Will Virtual Economies Affect Real-World Economics?

Thanks to Game Studies for their Edward Castronova-authored article discussing the economics of massively multiplayer games, which asks the question: "Will these economies grow in importance? Second, if they do grow, how will that affect real-world economies and governments?" It's suggested that "the mere fact that Earth economies may suffer as people spend more time in cyberspace does not imply that humanity is worse off", as "the basket of produced goods is simply changing." Finally, some of the unique economic facets to virtual worlds are pointed out: "Economics, on Earth, argues that no wise government will try to control prices. In an avatar economy, however, the government can effortlessly peg many prices at any value."

Comments

Fixing Prices

[spencerogden]

It may be easier to fix prices in a virtual world (No Cops or raids neccessary). But that does not mean it will not hurt the virtual economy, or that a black market will not appear. Think of all the stories about selling virtual objects and characters on Ebay.

Re:Fixing Prices

[tc]

Runaway inflation is a problem because the money supply is uncontrolled in many virtual economies. Prices for raw materials and items from in-game vendors can be fixed, but that doesn't stop the player prices from spiralling uncontrollably, and typically turning into barter economies for all but the most common of goods, with money (gold, credits, whatever) being essentially worthless for non-newbies.

The originally planned in-game economy becomes useless for meaningful trade, and the 'real' game economy is conducted via eBay or primitive bartering. Where of course it's difficult for the operators of the virtual world to perform any regulatory functions.

Re:Fixing Prices

[mutewinter]

Ever notice that inputing cheats into a game to give you powerful or all items makes the game a whole lot less interesting? Decrease the price artificially (which isnt really the correct word to use -- since the scarcity of the item in a virtual world too is artificial) and eventually the player will loose interest.

"Hey look I got this cool, rare xxxx!"
"Oh yah? I got it too"
"So do I"
and eventually its not so "cool" anymore.

Hm.. perhaps this explains why fads and clothing styles don't hang around very long. Forget implications to the virtual world.. its really just a mirror of ourselves.

"Wise" Being the key word

[duffbeer703]

Economics, on Earth, argues that no wise government will try to control prices. In an avatar economy, however, the government can effortlessly peg many prices at any value.

Real, unwise governments institute price controls all of the time with devastating effect. Witness how the US healthcare industry is reacting to price ceilings instituted via insurance and government health programs and how the oil markets reacted to Nixon's attempts to curb inflation in the 1970's.

Re:"Wise" Being the key word

[KDan]

It does not even have anything to do with being wise, but with being capitalistic. The submitter is very narrow-minded. Purely capitalistic economics argues against price control. Purely communist economics argues for it. There's a wide range of possibilities between the two, and certainly not all have been proved unwise (and if they have been, then all governments are unwise because no government is 100% capitalistic).

Daniel

Re:"Wise" Being the key word

[Anonymous Coward]

FYI, the term you want is "free-market" or "laissez-faire". "Capitalist" is a commonly used shorthand for the same idea, but it's not correct, and if you're going to hit the issue that hard, you may as well use the correct terminology.

Re:"Wise" Being the key word

[bj8rn]

price control is a good idea if you're dealing with a monopolistic market, especially one with very high entrance costs but producing something that many people use. as, for instance, is in the case of electricity and water (or telephone) in some places.

Meme exchange

[Anonymous Cowdog]

Virtual economies could be a good breeding ground for ideas about how to gain economic advantage. Just as real world memes are part of virtual economies, memes that emerge in virtual economies will cross over into the real world. So, for example, it should be possible to see the seeds of future criminal schemes by observing behavior on the edges of acceptability in virtual economies.

One positive aspect

[DuckDuckBOOM!]

of virtual economies is that they could enable experimentation with different socioeconomic theories without (serious) risk of screwing up real people's lives with the failures. I wonder how Marx's or von Mises' writings would have been affected if they'd had MMO simulators to play with?

Re:One positive aspect

[bj8rn]

I wonder how Marx's or von Mises' writings would have been affected if they'd had MMO simulators to play with?

The Capital would have never been written, as Marx would have spent all the time playing Everquest.

Fucking economists

[PeterGreen]

"the mere fact that Earth economies may suffer as people spend more time in cyberspace does not imply that humanity is worse off", as "the basket of produced goods is simply changing."

The mere fact that the economy may suffer as SCO spends more time producing lawsuits does not imply that humanity is worse off, as the basket of produced goods is simply changing.

See-Saw -ing between the real and virtual.

[leoaugust]

A common theme throughout the paper is that the analysis of virtual economies will require slightly different tools and approaches than we are used to.

I think mostly existing tools were used beyond what they are generally designed for - i.e. expanded into a virtual world. The thing on which it is applied is different but the tools and approaches used are not.

Thus, our time in virtual worlds is more valuable if everyone we know is in the same world. Moreover, if two worlds compete and one has more players than another, wouldn't everyone have an incentive to join the larger world, so as to enjoy the larger network of society, communication and entertainment that it affords? Might such network externalities lead to a domination of this market by one player?

When I see two words "value" and "worlds" so close to each other the thought that jumps to my head is world of religion and its value. Do we have one religion ? Does the size matter when you can choose yours ? Does one religion dominate the world ?

Third, if there are rewards for solving puzzles, we can assume that a puzzle with higher rewards is preferred, holding challenge levels equal.

Don't know if there is such a correlation beween the two, because it is hard to pin down what "higher rewards" and "challenge levels" are. Firstly, how can you be sure that the coder has captured the "reward" or "challenge" value in a pattern of numbers ? And secondly, regarding preferences, it is well known that one man's cake is another man's poision. One way to visualize it is to see a see-saw in motion.

One of the major attractions of life mediated by avatars is the anonymity it affords, and anonymity requires a person to have exit options: other worlds to escape to if one's reputation in this one gets unpleasant.

I guess what it could mean is that if you find that you have committed a sin in your religion, it is then not a bad idea to shop around for another religion that doesn't consider it a sin - if the analogy made with religion is appropriate.

A player starts the game with a weak avatar, but gameplay gives the avatar ever-increasing powers. As power increases, the avatar is able to take more advantage of the game world, to travel farther, do more things, see more people. A person with a high-level avatar then faces a high hurdle in switching games, because in the new game he will start out poor, defenceless and alone again. This situation definitely locks in the game's player base, but it is also open to defeat by any number of schemes to reduce the switching costs. Surprisingly, no competitor to a current game has offered new players the opportunity to start their avatars at a higher level of wealth and ability if they can provide evidence of a high level avatar in another game.

Now it sounds quite like religion to me. I can just imagine the power structures you described and those described in religious history.

Given the expected growth in connectivity, interface technologies and content, there is reason to believe that this digital capital stock may eventually become quite large.

Well it depends on how you visualize the function of its growth. If it is linear or quadratic, then you probably could be right. If the function is of a higher order the growth of digital stock might find a limiting value, or even reverse itself. It usually happens when currencies of differnt nations are allowed to partially or freely float agains the currencies of other nations. And hopefully if that could be predicted, then it might be comparable to the accomplishments of George Soros - who broke the Bank of England.

Has anyone pointed out...

[InfinityWpi]

...the we live in a virtual economy already? I work for 40 hours a week and some virtual funds are direct deposited into my checking account. I then write a virtual check to pay my bills online. There's no such thing as money anymore; the gold standard never lasted, the paper standard is a joke, the digital standard is just a virtual economy with solid objects as the prize for playing the cubicle game. Hell, pay for your Everquest subscription using your credit card, pay the card with a virtual check, it's all just ones and zeroes!

Re:Has anyone pointed out...

[thelexx]

I would beg to differ that the gold stanard never lasted. It has in fact lasted for thousands of years, and is still going strong, despite current world goverments attempts to ignore/hide it. Remember that thirty years or so, the period since the US 'gold window' was 'closed', is pretty much a blink of the eye in historical terms. And my sig is from a speech Greenspan made just last year iirc.

Reporting Virtual Earnings to Real Tax Authorities

[G4from128k]

I wonder when the U.S. Internal Revenue Service will require online gaming companies to report the earnings of players? At least some MMORG players are starting to worry about this issue.

The extent that virtual economies let "players" perform virtual jobs and earn virtual money that can be used to buy valuable products and services is the extent such virtual income is taxable. If enough players earn more money online than they pay in monthly fees, then said players are effectively gainfully employeed and profitable. If the virtual money is exchangable for real money, then it becomes much more likely that the IRS could get interested.

Hmmm... do virtual earnings count as earnings in foreign country?