The Poker Economy — Part 1

What is wrong with capitalism? The short answer is nothing, or at most, very little. Virtually all the problems laid at the door of capitalism are actually due to finance. These problems include debt, depressions, and something called unemployment. To help you understand the nature of these problems and their solution, here is a perfect analogy from the world of poker.

First, if you don’t know how to play poker, don’t learn! Having said that, there are basically two formats for poker games: the cash game format and the tournament format. As most poker is now played on-line, we will use a poker site for our analogy. And as the world’s largest poker site is PokerStars, we will use that as a base.

As poker is played against other players, unlike roulette which is played against the house, the first question we should ask is, how does a poker site make money to pay its staff, shareholders, and taxes? There are two ways – the rake for the cash game format, and the entry fee for the tournament format. Let us deal with the latter first.

At the beginning of a poker tournament, the player receives a certain number of chips for his buy-in; it may be a thousand, for a big tournament it may be considerably more. The number and designated value of the chips isn’t important because they are not real money. Typically a $10 tournament will cost $11 to enter. The extra dollar is for the house; this is its fee for hosting the game.

There are many different types of poker tournaments but at the end of the day they are all freezeouts. As the tournament progresses, the stakes are raised; this ensures that all but one of the players will eventually be eliminated, the last man standing has all the chips and is pronounced the winner. Again, there are variations, some tournaments, qualifiers in particular, may finish without an outright winner, but this changes nothing. The purpose of a poker tournament is to eliminate players progressively, and when it finishes, the prize pool is split with the winner receiving the largest percentage, runner up the second largest, and so on.

Cash games are very different because here you are playing with real money. If you sit down with a hundred dollars in front of you, and you get involved in a big pot being badly outdrawn, you may lose the lot. That is a very different proposition. When you buy into a cash game, your hundred dollars (or whatever) is worth that. There is no house fee, instead the poker site’s profit comes out of the pot, what is known as the rake.

This varies with sites and stakes; on PokerStars it is currently around 4.5%, which sounds a lot, but there are two caveats. One is that there is no rake if the hand ends before the first round of betting (no flop, no drop); the second is that the rake is capped. For ultra-high stakes, this will be $5. So if there are 5 players in a cash game and the pot is $200, the winner will be raked a total of $5.00, or on average $1 each, assuming each player wins about the same number and size of pots. If the pot is $2,000, the winner will again pay a total of $5, or on average $1 each. If you think a $2,000 pot is large, check out this article. If conversely, you think $5 taken out of a huge pot doesn’t sound much, bear in mind that five years ago PokerStars boasted it had a hundred million members.

Now, imagine this, ten players sit down to play a tournament but with real money. They each have a million dollars, and the stakes are extremely low: $1 minimum bet; $2 maximum. The rake is 4.5%, and they can sit there for literally years until there is one player left, one outright winner. If indeed they were able to sit there for years, one player would have not all the money, but maybe half of it, perhaps less than that, because the rest would be eaten up by the rake. Indeed, the longer the players sat there, the more the rake would swallow. What do we learn from this? That poker is a zero-sum game, and so, after a fashion is the economy, because money comes from the financial system, and ultimately only from the financial system. True, there is a small amount from the note issue, and an even smaller amount from coins, but the bulk by far is created by the banking system as an interest-bearing debt. Whatever goods and services entrepreneurs, corporations, small traders, service people and others produce, the banks take a large chunk. The only way the current system can continue is by the creation of new money (at interest). There is a well-known phrase for this, it’s known as a Ponzi scheme.

To Part 2.