's total capital would grow but there is zero growth in salaries. This means to suggest that in Monopoly, peak salaries occur right at the beginning of the game and that wages is something of an illusory effect.
That 13.33% is perhaps the single most important reason why the game of Monopoly works and that in the long run (unless a state of equilibrium is reached) that the game will have an outcome.

Monopoly (which calls itself a 'Property Trading Board Game' on the box), begins to start to be interesting only after property is bought and sold.
The rate of return on capital for all properties on the board in unimproved states is less than initial salaries growth. Even the most expensive property Mayfair, which boasts an unimproved rent of £50, still only returns 12.50% on £400.

Due to the fact that all rents are doubled if one owns all of a colour group (and which is the first condition to improve property), 19 of the 22 improvable properties will achieve better than the 13.33% return as salaries. This might sound insignificant but cuts right to the heart of why the game works.
If the return on capital outstrips the return from salaries, then in the long run, the game should have an inbuilt process of capital condensation and it does. The average return on capital in the game of Monopoly for all circumstances is 58.17% which is more than four times that on salaries.
Find properties and conditions that do better than a 58.17% return on capital and provided you can weather all storms, you should have a good chance of winning.

I should point something out here. The Utilities and the Railways are rubbish properties to own. Even if you owned all four Railways, the return on capital is still only 20.00% and the two Utilities aren't much better at 23.33% in the long run.
For an outlay of £1000, the return on the railways is 20.00%. For £970, you could own all of the sky blue group (The Angel, Euston Rd and Pentonville Rd) and the worst rate of return of those three is 157.14%. Even just one house on the sky blue group will return 20.00% at worst.
For the record, the greatest rate of return on outlay is Pentonville Rd at 162.16% whilst Mayfair with a hotel will only return 142.86% (Vine St on the opposite corner is practically identical in terms of rates of return).

I had a look at Chance and Community Chest cards and whilst they might seem like fun, they contribute practically nothing to the overall economy of the game. Except for being assessed for street repairs (which are both leakages from the economy), the net effect of both Chance and Community Chest is only an identical injection of £8.75 for both cases.
Most of the Chance and Community Chest cards have the effect of shifting minor amounts of capital around the board to different players, with the biggest possible effect being a windfall of £350 being collected for Opera Tickets if eight people are playing (the net effect to the overall economy is still nil though).

The basic reason why the game of Monopoly works is simple though. The game reaches a tipping point when the amount of new capital being added to the game is less than the rate of return on capital. That point happens very quickly once properties are formed into groups and accelerates once houses and hotels are built on them.
Except for the case of equilibrium where a small players have roughly the same amount of capital and aren't willing to solidify their capital into assets, the game should run to that point where capital returns outstrip salary returns pretty quickly.

Moreover, Elizabeth Magie's "The Landlords' Game" actually does work in the real world to some degree. If the rate of capital accumulation outstrips wages growth, then wealth condensation will happen. Apart from some major calamity where mass physical destruction of capital takes place, like Two World Wars for instance, then the game of Monopoly isn't a game any more. It's real.

² despite 'gaol' being the preferred spelling across the Commonwealth

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