Hello and welcome back to another Free To Play.  I normally don’t write these articles this frequently but the support you all gave on the last edition was mind-blowing, and a topic came up that I simply had to comment upon. On my lunch break I often read Reason magazine, the libertarian political magazine that is easily the finest political magazine in existence. Specifically, I read their blog, Hit and Run. While browsing through stories I saw a name I had very rarely ever seen in Reason’s publications: Nintendo. It was this article, about Nintendo leaving Brazil’s highly taxed video game market.  Considering I had just done a piece about the market and Nintendo, I felt like it’d be worth the time to examine this topic, especially as it perfectly illustrates the law politicians forget the most, the Law of Unintended Consequences.

your-new-health-care-system_51e70f9e059be_w1500

How about a diagram of the American healthcare system for an example of unintended consequences.

Brazil’s video game market is odd, to say the very least.  For many years, well into the 1990s, the dominant system was not the NES or even the Super NES it was Tec Toy’s version of the Sega Master System. This excellent article from Hardcore Gaming 101 details the rise of the SMS in Brazil. Today, console gaming makes up a very small part of the gaming market in Brazil as more gamers turn to things like mobile and free-to-play (no relation) instead of traditional video games. Many popular games from newer consoles were actually ported to the SMS with great success just for the Brazilian market; Mortal Kombat is arguably the most well known of these. This could be partly due to how badly the government intervenes in the gaming market.

tec toy SMS

A modern day TecToy Sega Master System.

Let’s look at prices of games in Brazil. I will first throw up a disclaimer that currency exchange rates change very rapidly. As the time of this writing – January 13, 2015 – one US Dollar is worth about 2.6 Brazilian reals.  The Reason article mentions that an Xbox One, normally about $500 here, goes for 2,199 Brazilian reals or $800 US. To put it in perspective, the same console is sold for roughly the same price of $500 in the US, Japan, and Europe.  Think it’s just Microsoft getting the shaft? Wrong. The Playstation 4 is subject to so many tariffs that the price of a PS4 console in Brazil is 3,999 reals, or about $1,500.  This has become so ridiculous that to save on taxes and related fees, Sony actually manufactures some PS3s in Brazil and is looking to do the same with PS4s.  This is likely what the government planners had in mind when they came up with the tariffs, but it rarely works, thanks to the Law of Unintended Consequences.

Basically, Unintended Consequences are exactly what it says on the tin. For any action there must be a reaction, and oftentimes the reaction is not the one expected. This isn’t a hard concept to grasp, but many fail to apply it to government actions for reasons I have never understood.  While we rightfully mock when a private company makes a colossal screw up like New Coke or the Virtual Boy, we ignore when a government program has an unexpected side effect. These are textbook examples of how governments think they can manipulate markets to do what they want it to, only to leave their citizens with less. In the Brazil case, the government’s blatant attempt at stealing money from companies who have the gall to not be based in Brazil leaves the gaming consumer with less choice, and far more expensive choices at that. The stealing money part? All taxation is theft; the government has no right to demand money just for selling your foreign products in their country. You’re reading a libertarian article, did you expect I’d be a fan of taxes?

Jefferson

The most accurate picture I have ever posted.

Let’s elaborate on what made New Coke and Virtual Boy good examples of this idea. New Coke was essentially Coca-Cola’s attempt to reformulate their familiar recipe to emulate the far superior (in my opinion) Pepsi. That’s likely the most controversial sentence I’ve ever written. As some of you older gamers may remember, New Coke went over like the proverbial lead balloon, and within a few months Coke replaced it with the “Coca-Cola Classic” we all know and love. Interestingly, the formula for New Coke was actually still available in parts of the US until 2002, under the name Coke II. I’ve never personally seen it, however. The idea was to take on Pepsi, but it unleashed a backlash against Coke that was so pronounced that it is still taught as a “What Not To Do” lesson in business and marketing classes. The unintended consequence was that instead of taking some of Pepsi’s thunder and market coverage, Coke actually lost ground due to how much hatred the public let loose on New Coke.

Coke_II_by_tyrie2001

You thought I was making this up, didn’t you?

On the video game side, the Virtual Boy was Gunpei Yokoi‘s attempt to make an affordable virtual reality console for the masses. During the design phase, Yokoi’s standard belief in using older, well-known technologies for new applications didn’t work. The best the team could do was the familiar red and black that made all the games seem like they were played in Dante’s Inferno. Unfortunately, the system of mirrors and lenses that made the 3D effect caused headaches, seizures, and possibly even affected eye development in young children. Nintendo’s marketing group attempted to call the Virtual Boy a “portable console” despite the fact that it had a tripod built into the unit. The Virtual Boy became the greatest failure in Nintendo’s 100 + year history, and is the poster child for gaming failures.

Nintendo and Yokoi expected this device to be the next quantum leap in gaming technology, but instead it has become an object lesson in the worst ways to design and market a console. The entire North American library for the console consisted of only 13 titles, or less than 10% of the games released on Steam each month. As Rizzard Core stated, the Virtual Boy had an UnNintendo Consequence.

Virtual_Boy

This Virtual Boy is sad because nobody loves it.

These are examples of precisely what the term “unintended consequences” was created to describe. Nobody creates a console just for it to fail – The Producers  is fiction – just like for the most part no government bureaucrat develops a tax just to drive people away.  Economists use the term “incentives” for things to lead us to do or not do certain things, and this is common sense to most of us.

The problem is that any tax offers an incentive to not do whatever is being taxed.  Now this is a concept that many seem to follow for certain things, just not capitalism. The abhorrent sin taxes on things like cigarettes and alcohol are expressly designed to get people to quit smoking/drinking because the higher prices lead them to not smoke/drink as much in the name of that nebulous “greater good.”  Now while I think the idea of making people do what you want by stealing money from them is horrible, the mechanism behind how a sin tax works is sound.

Liquor Store

A “sinners” paradise.

Now let’s use our brains and apply this same logic to a massive tax on game sales. This would lead people to either buy less games or turn to black markets, and of course the ever-present devil of piracy. The amount of money people have for entertainment is likely the same regardless of whether or not game taxes are high, so all the government is doing with this is taking away enjoyment from the very citizens they claim to represent. Nice job, guys.

If a tax on cigarettes means less people buy cigarettes, this would mean a tax on games means less games sold, which means less taxes received. That’s just straightforward logic, but logic is lost upon the State. What’s very bad is that the Brazilian government is infamous for its high levels of corruption – to the tune of costing the Brazilian economy billions of dollars per year. I normally don’t like to attribute to malice what can be attributed to ignorance, but a tax of 60% on something that not many people will complain about makes sense. The unintended consequence is that Nintendo decided to say “Screw you guys, I’m going home!” and took all their items out of the market.

Cartman Screw You Guys

South Park is the sharpest satire known to man, seriously.

Considering it is usually the refrain of idiot nannystaters bureaucratic crusaders that violent games shouldn’t be in the hands of children, the actions of the tax-hungry State has removed the one company that make the best family-friendly games in the market. A more conspiracy-minded person would wonder if the government is happy with this outcome, as it lets them point out how few family-friendly games are available on the Brazilian market, but that’s a different article series.

This leads perfectly to another unintended consequence of higher taxation. The tax isn’t exclusively experienced by the manufacturer, but passed on to the consumer. This same unintended consequence applies to the minimum wage. As the last Free To Play column explained, price increases only tend to make demand decrease, and the minimum wage is just a fancy name for a price increase on unskilled labor. Unfortunately with every minimum wage hike, the items made or served by such labor become more expensive as the producers have to pay more to provide those goods.

Once again we return to the logic of charging more and expecting less. A minimum wage increase is like a sin tax, except it’s a tax on hiring unskilled or entry-level workers. Not only does wage hiking leave less jobs available for those just entering the workforce for the first time, but it also leaves less jobs for unskilled laborers. Of course, nobody who supports a higher minimum wage ever intends to cause this, but that’s the problem. No matter what action a government takes, a wise bureaucrat will consider what similar actions have caused besides the desired effect, and adjust accordingly.

Wait. “Wise bureaucrat.” Yeah, I’ll find one of those at the same time “Military” and “Intelligence” can be used in the same sentence.

Rust In Peace

Megadeth said it best: “Military Intelligence two words combined that can’t make sense!”

Nintendo once again proves itself to be a forward-thinking video game company by completely avoiding a market that an overreaching government has taxed into oblivion. Let’s face it, sometimes the only correct move is not to play at all.  In doing so, they prove that every action has an equal reaction, and one that governments nearly always fail to anticipate.

By attempting to tax blood from stone, the Brazilian government has sent one of the three biggest video game companies on the planet to greener pastures. And they consequently have deprived themselves of large amounts of tax revenues. After all, many of the highest selling games of 2014 were Nintendo properties, and those are now unobtainium in Brazil.  Furthermore, the greedy actions of the government have rendered the gaming market a smaller one for Brazilian gamers, which is really sad and certainly a consequence nobody foresaw.

Liberman Brazil

Once again proving no government knows more than jack and squat about video games.

Those who seem to believe that governments are omniscient enough to exert controls over the modern market (one of the most complex things to ever exist) should be aware of how often unintended consequences not only add undesirable side effects, but can at times completely backfire, perverting the very intention of that government action in the first place.  All in all, this story is a cautionary tale of innocent citizens being screwed over by the unintelligent actions of those who are supposed to protect their rights. An action of government that harms those it aims to help is not worthy of staying law, but that’s an axiom very few governments anywhere seem to follow.

  • Dana Smith

    Interesting article, though I could do without the usual “grrr, big evil government” rhetoric. I’d be curious what the ultimate reason Brazil’s tax was meant to achieve. It couldn’t have been a sin tax and the market for games was simply too small in Brazil to expect manufacturing of games and consoles on site in the country to be productive. If a tax isn’t meant to be punitive, it should be dispersed broadly as not to drive out industries, damage the working class, or damage the flow of capital through the investing class. You can’t obviously have 0 taxes, but putting undue onus on game companies was obviously counterproductive.

  • Aggro Sky

    I’m kind of on the fence about big government. I certainly see ways that the government could be reduced or made “leaner and meaner” so to speak, but I also see reasons for certain regulations as well. And while there has to be some form of taxation in order for the government to function, I definitely see where “Sin Taxes” are somewhat immoral and frankly, unjustified (and makes me really wonder why they haven’t legalized Marijuana yet nationwide. Think of the money they would make with that Sin Tax!).

    I’d rather that destructive and harmful habits like smoking be regulated in where people are allowed to smoke rather than punishing them by hurting their wallet. Taxing just makes it harder on the individual smoking and frankly, they are still gonna smoke. At least if they weren’t allowed to smoke right out in front of the damn grocery store where I have to walk through it every single day, my lungs wouldn’t be damaged as a result :P.

  • Rizzard Core

    I think your giving the Brazilian government *way* too much credit here…I mean our own government is filled with a bunch of morons and corruption…I just imagine some idiot in bureaucrat is a cheap suit with a bunch of gold bling surrounded by whores signing new tax supports into law.

  • Derik Moore

    Forgive the late reply. Long week at work.
    The purpose of the tax, far as I can tell, was to encourage domestic production, but that isn’t happening. Again, unintended consequences. And yes, I am always going to take the “grr, big evil government’ position first because they exist by taking property by force and in this case are completely at fault.

  • Derik Moore

    Fun fact: marijuana is only illegal because cotton farmers pushed through the bill on the “think of the children!” angle in the early 20th century because of competition from hemp fabric.

  • Dana Smith

    Lol, that’s the bizarre thing Derek. You attract industry with incentives, not by taxing them. So yeah, that’s why I think they must have been up to something else. And as far “government taking by force,” that’s sort of the point of laws in general, though. Democratic Government is a contract between a lot of people. We all agree to give up natural rights in order to gain new ones. We all agree that we must give up our right to murder and steal from each other and give government the authority to force us not to, but then we gain the right to be protected from murder and theft. Likewise, we force industries not to dump radioactive sludge into our drinking water, but while they lose that right, we as a society gain the right to clean drinking water.

    A robust society exists when we find the balance between public and private power. I love Libertarianism as a fantasy. I mean, who wouldn’t want to live in a society where people rise and sink only on their own merits and we all live in log cabins that we built ourselves? Likewise, Communism is a nice fantasy too. Who wouldn’t want to live in a society where we all have one vote and we are all economically and politically equal? Sadly though, both are just pleasant fantasy that each begin at distant corners of a very big picture. The secret to a successful, prosperous, and healthy societies can’t be achieved with two or three word slogans like “taxes bad” or “government bad” or “rich people bad.” It can only be achieved by examining the great and many nuances of specific nations and cultures and specific moments in their evolutionary histories.

  • Derik Moore

    I would disagree with Libertarianism as a fantasy, but also it seems like you may think I’m anarchist, which I am not. Very minarchist, yes but not anarchist. I could not agree more about the slogans can’t determine government. However, you can state goals in few words. I follow the Non-Aggression Principle which is that I have no right to force others to do what I want, only to convince them to do it on their own accord. The example you use of dumping in drinking water plays into that as the companies have no right to dump into anyone else’s property. As for attracting industry, you are correct about incentives. I personally prefer no form of corporate welfare to exist and that includes cushy tax breaks.

    Funny thing, originally “libertarian” was applied to anarcho-communists. Wanted to say that since you mentioned communism as well.

  • Dana Smith

    I just take issue with people saying, “I don’t want the government telling me what to do” because the whole point of government is to pass laws, which by their very nature, tell us what to do. We need to judge every law on its merits, not point out a law we don’t like and then say, “I don’t like the fact that government makes me do things I don’t want to do.”

    The funny thing is that when I tell people my positions, they THINK I’m a libertarian. I’m pro free trade, pro-free markets, and pro-capitalism, but I recognize that negative externalities exist that cannot be resolved without government “coercion,” I recognize that all of the assumptions of a free market cannot be fulfilled (no one has perfect information, all transactions have costs, etc.) and I recognize that a free market with a weak government will always, always, always be captured by agents of the free market, who will then legislate in their own interests. A healthy free market is never in the interest of a single actor in that free market. A monopoly is. Thus, the need for a government that has strong enough institutions that cannot be captured, but small enough that it doesn’t smother industry in beurocracy (like India).

    I think we need to maximize individual liberties and I think people should be able to do whatever they want… as long as their own activities aren’t hurting others. And therein lies the problem. If my neighbor is burning tires in his yard and it wafts into my yard and into my window, his personal activities are harming me even if he has property rights to the land where he’s burning his tires. Likewise, if my friend decides to eat a 4 pound hamburger and 4 large fries every single day, I will technically end up paying for part of his healthcare when he ends up on dialysis through higher insurance premiums (if he has money for insurance) or a higher hospital bill (if he doesn’t have money and the costs are shifted on to people who DO have money). The great assumption of Libertarianism is that our own deeds don’t effect the lives of others, but they do and always will. And that is where the (unfortunate) need of regulation comes in. If you decide to figuratively eat a 4 pound hamburger and 4 large fries every day, it’s not fair that I should have to pay for it. Libertarianism, truly realized, creates one giant, classic moral hazard that would drag everyone down.

  • Dana Smith

    It’s only fair to tax smokers because smokers tax the healthcare system. When they show up at the hospital with lung cancer, who do you think pays for them? Most of the time, you do. That’s that same point of pollution tax. You tax industries that are inflicting costs on others so that you not only discourage them from causing harm (by cleaning up their acts) but you also are able to use that money to fix that harm that IS done. So sin taxes aren’t like apostacy laws. It isn’t moral legislation. It’s actually preventing people from spewing their costs on to others. Would it be fair for me to walk into a store, buy a cigarette, then take 50 cents out of your pocket to help me pay for it? No. Without a cigarette tax, that’s basically what’s happening.

  • Derik Moore

    Excellent comment. The problem with liberarianism will always be finding the balance while the only other assumption that the gov’t can restrict certain activities because of eventual outcomes leads in even worse directions. There is no such thing as a perfect political system, but for me a small gov’t that exists only to protect rights is the best of the worse. They all have glaring deficiencies, however.

  • Dana Smith

    Yeah, so if it were up to me, Libertarianism’s application would be to prioritize individual liberties and attempt to prevent unnecessary beurocracy. Unfortunately, the current political climate has deteriorated into black and white characterizations. Regulations bad. Taxes bad. Rich people bad. Like you said, the reality is about finding the balance, but of course, that’s not very flashy or gratifying.

    What’s more, it’s always been my impression that different systems work well in different circumstances. Decentralized, federalist, free market systems are good for big, diverse countries like the U.S. Centralized, socialist systems work well in homogenous countries with tight cultural identities. Command and control economies and government financed capitalism is good for developing economies (as we so aptly saw in the Japanese economic miracle and the rise of China) but as they mature, are better served by the innovative powers of the free market. There is a time and place for everything, but the current political dialogue is about “what is absolutely right, all the time.” And so that’s why I tend to shy away from pejoratives about “big bad government” or “big bad bankers.” It strips away the nuance, and nuance is the domain of good policy.

  • Derik Moore

    Great points. The sad thing is nuance has been slowly eroded away from political commentary for years now. When the two of the biggest names in politics are Michael Moore and Sean Hannity you know nuance isn’t on the list of concerns.

  • milky_vampyre

    They must have peeps smuggling ps4s over the border. $1500 is super expensive.

    Btw, you did the conversion backwards. Currently, and it’s been this way for about a month now, ¥100 = $0.85, so a PS4 is about $340 in Japan.

  • Dana Smith

    Yep, true. Partisanship is less about supporting a loose platform of issues now and more about recreation. People treat their political affiliations like football teams, and it becomes more about beating the other guys and winning the game than about governance. Right now, I tend to support politicians that behave less tribalistically. Guys like Rand Paul, John Boehner, Mitt Romney, (and yep) Barack Obama. They’ve all been willing to negotiate in the past, but the far left and far right of their caucuses keep wailing and gnashing their teeth when a compromise is immenent. I think that finding that magic balance we were talking about is done when we compromise is met during divided government, not when super majorities are made. I’m still a believer in the Democratic process. A single ant is aimless, but an entire colony acts as an intelligent super organism.

  • Derik Moore

    Crap. Thanks for the heads up. This is the first time I’ve done currency conversion in years so I’m apparently quite rusty. Thanks for reading.

  • milky_vampyre

    No probs. I live in japan and have to convert money sometimes so I’m used to it. At first I used to do it backwards too.

  • Mr. E

    You can make that same argument about people who eat hamburgers, go rock climbing, hang-gliding, sky diving– you name it. They all tax the health care system. Why should I pay for you to eat Hamburgers? Or fall while rock climbing or sky diving? Those are risky activities.

    I have no particular love for smokers, and I don’t personally mind if we use a “sin tax” to help eradicate the problem of smoking. I think the goal should be clear though– that we’re using it to eradicate smoking and not to supposedly defray the costs of medical care– because that’s a slippery slope argument.