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.
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.
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?
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.
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.
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.
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.
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.
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.
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.