MMOs and economics

Recently decided to tackle the subject of MMO – massively-multiplayer online games – in an article called “5 Ways Video Games are Saving Mankind“. Point #5 in the article caught my attention: “You can learn fascinating things about the economy from MMOs”:

You wouldn’t think you could learn a lot about society just by watching a person play a video game (other than that some members of society just cannot play FPS games without continually jumping around like jackasses). But experts are finding that if you want to model economic theories, just find a massively multiplayer online game and follow the imaginary gold. Right now, there are economists who are actually being paid to study how the digital currency flows in the world of fantasy MMOs.

This is certainly quite true. Online games are a great way to model economic activity to see how people actually operate and how incentives influence people. In any economy you will always have people willing to work hard and those trying to get by with the least amount of effort.

pp_logo.en_.pngNow for me, one online game to which I’ve been relatively active over the last 7+ years is Puzzle Pirates. From Puzzle Pirates, it is clearly obvious that many of what libertarians have been saying about economics works and works well.

The article linked above said this:

And the libertarians out there will like reading about how, in all of these cases, the games’ libertarian/anarchic financial models caused their economies to recover from crashes much more rapidly than in the real world (as did things like, say, the lack of a minimum wage).

I think we can go one-step further: we can learn how to avoid many of the economic issues we are seeing today. Allow me to elaborate, again using Puzzle Pirates as the example.

Puzzle Pirates has a somewhat unique economic setup. Some of the base commodities in the game are spawned somewhat randomly, harvested by in-game merchant bots and transported to islands via bot ships. Some of the base commodities can be harvested from populated islands through commodities markets. There are players who actively go out and reserve product on the commodities markets and move it to other islands for profit. This is actually how I operated in the game, and it could be quite profitable if you know what you’re doing.

But everything else in the game must be produced by someone – i.e. real players operating shops and real players working in those shops to produce products. Ships, clothing, swords, even the fabrics and dyes, paint and rum must be produced somehow by someone.

The economy in Puzzle Pirates mimics pure capitalism in these ways. Shops compete with each other to not only sell their product, but also produce their product. Shops advertise their labor rates and prices. Competition reigns supreme not only with the shops, but also on the open waters between the islands.

Then there’s the in-game monetary unit, called the “piece of eight” or “PoE”. The money in the game comes into existence through only one source: pillaging bot ships on the waters between the islands. And it leaves the game (“sunk” from circulation) through numerous methods. This keeps the monetary supply more or less in line with production and consumption by the other players in the game. There is no central authority issuing the money through any means, such as through loans or any other means.

As such there is little, if any room for inflation to set in.

This means that you could earn and save up several thousand PoE, log off the game, and come back on several months later and find that the prices are still about where they were when you left. The prices for base commodities do not fluctuate much, and the competition for labor keeps the economy in relative equilibrium. A lot of products also eventually wear out, or “dust”, keeping a steady stream of demand for these products and the commodities needed to produce them.

As the generation of the currency is relatively automatic, and is scaled to how well players pillage on the open waters, money is tied to effort. And effort is necessary for the money to exist. If no one pillages the bot ships on the ocean, no one has money to spend.

Beyond this, in Puzzle Pirates and most MMOs, there is no recognized concept of a loan. You cannot walk into a bank and get a loan. You can ask other players to lend you money, but any such loans are purely on the honor system, and there are no mechanics in the game to enforce that loan.

Anyone familiar with how banking works in the real world knows that without loans, the concept of fractional reserve banking cannot exist. Without fractional reserve banking, inflation is virtually non-existent.

And yet without loans, without fractional reserve banking, there is still plenty of economic activity on each ocean. The economies are stable and at a relative equilibrium. In the years I’ve been on Puzzle Pirates, I’ve yet to see anything that could be called a “crash” in the economy. Prices fluctuate as supply and demand fluctuates, and the monetary unit is a relative constant within the economy.

In other words, Puzzle Pirates is a model economy from which a lot can be learned.

The company behind Puzzle Pirates does occasionally introduce new products – such as the monthly special class ships – but this does not change the economy much. If people want that new product and can afford to purchase it, they will. If they do not want the product or cannot afford it, they won’t. If they want it but cannot afford it, they will work however they can to gain the money needed to afford it. They are products that compete with all others for the existing money supply. And the system only determines what is required to make the product, not the price. The price of the product charged to consumers is determined by the shop keepers based on costs of production and is also subject to competition and availability.

Taxes in Puzzle Pirates apply only to consumption, with tax rates set by island governors – i.e. live players – and the tax rates are directly reflected in the prices. This creates inter-island competition. Shop keepers can move their shop to a different island if the government sets tax rates too high. And as taxes are reflected in final prices for items purchased at a shop, customers can shop at different islands to find what they want or need, which is helped on by the fact that a person can, by using the ferry, go between populated islands near instantaneously.

And shoppes that can compete succeed and continue to operate. Those who cannot do not.

For a short while in the game, I did operate a shop – a distillery, which makes the rums needed by ships for their voyages. The shop turned a decent profit while I was running it, too. I have a business degree, so taking my knowledge of business and how to earn profits while avoiding losses worked out well for me. It took a bit of effort to pull off, along with at times switching up what I was producing to ensure I was earning the greatest amount of profit.

But then the open market of Puzzle Pirates is what really made it possible for me to do that.

In the end, I think that Puzzle Pirates is a great system from which we can learn a lot. But the one lesson we can learn from all MMOs currently is that the fractional-reserve system must be eliminated, or at least severely scaled back. Eliminate the fractional-reserve system and you will virtually eliminate inflation. Virtually eliminate inflation and the rest of the economy will likely fix itself over a short period of time.