Horton Hears a Who: Monetary Policy and Import Taxes

Day 468, 22:32 • Published in USA USA • by scrabman

On this day 105 years ago, Theodor Geisel was born. Better known by his pseudonym Dr. Seuss (pronounced “soys”, like “joys”, by the good doctor himself); he contributed so much to children’s literature that he could arguably be considered the most influential author, in his genre, of all time.

Perhaps you are asking “Why, scrabman, do you run a campaign article that begins with the recognition of Dr. Seuss?”

Well for one, he was a great man; two, my literacy level remains on par with “Green Eggs and Ham”; and, three, because one of his books contains an analogy which may present a virtual tectonic shift in your perspective regarding Import Taxation and Monetary Policy within eRepublik. The book, published in RL 1954, is “Horton Hears a Who”.

For those who have not read the book, the basic premise is that Horton, an elephant, hears a sound coming from a tiny speck that lands on a flower. Listening closer Horton finds that there is an entire world of little persons (called Whos) inside the speck that require his help. But just as Horton has trouble convincing the rest of his peers that the little world exists in the speck, the mayor of Who-ville has trouble convincing his peers that the big world, with Horton, exists. It’s a great book with the oft quoted line, “…a person’s a person no matter how small…”

There is a powerful analogy in how the eRepublik economy works in there, especially as it relates to the dynamics of Monetary Policy and Import Taxes. There is some chatter coming from those that support comparing tax structures of foreign nations with strong GDP with the eUSA Tax Structure for the purpose of supporting extremely high import taxes, very low Income Taxes/VAT, and supporting the devaluation of currency for the benefit of exporters. While they certainly have every right to their opinion, the reality of in-game economic dynamics undermines their approach for the purpose of the eUSA; why, because they concentrate so much on the happy dynamics of Who-ville (eRep), that they forget about Horton (admin).

I am going to step you through my thought processes so that I may be clear about why Conservative tax policy and “pro-exporter” currency devaluation policies defy eRep economic dynamics and, more importantly, makes incorrect assumptions about United States eRep player habits.

In RL, economic theories regarding money supply and taxation can be tested, and the results predicted with reasonable certainty because resources are finite. That being if, for example, there were only 100 grams of real gold in the entire world, and based on the intrinsic value of that gold 100 units of currency were issued, one gram of gold would be equivalent to one unit of currency.

If a consumer, in this model, were to convert or purchase 5 grams of gold for its intrinsic value of 5 units of currency, then, although the composition of the holdings of the consumer would change, the volume of gold and currency units would remain static at 100 units each respectively.

Even if the consumer instead decided to devalue their currency by half, offering 10 units of currency for the same 5 gold, the total finite volume of gold and currency would remain the same, however the consumer would now have 90 units of currency and 5 grams of gold versus the gold sellers 95 grams of gold and ten units of currency.

Regardless of the merit of the conversion choice, the volume of the resource remains consistent in a closed system. The problem with the currency devaluation paradigm in eRepublik is that we are not in a closed system.

To illustrate, where does the GOLD that you received for your HARD WORKER MEDAL, attaining experience level 6, and attaining elective office come from?

It comes from thin air

It is not converted or issued from a finite supply as it would be in real life, it just appears. And as soon as it magically appears, it inherits an intrinsic value based on the total amount of GOLD existing in eRepublik.

Some call this fake GOLD, but is is not fools GOLD, it just appears and gains value by diluting the value of all other GOLD supply.

What in eRep is converted for the purchase of GOLD boxes?

Nothing. But the GOLD that appears because in RL someone transferred some Euros (which have no intrinsic value in-game) to eRepublik (Horton) which results in large quantities of GOLD magically appearing to dilute the virtual GOLD supply.

Now, if GOLD vaporized into thin air for things like Wellness Boxes, Feature Unlocks, MPPs and the like at the exact same rate as GOLD appeared, then the issue of GOLD supply might be solved and therefore devaluation of currency might be tested, but there is no way to know when that is actually occurring. However market economics come to the rescue in this situation and currency will generally normalize to its inherent value versus the volatile swings of the GOLD supply.

Consequently, if you manipulate the market to devalue currency, you never allow the currency to normalize against the magically expanding and contracting GOLD supply and in the end you become much like the consumer in my example above, you end up paying twice or more what the intrinsic, in-game value is for the resource. To put it plainly, if the supply of GOLD is increased, is should cost less currency to purchase, however if the supply of GOLD decreases is should cost more currency to obtain from supply.

Again, there is inherent risk in artificially dictating the value of currency through money supply manipulation because supply of the base resource is not fixed, it just appears and disappears at random. Does it help exporters to earn more profit on international markets if we make our money worthless, sure, but is it of value to eUSA citizens to have to virtually carry around wheelbarrow loads of USD to purchase products, no.

International Taxation

As you can see, though many may call GOLD box purchases “fake GOLD” the reality is that it has intrinsic in-game value equal to earned GOLD. But the question that is most commonly asked by Conservatives lately appears to be…”how can Indonesia and Romania have super low income and VAT taxes, incredibly high Import Taxes and still be dominating the game?” I had to ask myself that as well, “How can they get away with taxes like 1% INC / 99% IMP /1% VAT and still fund their military, when the eUS cannot seem to do so?”

That has to do with the prevalent eUS players approach to the game. We are generally a pretty frugal group, with the audacity of wanting to use in game supplies and mechanics rather than spending our RL wages to make a “free” game, eRepublik, a not-so-free game. And while I will not generalize to state that most others in the international community are more liberal in their spending habits with their RL funds to manufacture in-game GOLD from thin air to underwrite their gaming experience, I would hazard a guess that a substantially higher percentage of them do in comparison with the American players. Additionally, I read recently in the forums that many of the powerhouse nations in eRepublik rely to a much greater degree of self-funding for individual player exploits, which requires…you guessed it more GOLD appearing into the supply, further diluting the value of in-game earned GOLD.

Since American players tend, to a much greater degree then, to rely on in-game supplies to obtain financing for military exploits, it becomes natural to look for an in-game underwriting source, namely the eUSA government who obtains revenue through taxation. Therefore, our import taxes, by virtue of our citizen/player actions must reflect our requirements for revenue. While, in other countries, the import tax, because of the volume of magically appearing GOLD, may be used as simply an in-game (and cheaper) deterrent to foreign exports which does not require going the whole length with an embargo; the eUSA must balance protectionism with revenue needs. If we want to place barriers we would be better served to do so with embargos because, frankly, we need every revenue stream available so that we can remain a “free” nation (forgive the pun) when so many others nations are more comfortable trading RL Euros for success at our expense by diluting the intrinsic value of the in-game GOLD supply.

We live our virtual lives within a game that is run by a RL for-profit business, and while it remains a game with a diverse user base with many opinions; the reality remains that Conservative economic theory or “Pro-Business” currency devaluation theory, though it may be music to the ears of many of the blissfully ignorant in Who-ville, ignores the very presence of Horton and his impact on the Who-ville economy; it also evidences a blissful ignorance of the playing habits of the citizens of the New World.

“…a person’s a person no matter how small…” Thank you, Dr. Seuss.

Vote scrabman/PrincessMedyPi on March 5th, 2009

The last article in this series was:
http://www.erepublik.com/en/article/the-mystery-of-atlantis-745059/1/all