Learning About Real-World Economies Through Game Economies

Reuters has a report about research being done on the in-game economies of MMOs like EverQuest II and World of Warcraft to better understand much larger economic situations in the real world. The games are used as case studies where researchers can do controlled experiments that they couldn't necessarily attempt if real money or goods were involved. "After studying 314 million transactions within the fantasy world of Norrath in EverQuest II, including trading in-game goods like armor, shields, leather, herbs and food, the researchers were able to calculate the GDP of one of the game servers (the back-end computer that hosts thousands of players in one world). As more people opened accounts and flocked to Norrath, spending money on new items, researchers saw inflation spike more than 50 percent in five months. 'We have seen that kind of volatility during times of war and in developing nations in the real world,' said [Dmitri Williams, assistant professor at the USC Annenberg School for Communication]. 'Our own economy has turned out to be less stable than we'd all assumed.'"

Comments

I for one...

[Anonymous Coward]

wholeheartedly welcome our new nerd overlords.

Re:I for one...

[Anonymous Coward]

Right... as if someone with knowledge of real world economics could actually be put in a place of authority.

Re:I for one...

[causality]

Right... as if someone with knowledge of real world economics could actually be put in a place of authority.

My thought was something like this. Specifically, from the summary:

Our own economy has turned out to be less stable than we'd all assumed.

Well let's see now. We have fiat currency instead of representative currency (an example of which is the gold standard). Furthermore, the way fractional reserve banking in general and the Federal Reserve in particular is set up, there is always more debt built into the system than there are dollars in circulation. That's because debt is attached to money the moment it is created; i.e. for every X dollars in circulation there is always X+Y debt. This system is just not sustainable. How could it ever do anything but ultimately fail? Who are these people who expected it to be a paragon of stability and sustainability?

The real joke, though it's not a funny joke, is that this system as we know it came from the Great Depression. Its purpose was to ensure that such depressions would not happen again. By that I mean, this is how it was sold to the public. Isn't this typical, that an undesirable system that would not otherwise be accepted is proposed during a time of crisis and becomes entrenched? It's not like we have never seen that pattern before...

Re:I for one...

[blahplusplus]

"This system is just not sustainable. How could it ever do anything but ultimately fail? Who are these people who expected it to be a paragon of stability and sustainability?"

The same thing was said about the gold standard, every tom dick and harry intellectual thinks they "know" how to run an economy I call 100% BULLSHIT. Especially austiran economists, some of the most dogmatic, ideologically driven people on the face of the earth.

The real issue is that because society has become so specialized and because we use money as a store of value it's one of the KEY components of why society is so unstable because in a specialized society money must constantly be circulating between people and real goods, the problem is jobs and industries are not permanent in economies, they are constantly in upheaval being moved around, created, or destroyed because and because we only pay people if they have a job or are working, the people without jobs for any length of time start to put stress on the system.

Money ideally is supposed to keep track of debt's and obligations but here's the thing: As a medium of exchange it can't deal with the real world upheavals complexities of specialized society.

Even if austrians got their way by eliminating the fed they would have all the same issues under the gold standard, because monetary policy is only one aspect of the economy, the other is to keep money constantly flowing between those who need it (for necessities) and those who produce them (the businesses), the problem is their becomes large asymmetries because of our technology and ability to do more things with less people, which leaves a huge surplus population in a precarious, temporary and unstable jobs as the march of tech moves on and people simply can't keep up with the real world technological and political changes taking place.

Inflation is nothing more then debt and risk distribution, if Group A charges more for necessities B, the group with the least money is constantly being indebted by inflation.

Certain kinds of inflation (not all kinds) of course is an aspect of using money as a medium of exchange.

Re:I for one...

[Wildclaw]

for every X dollars in circulation there is always X+Y debt. This system is just not sustainable. How could it ever do anything but ultimately fail?

There is nothing unsustainable about it. The X dollars in circulation just have to circulate fast enough. If fractional reserve banking has a flaw, it is the same thing that is its main advantage, and that is that it adepts to the demands of the economy. It amplifies both good and bad intentions of making use of money.

In the last 30 years there has been a lot of bad intentions going on, building on bubble after bubble. But blaming it on FRB is just plain wrong. There are real things in the economy that are unsustainable. Having the debt levels rise faster than the income levels would be one such thing. Having the lower and middle class owning a lesser and lesser percentage of the wealth would be another. And it isn't difficult to find more examples.

Having said all that, there are of course faults in how FRB is implemented in the US. There is for example no reason why a government should need to get in debt just to create money. That has nothing to do with the basic idea of FRB. Having a private institution running the money supply is another very stupid idea. Finally, you need regulators and law makers who generally aren't corrupt to ensure that the FRB system isn't abused. And that last thing is something that doesn't exist in the US right now, or most banks would have been shut down already, just by looking at their balance sheets. The only thing keeping the banks alive is corruption.

is that this system as we know it came from the Great Depression

Yes and no. The system today mostly has its origin in the 1980s. It may look similar to the old system, but all safeguards and general ideas of sanity has been removed as an ongoing process to promote "modern" capitalistic principles. The idea of balance has been totally abandoned and instead the concept that anything is right as long as it produces higher numbers has been promoted.

Re:I for one...

[Curunir_wolf]

"This system is just not sustainable. How could it ever do anything but ultimately fail? Who are these people who expected it to be a paragon of stability and sustainability?"

The same thing was said about the gold standard, every tom dick and harry intellectual thinks they "know" how to run an economy I call 100% BULLSHIT.

Lol! I guess you know better, and we should trust you instead? As well as all the people claiming they know how to "run" an economy but somehow keep getting proven wrong.

Especially austiran economists, some of the most dogmatic, ideologically driven people on the face of the earth.

Not sure what "ideology" you think the "austiran"[sic] economists are espousing. More like they have developed a theory of economics that has been proven to predict results over and over again, including the current state of the economy. keynesians keep claiming that Austrian school is old, outdated, discredited. And yet their own theories of how they should be able to use central planning to produce bust-free perpetual growth somehow never works.

The real issue is that because society has become so specialized and because we use money as a store of value it's one of the KEY components of why society is so unstable because in a specialized society money must constantly be circulating between people and real goods, the problem is jobs and industries are not permanent in economies, they are constantly in upheaval being moved around, created, or destroyed because and because we only pay people if they have a job or are working, the people without jobs for any length of time start to put stress on the system.

Money ideally is supposed to keep track of debt's and obligations but here's the thing: As a medium of exchange it can't deal with the real world upheavals complexities of specialized society.

Interesting theory. Should I subscribe to your newsletter?

I really can't follow what you are talking about here - it sounds like you think money itself should be eliminated. Do we go to barter? Is that supposed to "keep up" with upheaval and complexity better? Even if what you say is true, it doesn't explain why at times (like today, and the Great Depression) nearly all industries are faced with contraction at the same time, and all of them shed jobs, instead of just one or a few sectors. Austrian theory explains this very well.

Even if austrians got their way by eliminating the fed they would have all the same issues under the gold standard, because monetary policy is only one aspect of the economy, the other is to keep money constantly flowing between those who need it (for necessities) and those who produce them (the businesses), the problem is their becomes large asymmetries because of our technology and ability to do more things with less people, which leaves a huge surplus population in a precarious, temporary and unstable jobs as the march of tech moves on and people simply can't keep up with the real world technological and political changes taking place.

But it's exactly the Fed and central banking policies that interferes with that process. By making credit artificially cheap (or artificially expensive), people make wrong choices about where to invest capital. Then you have a unsustainable bubble that will inevitably collapse. Creating money doesn't create extra consumers - it just puts industries and consumers deeper into debt until they can't continue to pay it - at which point the overdue correction drags the entire house of cards down.

Inflation is nothing more then debt and risk distribution, if Group A charges more for necessities B, the group with the least money is constantly being indebted by inflation.

Certain kinds of inflation (not all kinds) of course is an aspect of using money as a medium of exchange.

I don't know where you got this idea. Inflation is

Re:I for one...

[eiMichael]

You say that it is sustainable, please elaborate. Because unless you're ignoring the presence of interest rates, the money owed will always exceed money existing. This ends with people or businesses going bankrupt unless there is perpetual growth, which is also unsustainable.

Re:I for one...

[Sapphon]

[T]he way fractional reserve banking in general and the Federal Reserve in particular is set up, there is always more debt built into the system than there are dollars in circulation. That's because debt is attached to money the moment it is created; i.e. for every X dollars in circulation there is always X+Y debt. This system is just not sustainable. How could it ever do anything but ultimately fail?

Dear Parent, I presume you understand the fractional reserve system so you can skip down to paragraph 4 whilst I provide an Economics 101 refresher for the gallery (and this really is first-semester stuff; I taught it earlier this year):

You and all your friends deposit money at the bank. The bank holds a fraction of the money in reserve (hence the name), at minimum the amount the law specifies, usually plus some amount X. We'll come back to this. The rest of the money it lends to people who want to borrow it; they pay interest, you get interest, the bank takes a cut, hooray.

These borrowers spend the money, and the people who get it stick some of it back into the bank, where the cycle starts afresh. It depends on how much money the bank holds in reserve and how much the populace deposits but, yes, usually there is more debt around than originally produced currency.

Now, you claim that this is a Bad Thing (TM). You don't state why. Presumably you are relying on the intuitive logic that having more debt than official assets can't be good. That intuition relies on the following crucial point: having more debts than assets is only a problem when people try and collect on their debts. Amazingly, this very rarely happens.

You have the absolute right to go to the bank and demand your money, in bar. All of it. Buy who does that? Practically no-one. You ask for a portion of it; some here, some there, more at Christmastime and during the holidays. So long as the banks have enough money to give everyone what they want – and this is the amount X from above – holding the rest of it would just be inefficient, since none of the depositors want it and there are plenty of borrowers who can do productive things with it. Fact: if the banks decided to hold more money in reserve, the government/central bank would simply create more 'original' dollars until the effective level of money is back where it was.

The fractional reserve system does have its problems. But the problems lie in deciding how high the reserves should be – too low, and when people do decide they want their money everything comes crashing down (e.g. AIG). Too high, and businesses can't borrow money and productive potential lies wasted (e.g. the current situation in much of Europe and the US). But the system is not inherently flawed. If the right level of reserves are held – and this is usually the case – the system provides a much more flexible and efficient supply of money than a representative currency.

Re:I for one...

[Timothy Brownawell]

We have fiat currency instead of representative currency (an example of which is the gold standard).

The gold standard isn't actually different in this respect, because gold has very little nutritional value and sucks for building things.

Furthermore, the way fractional reserve banking in general and the Federal Reserve in particular is set up, there is always more debt built into the system than there are dollars in circulation. That's because debt is attached to money the moment it is created; i.e. for every X dollars in circulation there is always X+Y debt.

I thought it was actually that there was X-Y debt.

The real joke, though it's not a funny joke, is that this system as we know it came from the Great Depression. Its purpose was to ensure that such depressions would not happen again. By that I mean, this is how it was sold to the public. Isn't this typical, that an undesirable system that would not otherwise be accepted is proposed during a time of crisis and becomes entrenched? It's not like we have never seen that pattern before...

Which parts exactly came from the great depression? I seem to recall fractional-reserve banking being a bit older than that.

Re:I for one...

[Vintermann]

More like they have developed a theory of economics that has been proven to predict results over and over again, including the current state of the economy. keynesians keep claiming that Austrian school is old, outdated, discredited. And yet their own theories of how they should be able to use central planning to produce bust-free perpetual growth somehow never works.

Somehow, I feel like I look at a post that was written three years ago.

Re:I for one...

[Anonymous Coward]

either way creating FED in 1913 was the beginning of the end.
There was almost no inflation in 19th century and since FED creation dolar lost 96% of its value. Why it took US economy long 100 years to fall? Gold standard was abandoned in 1971 (it kept insane ideas in check) and all that time dollar was the world's reserve currency which artificially pumped up its desirability and purchasing power and allowed the US to live on credit for decades.

Re:I for one...

[Anonymous Coward]

Fiat currency works if you can trust the people in charge to act responsibly and in the interests of the people. Obviously, that's not the case with what we've currently been seeing. Therefore, we need a backing that these imbeciles can't screw with.

Re:I for one...

[Nathrael]

Now, whatever one may think about the post you are quoting...he certainly is right in saying that Austrian economists are *very* dogmatic people. Austria is a deeply "social-capitalist" (read: Socialism Light) country, we have no political or otherwise opposition (all our parties are either socialist or nationalsocialist, with the exception of the Young Liberals which only ran for the EU elections and got almost no votes because they couldn't afford an election campaign) to that dogma here, and it likely will stay in place for a long time.

Re:I for one...

[Curunir_wolf]

Um, well, the "Austrian School of Economics" has its origins with St. Thomas Aquinas in Spain, and doesn't really have anything to do with Austria and its government or politics.

Re:I for one...

[blahplusplus]

Interesting theory. Should I subscribe to your newsletter? I really can't follow what you are talking about here - it sounds like you think money itself should be eliminated. Do we go to barter? Is that supposed to "keep up" with upheaval and complexity better?

The problem is that money as a store of value is problematicc because people can't just wait forever for food/electricity/clothes/housing, an austrian run economy would quickly devolve into one where there would revolution I have no doubt, because they'd be forced to realize the world is a physical place and their theories of human action break under constraints of physics and physical systems and their transformation.

Any theory that does not account for how the world actually is physically integrated into the economy is laughably naive.

But it's exactly the Fed and central banking policies that interferes with that process.

But you're missing my point, the instability would not go away! You're missing the physical aspects of the economy, if x amount of people are umemployed for Y time and their money is quickly depleting, you can't have that happen to a huge population without huge political discontent and in the worse case scenario revolution.

Everyone (anyone who is anti-fed) assumes that moving back to a gold standard or some other currency is going to fix thing - it is not, you're just trading one set of policies for another, the fundamental problem of specialized society connected by interlocking and highly unstable trade networks, and technological displacement is still there.

By making credit artificially cheap (or artificially expensive), people make wrong choices about where to invest capital. Then you have a unsustainable bubble that will inevitably collapse. Creating money doesn't create extra consumers - it just puts industries and consumers deeper into debt until they can't continue to pay it - at which point the overdue correction drags the entire house of cards down.

Except that bubbles are natural outcome of using money, bubbles will ALWAYS occur under the fed, gold standard or not. People are the cause of bubbles not anything else, and because we live in a specialized society the effects of too many people failing at once is transmitted through the whole system and that means I get fucked for someone elses stupid economic decisions, austrians take a hyper individualistic view of the economy that is simply not real. Group of persons actions A far away from me can economically have negative effects on me without my consent.

Theit whole big push of "no initiation of force" is a farce, since monetary systems require the initiation of force else you would have rampant counterfeiting.

I don't know where you got this idea. Inflation is too much money chasing too few goods. Prices go up because there's more money in the system and production of goods is either stagnant or declining. And all this mis-allocation of resources is caused by central planners like the Fed sending the wrong signals to investors and consumers.

No there are different kinds of inflation, this is the whole problem to begin with. Once someone is taught somethign about economics by people they admire, or they are ideas they fancy. They are usually never willing to question it because that's what they've been taught. Inflation occurs for many reasons.

I'm not a big believer in economists understanding of inflation because the physics of how economies physically work. Once you stop thinking in terms of theory and in temrs of observable physical systems you come to understand money is a political conveneience to distribute debt and obligation, since money itself is a double edged sword as a medium of exchange.

Now I'm not saying I have all the answers, but I do know that the way we currently think about money and how we calculate the allocation of resources and obligations in society has

Re:I for one...

[Wildclaw]

You say that it is sustainable, please elaborate. Because unless you're ignoring the presence of interest rates, the money owed will always exceed money existing. This ends with people or businesses going bankrupt unless there is perpetual growth

This is basic economics, and has little to do with FRB. But anyway, the answer is that money circulates. As long as those who lent out money uses the interest they collect to buy stuff from those in debt, everything remains balanced. Theoretically I can pay back a $100 loan with a single dollar bill, as long as I pay it back $1 at a time, and the one I pay it back to keeps buying stuff from me.

Of course, the real problem here is that borrowing to consume is bad as you won't have anything that the borrower will want to buy after you consumed, so you won't be able to pay him back. Borrowing to buy something at bubble prices is also bad for the same reason. You won't be able to pay back what you borrowed.

Borrowing is best done on actual stuff that increases productivity. Specifically, when the interest on the loan is less than the productivity increase. In that case both parties of the transaction profit by getting part of the productivity increase.

Re:I for one...

[wellingj]

I can agree with the way fractional banking works in the private sector. I don't think a bank should be regulated on how much money it holds in reserve. Instead, it should have to tell it's customers how much is held in reserve, then let the people decide if they want this bank or that bank. If there is a run on a bank, guess you learned your lesson the hard way.

The problem I have is that the FED doubled the money supply in a year. If that gets into the economy at large you will have to pay $10 for your average McDonalds meal. Most people will be confused and start some stupid campaign to have price fixing in fast food 'for the poor folk'. The whole time very few will realize who actually stole the value of the dollar.

Re:I for one...

[Vaphell]

The gold standard isn't actually different in this respect, because gold has very little nutritional value and sucks for building things.

people of Zimbabwe beg to differ http://www.youtube.com/watch?v=7ubJp6rmUYM

Re:I for one...

[Trepidity]

Is there actually a "right" level of reserves that can withstand crises, though? Crises feed on themselves, and bank runs have happened throughout history. If people are really convinced that the financial system is going down, everyone will demand all their money, so the only safe level of reserves is damn near 100%. This can be mitigated somewhat if government props up the banking system, e.g. through deposit insurance, but it doesn't fix itself.

Re:I for one...

[Hognoxious]

Unfortunately, pegging the money value to an arbitrary mineral isn't it.

Re:I for one...

[digsbo]

Right on for inflation. And the in-game inflation can be easily explained: It's too cheap to mine gold.

Re:I for one...

[Curunir_wolf]

That's a pretty long-winded way of saying you don't understand economics. But at least it's a good starting point.

You may not like "money" (however you define it) as a way of allocating resources, but it's the only one we have right now. Maybe some day we could transition to something like the "reputation system" envisioned in Accelerando, but we have to work with what we have to work with now.

The arguments you make point to Austrian economics working better than anything out of Keynesian, as it is closer to following physical assets than the artificially controlled fiat money that Keynesians prefer. Yes, even with real assets being used as a medium of exchange, there will be bubbles and busts, but they will be very much limited to specific industries or companies, rather than across the entire economy like happens now. But that's because entrepreneurs have to make guesses about the future - it can't be predicted in any deterministic way, since it involves human behavior. But it's a better system than letting a few central planners make those guesses for everyone, because they can never be as accurate as millions of people making their own guesses based on experience and self-interest.

Re:I for one...

[astar]

You managed to have a bit of observational sanity. However, you would be better off rejecting monetarist theory. Try this. The physical economy is deflating, the money supply is hyper-inflating. Debt is increasing faster than money. So, big crash.

The historical analogy is to Wiemar Republic 1923. So we will have a blowout this year, perhaps as early as this month. Reasonable people differ on how bad it will be. This month I am looking at the October 19th to October 25th period specifically.

Anyway, at times I have favored Glass-Steigel approaches and I think you would have also. These would have been good say as late as 2007. Now they would be a joke.

Re:I for one...

[mrlibertarian]

The X dollars in circulation just have to circulate fast enough.

I think you're confusing cause and effect. For example, in hyperinflation, it's true that people will tend to spend their depreciating money very quickly. However, the currency is not losing value because people are spending their money quickly; the currency is losing value because the government is rapidly expanding the money supply.

Why do you think we had deflation during most of the 19th century? Because people spent their money slower and slower? No, it was because the money supply was relatively stable, while the number of goods rose.

...building on bubble after bubble. But blaming it on FRB is just plain wrong.

Did you ever notice that bubbles tend to grow when the fractional reserve banks are quickly expanding the money supply, and bubbles tend to pop when the rapid expansion finally slows or stops? There certainly seems to be a connection.

What blows my mind is how liberals often act like the Great Depression somehow vindicated their case against the unregulated free market. The reality is that the Austrian economists were vindicated. They said, "Don't inflate the money supply." But, of course, that's what the Fed and the FRBs did during the 1920's, and a bubble grew. The Austrians said, "Do nothing. Let the economy fix itself." But, unlike in previous panics, Hoover did not listen. He intervened, and the economy grew worse. Then Roosevelt intervened even more, and things got so bad that we now call it the Great Depression. And then there was WW2, which further devastated the economy. Finally, when the government lifted the war-time price controls, prosperity returned.

But now, Hoover is remembered as a non-interventionist, when he in fact intervened more than any president before him. Perhaps Bush will be remembered as a non-interventionist as well, because, just as Hoover did not intervene as much as Roosevelt, Bush did not intervene as much as Obama.

Here we are in the 21st century, and we still haven't learned out lessons. Look at what the Fed has done to the monetary base since October. That's a ticking time bomb. Also, we were told that if we didn't pass the stimulus, unemployment would go all the way to 9%. Well, we passed the stimulus, and now unemployment is 9.8% and still climbing! We've increased the minimum wage (i.e. made low-paying jobs illegal), extended unemployment insurance (i.e. took money from employers and used it to pay people to stay unemployed) and now teenage unemployment is over 20%. Isn't fucking with the economy fun?

Christ. Hopefully, when we start getting 1970's style stagflation, people will finally wake up and the pendulum will swing back towards the free market. But I'm not holding my breath.

Re:I for one...

[Sapphon]

Is there actually a "right" level of reserves that can withstand crises, though?

There is, but unfortunately it's not the same level that's "right" for the non-crisis time. Ideally the financial sector would see the crises (or rather, the change in demand for or supply of reserves) coming and adjust, but that obviously doesn't happen when external shocks occur.

Re:I for one...

[Vaphell]

Except that bubbles are natural outcome of using money, bubbles will ALWAYS occur under the fed, gold standard or not.

removing FED would work much better than what we have now. In 19th century the US economy was stable and after FED creation in 1913 we had several serious recessions.

Bubbles happen because there is fast, steady influx of new players who want to profit quickly - you only have to put some cash on the table to enter the game and 2 years later you get guaranteed +50% in return. Where do players get their money to enter from? They take loans. If there was a limited money pool and no central planning, interest rate would instantly shoot through the roof thanks to free market forces (when people compete for money from banks, interest rate raises). In such scenario the forming bubble meets its pin of doom much quicker because people are discouraged when IR starts to match projected profits. When you keep the rate of 1% for years no matter what (like the FED did), don't be surprised that everybody and his dog enters the game - after all money is almost free and almost guaranteed to pay for itself... until the supply of suckers runs out and the whole Ponzi scheme collapses.

What we had recently was a whole economic growth for a decade or even longer built upon bubbles of nasdaq, housing market and whatnot. GDP growth had nothing to do with productivity and other such worthless qualities, it was all hot air in the financial world playing with big virtual numbers. Such scenario would never happen with free market rules being the only ones defining the game.

Whole situation with central banks micromanaging the economy is like meddling with the ecosystem. You may think you can somehow make it 'better', but you just can't do it right - unintended consequences of your actions will always bite you in the ass. The system will find it's equilibrium by itself

Re:I for one...

[xelah]

Inflation is too much money chasing too few goods. Prices go up because there's more money in the system and production of goods is either stagnant or declining.

Prices depend on the velocity of money, too. If everyone decides to hang on to their money more tightly, so that each piece of it changes hands half as often, say, then the amount of money in the system can be increased without causing inflation. Making it impossible to adjust your money supply (which is all the gold standard really achieves) doesn't eliminate inflation and deflation, it just removes a potentially valuable policy response to changes in things like consumer confidence and the savings rate. That's why economies that took longer to leave the gold standard took longer to come out of the great depression - they couldn't respond to the fall in the velocity of money by creating more.

You also shouldn't just assume that inflation is always and necessarily evil. Especially not in the presence of price and wage stickiness - in some areas of some economies it's as near to impossible as makes no difference to reduce wages in nominal terms. A low level of inflation is quite possibly a good thing.

Re:I for one...

[Nefarious Wheel]

You may not like "money" (however you define it) as a way of allocating resources, but it's the only one we have right now

All tangential discussions of the value of money aside, I believe the studies will point out two things:

(1) That it's quite possible to get a grant to play computer games (disclosure: level 80 characters here, plural, think it's a good idea ;P);

(2) People may become aware that money exists primarily as numbers registered in one of a number of accounting systems, and nowhere else. If you think about it, most MMORPG's have a hierarchical system of banks and a means for transferring numbers (call it "gold pieces" or "plat" or "lindens", it's still decimal currency) from one account to another.

(3) Most game EULA's specifically forbid trading in-game items for real-world (!) valuta, presumably to make it more attractive and to keep the tax people away;

(4) ...???

Re:I for one...

[Wildclaw]

the money supply is hyper-inflating

The money supply is hyper inflating? M1 yes, but not everything else that is used as money. Printed money is up a lot as the federal reserve is trying to compensate the loss in debt and asset money (which they can't without really causing hyperinflation. But that money is mainly sitting in bank vaults so far, acting as little but deleveraging money.

If it actually started getting out to the population, then we could start seeing inflation. But as companies aren't borrowing, and consumers aren't borrowing, and banks aren't lending, the only way that will happen is through the government. Well, make that the federal government, because the states are broke also.

There is simply no demand to buy anything as everyone is trying to get out of their debts at the same time. When demand is lower than supply, prices go down, not up. You can't just force people and companies to start buying stuff when they don't want to.

Re:I for one...

[azgard]

I don't believe in Austrian economics, I don't think they are right. The problem with monetary instability goes deeper than to FRB, it goes (I believe) as far as to lending for profit.

Steve Keen has a nice theory (developed from Minsky) about this. I don't have much time to explain, but you can find his blog at http://www.debtdeflation.com/

He notes, for example, that changes in M2 are preceeding changes in M0 (which by itself invalidates Austrian theory, by the way). Which means that commercial banks increase debt first, and then come to central banks asking to cover it. If we hadn't FRB or central banks would refuse to cover this additional debt, then you would have a credit crisis. But not always the debt is unsustainable - if you have real growth, then growth in debt can be sustainable. That's the basic advantage of FRB with respect to gold standard - unlike gold standard, FRB can adapt money supply to finance real growth. With gold standard, it pays off to hold on money during real growth, because money increase value, and it means nobody wants to invest. But they are both inherently unstable, because the debts can grow even if there is no corresponding real growth.

Re:I for one...

[rohan972]

There are real things in the economy that are unsustainable. Having the debt levels rise faster than the income levels would be one such thing. Having the lower and middle class owning a lesser and lesser percentage of the wealth would be another.

Fractional reserve banking by definition causes debt levels to rise faster than income levels since it is ultimately income which provides the reserve which is only a fraction of the lending. Allowing banks to create chequebook money out of nothing and lend it out at usury causes a transfer of wealth to them from the lower and middle classes. The problems you cite are intrinsic to FRB. They are features, not bugs, remember the banks came up with this fraudulent system to benefit themselves, not their customers.

Finally, you need regulators and law makers who generally aren't corrupt to ensure that the FRB system isn't abused.

Ok, let's implement fractional reserve banking AFTER you find out how to ensure a constant supply of regulators and law makers who generally aren't corrupt.

Re:I for one...

[rohan972]

The gold standard isn't actually different in this respect, because gold has very little nutritional value and sucks for building things.

It does, however, have good decorative value with substantial social and reproductive benefits for those who bestow such decorative pieces wisely.

for every X dollars in circulation there is always X+Y debt.

I thought it was actually that there was X-Y debt.

A common misconception. Debt is the basis for most of our currency supply, that's why loan defaults cause deflation. When a loan is made by the commercial bank (which keeps only a fraction of the central bank money as reserves), using the central bank money from the commercial bank's reserves, the money supply expands by the size of the loan.

Re:I for one...

[Wildclaw]

I think you're confusing cause and effect. For example, in hyperinflation, it's true that people will tend to spend their depreciating money very quickly. However, the currency is not losing value because people are spending their money quickly; the currency is losing value because the government is rapidly expanding the money supply.

Inflation: Supply decrease, demand increase, money supply on main street increase
Deflation: Supply increase, demand decrease, money supply on main street decrease

Did you ever notice that bubbles tend to grow when the fractional reserve banks are quickly expanding the money supply, and bubbles tend to pop when the rapid expansion finally slows or stops? There certainly seems to be a connection.

Cause and Effect. Why is the fractional reserve banks expanding money supply. Simple, because there is demand.

They said, "Don't inflate the money supply."

The M1 supply has always lagged behind the market, not the other way around. But austrian economists are just as little interested in facts as the keynesian economists.

" But, unlike in previous panics, Hoover did not listen. He intervened, and the economy grew worse. Then Roosevelt intervened even more, and things got so bad that we now call it the Great Depression. And then there was WW2, which further devastated the economy. Finally, when the government lifted the war-time price controls, prosperity returned.

Talk about rewriting history.

But now, Hoover is remembered as a non-interventionist, when he in fact intervened more than any president before him. Perhaps Bush will be remembered as a non-interventionist as well, because, just as Hoover did not intervene as much as Roosevelt, Bush did not intervene as much as Obama.

No, Obama would be Hoover. He is intervening, but in all the wrong ways. Just like Hoover. And he probably thinks the worst is over. You can't fix the problem until you face reality. And most people haven't faced reality yet.

Here we are in the 21st century, and we still haven't learned out lessons. Look at what the Fed has done to the monetary base since October. That's a ticking time bomb.

Yeah, just like it was when Japan did the same. Or to take your favorite example, the US during the great depression. Of course, this time they have added quite a big and quite quickly. But it won't help.

Also, we were told that if we didn't pass the stimulus, unemployment would go all the way to 9%. Well, we passed the stimulus, and now unemployment is 9.8% and still climbing! We've increased the minimum wage (i.e. made low-paying jobs illegal), extended unemployment insurance (i.e. took money from employers and used it to pay people to stay unemployed) and now teenage unemployment is over 20%. Isn't fucking with the economy fun?

Fucking with the economy? During the 90s and 00s, the economy had the least regulation since the great depression. Reagan and the following presidents all saw to that. The Austrians got what they wanted. Of course, they forgot to include the corruption that comes with it. They always do, because Austrians economy is like a game economy. Totally unrealistic when actually implemented in reality.

Re:I for one...

[Wildclaw]

Fractional reserve banking by definition causes debt levels to rise faster than income levels since it is ultimately income which provides the reserve which is only a fraction of the lending. Allowing banks to create chequebook money out of nothing and lend it out at usury causes a transfer of wealth to them from the lower and middle classes.

Bullshit, bullshit and bullshit.

The reserve is a multiplier of the base money supply which varies depending on the current economy's demand for money. The multiplier also has a cap which is dependent on the reserve ratio, but it rarely comes into play, as it is the demand of the economy that dictates everything, and not the other way around. Banks can at most be more or less leisurely with how they lend out money, and as such what risks they take. But that is it.

Btw, It is only in the last 30 years with consumer borrowing that debt has gone out of control, and not in every country. And that has little to do with FRB, and more to do with insanity of everyone involved. Consumption debt is bad, plain and simply.

But they aren't creating money out of nothing. They are lending out the same money you deposited. No different than if I have borrow 100 dollars from you and lend it to my friend. Of course, I did it without keeping any reserves at all. If you deposit money into an account, then you should be aware of that. Otherwise you truly are an idiot. Because, how else did you think the banks created that interest. It wasn't by letting your money sit in the bank vault was it.

Oh, and if you think the constant inflation through the 20th century has anything to do with FRB, then you are wrong. Constant inflation is about the government using fiat money to tax people. Nothing more, nothing less. Over time 2% tax a year does add its toll, so it looks like a huge degradation of worth in money. But compared to the total tax pressure, it is actually not that big of a tax.

Re:I for one...

[Curunir_wolf]

Inflation is too much money chasing too few goods. Prices go up because there's more money in the system and production of goods is either stagnant or declining.

Prices depend on the velocity of money, too. If everyone decides to hang on to their money more tightly, so that each piece of it changes hands half as often, say, then the amount of money in the system can be increased without causing inflation. Making it impossible to adjust your money supply (which is all the gold standard really achieves) doesn't eliminate inflation and deflation, it just removes a potentially valuable policy response to changes in things like consumer confidence and the savings rate.

Here, you are just talking about some of the mechanisms of inflation. A better way to describe it is the amount of capital in the system. If, as you suggest, the response to reduced spending is for a central planner to increase the amount of fake money, then prices are propped up when they should naturally be falling. Eventually this will catch up with you when people start spending, and you'll have to raise interest rates and inflation will take off.

This "potentially valuable policy response" that you advocate is simply a way to interfere with the ability of people to make rational decisions about spending and saving, and prevent any corrections in resource allocation from occurring where they should.

That's why economies that took longer to leave the gold standard took longer to come out of the great depression - they couldn't respond to the fall in the velocity of money by creating more.

I'm afraid you've been misinformed. The US was one of the last economies to recover from the Great Depression, precisely due to the application of the policies you favor. They didn't "go off the gold standard" at all until 1971. Rather, FDR confiscated all the gold, then decided the US dollar was worth about 1/2 of the amount of gold it was worth before. Huge inflation of the money supply. None of this worked - unemployment in the US remained about 18% until WWII.

You also shouldn't just assume that inflation is always and necessarily evil. Especially not in the presence of price and wage stickiness - in some areas of some economies it's as near to impossible as makes no difference to reduce wages in nominal terms. A low level of inflation is quite possibly a good thing.

Yes, you are correct. But inflation should be driven by the resources available, demand for various goods, and the level of labor available, not by some central planning facility trying to manage everybody's decision-making. The natural level of inflation in a gold-backed monetary system is about 3%, as that's the typical amount of gold entering the economy each year. But that's mitigated since the practice of mining, refining, and distributing gold is real work, actual effort that provides value and jobs.

Re:I for one...

[Vaphell]

Fucking with the economy? During the 90s and 00s, the economy had the least regulation since the great depression. Reagan and the following presidents all saw to that. The Austrians got what they wanted. Of course, they forgot to include the corruption that comes with it. They always do, because Austrians economy is like a game economy. Totally unrealistic when actually implemented in reality.

No, Austrians didn't get what they wanted - interest rate was not decided by the free market forces but by arbitrary decisions of the FED. When people rapidly get loans in ridiculous amounts, it should end up quickly raising interest rate to the 2-digit range, yet it was kept near 0 because it stimulated the economy, kept that frightening R-thing at bay and produced nice GDP growth numbers - debt driven consumer spending is so good and financial institutions leveraged 50:1 have ridiculously high profits to show to their shareholders. Politicians are happy, voters are happy, disaster is around the corner. Meddling with interest rates in a way FED did is anything but Austrian economists' wish.

Re:I for one...

[Curunir_wolf]

He notes, for example, that changes in M2 are preceeding changes in M0 (which by itself invalidates Austrian theory, by the way).

No, it doesn't. It just shows how the Fed manipulates the economy. Just because banks know that they can go to the Fed or the Treasury to get more debt or a bailout when they are in trouble doesn't mean that it's caused by rational decision-making, it just means that the banks understand the kind of system they are working under, which allowed private profits to be made, and that risk is mitigated by allowing huge debts to be socialized by the tax system.

But not always the debt is unsustainable - if you have real growth, then growth in debt can be sustainable. That's the basic advantage of FRB with respect to gold standard - unlike gold standard, FRB can adapt money supply to finance real growth.

And how do you determine what is "real growth"? We had lots of growth during the dot-com boom, financed by cheap debt. Yet, it couldn't be sustained. I wonder why? Keen (and Minsky) don't seem to be able to explain this. They continue to proposed the same policies that failed then, and are failing now.

With gold standard, it pays off to hold on money during real growth, because money increase value, and it means nobody wants to invest.

Actually, the opposite is true. You don't get "growth" by holding onto money, even if it's gold. Even on a gold standard some inflation occurs. The only way to increase your saving (or keep it from losing value to inflation over the long term) is to invest that money in some value-creating enterprise.

But they are both inherently unstable, because the debts can grow even if there is no corresponding real growth.

Exactly. Especially when, for instance, the Fed keeps interest rates artificially low, creates a housing bubble, and people borrow money against and artificially inflated home value. If the interest rates were allowed to go up in response to the reduced savings, the bubble would not grow so large and the adjustment would be short and easy to deal with, instead of creating a global crises like this one did.

Re:I for one...

[blahplusplus]

"That's a pretty long-winded way of saying you don't understand economics. But at least it's a good starting point."

This is exactly why I don't talk about economics, you exemplify my point:

"Most people are way too narrowminded to entertain thoughts that don't speak their language or to their master conceptions or theories they fancy, thats what I hate about not just austrians, but all economists."

You think I don't understand but that's simply not the case. No man has a monopoly on the truth and there are many different paths to it and ways it is expressed, you dislike the way I express my factual observations so you accuse me of not understanding economics. This is EXACTLY why I often avoid such discussions. People tend to pre-decide their positions and then look for reasons to support those positions, and if someone disagree's the accuse that person of not understanding economics, it's 100% bs though I'm sorry to say.

This is exactly why debate is most fruitless since it has been precided by the a group of persons what is or is not, so there is no room for discourse.

Re:I for one...

[Timothy Brownawell]

for every X dollars in circulation there is always X+Y debt.

I thought it was actually that there was X-Y debt.

A common misconception. Debt is the basis for most of our currency supply, that's why loan defaults cause deflation. When a loan is made by the commercial bank (which keeps only a fraction of the central bank money as reserves), using the central bank money from the commercial bank's reserves, the money supply expands by the size of the loan.

But if everyone defaulted on all their loans, you're saying we'd end up with a negative money supply, rather than just a very small positive one?

Re:I for one...

[astar]

This is a good monetarist argument, but I find it hard to make predictions about reality based on something that is not real. The fundamental issue in economics is the nature of wealth. People early on tried land and gold. Here I am being a little cynical, but I think it fair to say the Soviet Union tried the sweat of the worker. Now the question is deliberately obscured as inconvenient.

I claim the monetarists says wealth is money. Gambling money, farm money, all the same. But we know the Weimar Republic had plenty of money. We have plenty of money. Sort of adapting to your view, I claim that at the present time, adding money to M1 increases non-productive sinkholes by more than the addition, thus even the hyper-inflation of M1 simply makes the matter worse. The debts cannot be paid.

   

Re:I for one...

[rohan972]

The multiplier also has a cap which is dependent on the reserve ratio, but it rarely comes into play, as it is the demand of the economy that dictates everything, and not the other way around.

Control of interest rates (the price of loans) is used to influence demand up or down as seen fit by the central banks. That's the point of them and openly acknowledged so I don't see how anyone could dispute this.

But they aren't creating money out of nothing. They are lending out the same money you deposited.

If they are lending out my money, why doesn't my available balance go down when someone takes out a loan? Clearly it is not the same money, it can not simultaneously be available to me and the borrower. Think about it, many people have a mortgage on their house, very few people have enough savings to loan enough to buy a house. If they are just loaning out deposits then for every person who takes out a $250,000 loan for their house you need other people with net savings (savings - loans) of $250,000. Do you really think that for every person with a $250,000 loan there are 10 with no debt and $25,000 in savings? Where are they?

What about loan defaults causing deflation, how is that? If the loan money was existing money none of it would disappear on default (no deflation), the borrower would be bankrupt, the lender would lose money but the money itself would still be in circulation. Don't take my word for it though, check what the Federal Reserve Bank of Chicago has to say: http://www.chicagofed.org/publications/fedcentralbank/fedcentralbank.pdf
To achieve this goal, the Fed works to control money at its source by affecting the ability of financial institutions to "create" checkbook money through loans or investments.

Re:I for one...

[Curunir_wolf]

No man has a monopoly on the truth and there are many different paths to it and ways it is expressed, you dislike the way I express my factual observations so you accuse me of not understanding economics.

I didn't accuse you of that, you stated it yourself. And I pointed out that it's a good starting point, because no one person or small group can understand macro economics well enough to be able to plan and manage it. Which is the point.

If I didn't response to some of your points that you felt were relevant, it's because I didn't understand your basis or point you were trying to make. Yes, there are many "ways it may be expressed", etc., but you have to find some common ground that allows you to communicate with someone else. That's great that you have some unique "view of truth" and "way of expressing" it, but the hard part is finding a way to communicate it with someone else.

Re:I for one...

[rohan972]

But if everyone defaulted on all their loans, you're saying we'd end up with a negative money supply, rather than just a very small positive one?

No:
(X+Y)-Y=X
even if Y>X

For clarification on this check what the Federal Reserve Bank of Chicago has to say: http://www.chicagofed.org/publications/fedcentralbank/fedcentralbank.pdf
To achieve this goal, the Fed works to control money at its source by affecting the ability of financial institutions to "create" checkbook money through loans or investments.

If the Fed confirms that financial institutions create money through loans can I stop having this debate with people over whether this is actually so? Here is the frightening reality: most people in our society are trading their time and services for something they have no clue as to the origin or real value - dollars. This is a site that represents a higher level of education than most and look at the threads on this topic, you will find an appalling level of ignorance regarding a good we spend a great deal of effort obtaining.

Re:I for one...

[blahplusplus]

No doubt about it. I may have misconstrued your post and I apologize for that but I've had discussions with people with such people directly and they are often very immune to any kind of dialogue.

Re:I for one...

[eiMichael]

Thank you for the interesting reply.

Re:I for one...

[sdeath]

Yeah, uh, you kind of miss the point here. Rothbard, "Fractional-Reserve Banking" and "Anatomy of the Bank Run", game over, you lose.

The problem with FRB: it constitutes fraud. While I maintain that this statement is prima-facie obvious, I have the feeling that it will escape some portion of the crowd, so we'll try a thought-experiment.

"Fractional reserve" banking says that for every, say, $1000 of demand deposits (ex. checking accounts), the bank need only keep some fraction available at any time, on the theory that not all $1000 will be demanded at once. Yes, that's sort-of true - statistically, most of the time, most people will be content to leave it in the bank, and only call it out as-needed. Most of these calls for money will, in turn, be deposited in another bank, thereby adding an extra level of "protection": inter-bank transfers can be "batched" and resolved on different time scales than the demand-deposit processing (e.g. accounts squared at end-of-day, end-of-week, whatever).

However, what the bank is saying when you deposit money in a demand-deposit account - "your money is available for withdrawal at any time of your choosing" - is, literally, not true. *Your* money has disappeared into someone else's pocket, in that it has been loaned out to some other party as soon as it hits the bank. This is not a "theoretical" untruth - it is a real untruth, in that at all times, the bank is illiquid, i.e. does not possess sufficient capital to redeem all its demand-deposit accounts on actual demand. This is what is referred to in any other instance as "constructive fraud". It is useful to compare this to the eponymous Ponzi scheme, where the fraud consists of there being no actual capital or investment to satisfy the promised payout schedule to current investors, requiring that new investors be found to service existing obligations.

This is not the worst feature of fractional-reserve banking, though. FRB is the gateway for the money multiplier and hence inflation; a bank with a reserve requirement of 5% (larger than the current reserve requirements, note; I believe they're hovering at less than 1%) can, with a deposit of $1000, immediately turn around and loan out $950 of that money. This functionally doubles the amount of money in the economy ($1000 of "fantasy" money, and $950 of "actual" money floating around). That $950 typically gets deposited in *another* fractional-reserve bank, almost invariably with the same reserve ratio (set by the central bank, and reinforced by consumer preferences; ceteris paribus, a higher reserve ratio implies lower interest rates on deposits, providing customers incentive to move their deposits to another bank), at which point the cycle starts again ($950 in "fantasy" money, of which $47.50 is kept on-hand, and the remaining $902.50 lent out). This multiplies that original $1000 of "real" money to something like $20,000 in terms of its real economic effect. SUPRISE INFLATIONSECKS LOL. Then, when you start printing up more money (cue the Fed) and tweaking reserve ratios (cue the Fed again), you wind up with - wait for it - more inflation. Inflation has well-known and universally-observed destructive effects, penalizing saving and encouraging increasing amounts of debt, since debt is paid off with future money that is worth less than the original loan. How's that working out for us so far?

(Side note: it is instructive to note the identity between fiat currency and counterfeit, with the only difference being the identity of the printer of money.)

Austrian economic theory consists of the "duh no-shit" observation that this has an effect on the economy - inflation makes money cheaper to obtain (hey, they print it for nothing!), thereby making marginal enterprises "profitable" under inflationary conditions. This produces the "boom". When those conditions cease - there is an lower bound on the worthlessness of fiat currency, beyond which it is not used except as kindling - all of those bad ideas *come home to roost*, with the acc

Re:I for one...

[Timothy Brownawell]

If the Fed confirms that financial institutions create money through loans can I stop having this debate with people over whether this is actually so?

Um, I know they create money that way. But the amount of money created is the same as the amount of debt created, not less. So the question is where the initial money comes from... which I think is the government printing bills or the electronic equivalent, and I don't think these involve debt. They certainly don't involve more debt than the amount of money produced.

...looking at your earlier reply, "Debt is the basis for most of our currency supply, that's why loan defaults cause deflation.", I think we're saying the same thing: creating a certain amount of debt creates an equal amount of money, but there is a little bit more money than debt.

Re:I for one...

[rohan972]

Um, I know they create money that way. But the amount of money created is the same as the amount of debt created, not less. So the question is where the initial money comes from... which I think is the government printing bills or the electronic equivalent, and I don't think these involve debt. They certainly don't involve more debt than the amount of money produced.

Then what we have is not a misunderstanding of the concepts involved but an unclear explanation on my part. I (and I assume causality, who you originally replied to) was referring to the printed money as "money" or X and the checkbook money as "debt" or Y. So debt will be only a portion of the total money supply but is always much larger than the supply of printed money. In fact, just the interest on Y can be larger than X. I assume that this is what causality was referring to as it means we have a mathematical requirement of a constantly expanding money supply to repay the debt. This can either be in proportion to the goods and services produced, requiring an infinitely expanding use of resources, or through price inflation.

Re:I for one...

[xelah]

Here, you are just talking about some of the mechanisms of inflation. A better way to describe it is the amount of capital in the system.

Capital is something you can use to create a stream of (real) goods and services - a factory, a shop, a train, a house. You can't (directly) change the amount of capital there is in an economy by creating and destroying money. Money is, in essence, no more than an assignment of abstract numbers to people. It's pure information.

If, as you suggest, the response to reduced spending is for a central planner to increase the amount of fake money, then prices are propped up when they should naturally be falling.

Firstly, why should they be falling? What does having the price of everything fall or rise achieve that an increase in the money supply with constant prices does not?

Secondly, price falls are a very difficult process to a point where this process doesn't really work. This is really the nub of it, if prices were not sticky the gold standard would work. Workers and unions defend wages, firms may need their input prices to fall before they can fully reduce their output prices, competitors wait for someone else to move first, homeowners hold out for house prices which are months or years out of date, etc. Prices stay high for months or years and resources get underused, including labour. If everyone could agree to reduce their prices together there'd be no problem, but it's a coordination nightmare compounded by money illusion. Why bother when the state can adjust the money supply? It's like changing the clocks to do daylight saving....we /could/ have the same effect by all agreeing to adjust all of our schedules, opening times, etc. all at once on the same day whilst keeping the time the same. But it's much easier to change the defined time of day.

Eventually this will catch up with you when people start spending, and you'll have to raise interest rates and inflation will take off.

Which is just saying that the other side of increasing the supply when the velocity of money falls is that you have to reduce it again when it rises. That can be done. It won't be done perfectly, I'm sure, so there'll be too little or too much inflation; but that doesn't mean that a fixed money supply is better.

This "potentially valuable policy response" that you advocate is simply a way to interfere with the ability of people to make rational decisions about spending and saving, and prevent any corrections in resource allocation from occurring where they should.

The policy response is a response to irrational decision making. I'm sure that amongst the 25% unemployed in the depression there were butchers who wanted bread, bakers who wanted meat, farmers who wanted tractors, engineers who wanted corn, etc. There must have been many valuable trades which just didn't happen because the normal economic decision making systems were broken. Even if the individual spending and saving decisions were rational the systemic decisions were not, and there was clearly nothing even approaching a correct resource allocation.

Yes, you are correct. But inflation should be driven by the resources available, demand for various goods, and the level of labor available, not by some central planning facility trying to manage everybody's decision-making.

Why should it be driven by those things? Relative prices should (in the absence of specific market failures, etc, of course), but why the absolute price level? It's only an arbitrary number, it doesn't represent anything. And managing certain aspects of the decision making in a system-wide way is the whole point. Sometimes the system makes utterly terrible and tragic decisions even as individuals act rationally. It's foolish not to mitigate this.

The natural level of inflation in a gold-backed monetary

Re:I for one...

[Curunir_wolf]

Firstly, why should they be falling? What does having the price of everything fall or rise achieve that an increase in the money supply with constant prices does not?

Well, your premise was that you could increase the money supply without inflation when "everyone decides to hang on to their money more tightly". The response that should be to drop prices, so people will buy more. Not sure what else you were referring to - if people are holding on to money, they are not buying goods, yes? So maybe because prices are too high?

Secondly, price falls are a very difficult process to a point where this process doesn't really work. This is really the nub of it, if prices were not sticky the gold standard would work. Workers and unions defend wages, firms may need their input prices to fall before they can fully reduce their output prices, competitors wait for someone else to move first, homeowners hold out for house prices which are months or years out of date, etc. Prices stay high for months or years and resources get underused, including labour. If everyone could agree to reduce their prices together there'd be no problem, but it's a coordination nightmare compounded by money illusion. Why bother when the state can adjust the money supply? It's like changing the clocks to do daylight saving....we /could/ have the same effect by all agreeing to adjust all of our schedules, opening times, etc. all at once on the same day whilst keeping the time the same. But it's much easier to change the defined time of day.

You're making a preconceived assumption that everything has to be centrally planned. BTW: when industries do this it's considered price-fixing and is illegal. Somehow government or the Fed should do it instead? Why not just let the prices correct themselves. If people aren't buying buggy whips, maybe the buggy whip factory should just shut down. If people aren't buying much wheat, farms should cut back on production. If a labour union won't allow a business to lower wages or layoff workers even when people are buying less of their product, the company should go out of business. Yes, that means some will go through hard times. But that's better than putting everybody through hard times to keep a business going that is doomed to failure anyway.

Which is just saying that the other side of increasing the supply when the velocity of money falls is that you have to reduce it again when it rises. That can be done. It won't be done perfectly, I'm sure, so there'll be too little or too much inflation; but that doesn't mean that a fixed money supply is better.

Whether it's a fixed money supply or not is not the issue. The issue is that millions of people are better at deciding where that level should be is orders of magnitude better than letting a small group make that guess. They are far more likely to be wrong.

The policy response is a response to irrational decision making.

No it's not. It's a response to its own prior poor policy decisions

I'm sure that amongst the 25% unemployed in the depression there were butchers who wanted bread, bakers who wanted meat, farmers who wanted tractors, engineers who wanted corn, etc. There must have been many valuable trades which just didn't happen because the normal economic decision making systems were broken.

Yes, they were. Broken by poor policy decisions. For instance - food prices under FDR were considered (by farmers) too low, so the policy response was to destroy crops and pay farmers to not grow food. Yea, well... it worked to raise food prices, but how did that really help anybody else?

Why should it be driven by those things? Relative prices should (in the absence of specific market failures, etc, of course), but why the absolute price level?

Because that's how rational resource allocation occurs. If a loaf of brea

Re:I for one...

[tmosley]

There are two ways in which people can deal with one another. Money, or guns. Any person who claims to hate money makes his preference abundantly clear.

Re:I for one...

[tmosley]

Spoken like someone who really can't back up what he says with either logical or factual analysis.

Re:I for one...

[tmosley]

In addition to that, I would add that money that is held in a savings account under a gold standard is loaned out. Even if the person who had wealth were to take their money and put it in a safe for a hundred years, it is still doing good. It makes all the other gold held by every other person more valuable, as he has reduced supply. He has pumped power into the economy in exchange for nothing, or at least a highly delayed reward.

In a fiat system, on the other hand, that money that is hoarded away is simply reallocated to the government and used to kill people. Seriously, the reason central banking was first initiated was so that wars could be fought without imposing demoralizing taxes on the people (the taxes were, and are, invisible, in the form of inflation), and were delayed enough so that people couldn't connect the dots. After all, why should a war that ended three years ago be causing the cost of bread to double today?

Re:I for one...

[tmosley]

That's great, except for the fact that the fed burns (literally) the money that it gets in order to fight inflation. It doesn't continue circulating.

Why do you think we have such a huge national debt? How on earth could Americans have accumulated on average $200K+ in debt individually over the last thirty years?

If you think that's sustainable, I have a few bridges I'd like to sell you.

Re:I for one...

[tmosley]

The system you described is classical fractional reserve banking. Understand, however, that we no longer operate under that system (why it is still called fractional reserve banking is beyond me). Rather, for the vast majority of transactions, there is no reserve requirement. That's right, THE BANKS CAN GIVE OUT AS MUCH MONEY AS THEY WANT, REGARDLESS OF RESERVES. This is what people are referring to as "printing money", although that takes other forms as well, mainly with the Fed printing money to buy treasuries or other debt.

I would advise anyone reading this to buy gold and silver. Those green things in your wallet aren't going to be worth the paper they're printed on soon. I can't say when exactly, but I would give it less than five years, and al little as three months (the dollar is declining as we speak).

Re:I for one...

[Anonymous Coward]

Eh? No government uses the gold standard anymore. See the second sentence in the wikipedia article.

Re:I for one...

[fishbowl]

>If that gets into the economy at large you will have to pay $10 for your average McDonalds meal.

Don't they already come in at $6 or $7 ?

Re:I for one...

[fishbowl]

>Here is the frightening reality: most people in our society are trading their time and services for something they have no clue as to the origin or
>real value - dollars.

It's even scarier when you realize that the same people would be hard pressed to try to identify any preferable basis for barter.

Re:I for one...

[azgard]

No, it doesn't. It just shows how the Fed manipulates the economy. Just because banks know that they can go to the Fed or the Treasury to get more debt or a bailout when they are in trouble doesn't mean that it's caused by rational decision-making, it just means that the banks understand the kind of system they are working under, which allowed private profits to be made, and that risk is mitigated by allowing huge debts to be socialized by the tax system.

I don't think they knew, at least at the beginning of the crisis. It wasn't obvious at all. Anyway, your statement makes any statement about economics irrefutable, because we can always argue "they knew the government will do this and that". I think you would have to come up with proof that they knew that (for example, internal communication among banks) for me to believe this.

And how do you determine what is "real growth"? We had lots of growth during the dot-com boom, financed by cheap debt. Yet, it couldn't be sustained. I wonder why? Keen (and Minsky) don't seem to be able to explain this. They continue to proposed the same policies that failed then, and are failing now.

You can't determine that - that's whole point of investing. But the point is, real growth does exist - we have advances in manufacturing and society. Albeit it isn't 3% per year like GDP shows.

Actually, the opposite is true. You don't get "growth" by holding onto money, even if it's gold. Even on a gold standard some inflation occurs. The only way to increase your saving (or keep it from losing value to inflation over the long term) is to invest that money in some value-creating enterprise.

Well, if you are saying that you get inflation under either system, what's the difference? Ideally, you want to increase money supply to match the real growth (which is tricky, because you don't know what it is). If you don't supply enough money, the value of money not invested will grow by itself. If you supply too much, you will get inflation. The gold standard fails with the first situation, and the FRB may fail with the second. Do you also realize that the gold standard is a limit case of FRB (when the fraction is 1)?

Exactly. Especially when, for instance, the Fed keeps interest rates artificially low, creates a housing bubble, and people borrow money against and artificially inflated home value. If the interest rates were allowed to go up in response to the reduced savings, the bubble would not grow so large and the adjustment would be short and easy to deal with, instead of creating a global crises like this one did.

So you agree with me that the real problem has nothing to do with FRB, but rather with lending (with interest) in itself?

Re:I for one...

[oldhack]

That's a pretty long-winded way of saying you're an "Austrian" religious zealot.

Re:I for one...

[TheSunborn]

If THE BANKS CAN GIVE OUT AS MUCH MONEY AS THEY WANT, why was the biggest short term problem with the recent crisis, that banks could not borrow money from other banks*? If they could just give out money they would not have any need to borrow.

And I admit i don't know how the USA bank system work, but banks in the rest of the world can't lend money they don't have so if the bank want to lend me 1$ it need to either have a person who have 1$ on his account, or the bank need to borrow 1$ from an other bank**

With fraction, i think you may be talking about the 8% rule which govern the ratio between the maximum allowed lending and the banks capital (It does in no way allow the bank to lend 10 times the customers deposit)***

Funny fact: the ratio between ingoing and outgoing money in Denmarks largest bank(Only talking about its danish branch, they did some insane things is other countries) is really close to 1:1 meaning that all the money they lend out, are money they got because other of their customers deposited them there.

*The inter-bank marked froze, because each bank suddently were unable to determine how risky borowing money to an other bank was.

**And this was what almost stopped, when the crisis hit. And no the national bank/federal reserve don't just lend out money long term(Normal limit is 14 days) to any bank that ask. If they did there would be no bank crisis.

***The banks capital is money that the bank own(Not money customers have deposited in the bank). The banks capital can come from either investors in the bank(That's how you start a new bank), or from profit from the previous years.

Re:I for one...

[TheLink]

> There are two ways in which people can deal with one another. Money, or guns.

Spoken like a true virgin slashdotter.

Re:I for one...

[jandersen]

Well let's see now. We have fiat currency instead of representative currency (an example of which is the gold standard). Furthermore, the way fractional reserve banking in general and the Federal Reserve in particular is set up, there is always more debt built into the system than there are dollars in circulation. That's because debt is attached to money the moment it is created; i.e. for every X dollars in circulation there is always X+Y debt. This system is just not sustainable. How could it ever do anything but ultimately fail? Who are these people who expected it to be a paragon of stability and sustainability?

Interesting thought - I think I agree (if I have understood what you are saying correctly). But isn't indebtedness at the very basis of Capitalism, at least as we know it? To me at least, it seems that "growth" is the central theme in Capitalism, and the idea that one can somehow "create wealth" is put forward as a fundamental truth; but it always presupposes the existence of unlimited resources that we can "borrow" from. I say "borrow" because these resources are in reality not unlimited, but have been laid down by natural processes over a long time - at some point they will run out, and we will have to "pay back" our debt, in a sense. Future generations will have to pay for our lack of concern.

Capitalism as it is known now, will never be sustainable, because sustainable means, in the long run, zero growth.

Re:I for one...

[xelah]

But isn't indebtedness at the very basis of Capitalism, at least as we know it?

Indebtedness is the basis of pretty much any system involving money. (Capitalism is different, I don't think there's any reason why you couldn't have capitalism without money). Suppose I, say, wash your car and you give me $10. What does that $10 represent? The fact that I've done something for the rest of the economy and it hasn't yet returned the favour. ie, my ownership of it represents a debt, in a very plain and old fashioned way. Since the whole point of money is to represent debts of this sort I don't think you should be scared that money is constituted as debt. It's getting the amounts wrong - people getting in to obligations they can't keep - that's the potential problem, not that money represents debt.

Capitalism as it is known now, will never be sustainable, because sustainable means, in the long run, zero growth.

Economic growth doesn't equate to the exploitation of more and more resources, or the creation of more and more physical stuff (although doing so can cause growth). Economic growth means growth in the value that we all extract from our economic activity. Doing more and better things with fewer resources represents growth, just as much as doing more by using more resources does. Obviously the heat death of the universe will get in the way eventually, but there's no reason in principle that the economy can't go on creating more and more value for a very long time.

(That's not necessarily the right thing, of course. It's conceivable that less value but more leisure time for everyone would turn out better, for example).

Re:I for one...

[Curunir_wolf]

No, it doesn't. It just shows how the Fed manipulates the economy. Just because banks know that they can go to the Fed or the Treasury to get more debt or a bailout when they are in trouble doesn't mean that it's caused by rational decision-making, it just means that the banks understand the kind of system they are working under, which allowed private profits to be made, and that risk is mitigated by allowing huge debts to be socialized by the tax system.

I don't think they knew, at least at the beginning of the crisis. It wasn't obvious at all.

So, you've never heard of the "Greenspan put"? The bankers and Wall Street certainly have.

Re:I for one...

[TheRaven64]

And what backing do you propose? Gold? Largely artificial value. When someone finds a new gold vein, you suddenly have devaluation of the currency, because the supply increases, but you have much worse problems than that. The big one is that there is no incentive to spend.

Lots of posters in this thread seem to thing that inflation is bad, but in limited amounts inflation is essential for an economy working on existing principles. Money is used for two things; as a medium of exchange and as a store of wealth. It is good at the former and incredibly bad at the latter. Inflation encourages people to use it as the former because it does not hold its value. With currency that holds its value (or, worse, increases in value over time), there is no reason for people with money to trade it for things. With money that loses value, when you have money you want to get rid of it quickly in exchange for things that have actual value. These are typically things like shares in a company that produces things. Most people don't buy these directly, they put the money in a bank that invests it on their behalf (and skims a percentage off the top).

Which brings up the next point: We already have several parallel currencies within the same economic system. There is no conceptual difference between shares in a company and shares in a government (a.k.a. currency) other than that there are laws requiring the latter to be accepted for settling debts. Lots of people accept shares as part payment for their work though, because (as always, when talking about economics) it's a matter of trust: Do you trust the organisation issuing the currency?

One of the interesting (and not widely publicised) side effects of a bit of EU legislation passed last year, by the way, is that it dramatically simplifies the legal issues in creating and using new currencies. The logical conclusion of our current system is for every individual in the world to issue currency backed by their own reputation.

Re:I for one...

[jfrankmbl]

You ask for a portion of it; some here, some there, more at Christmastime and during the holidays. So long as the banks have enough money to give everyone what they want

From what I understand of banking, please correct me if I'm wrong, is that if the bank makes bad investments, then it won't have the money to give everyone what they want at times of high demand, like Christmas. And yes, this is a unlikely situation; however, financial institutions believe they can take a higher level of risk because the FDIC ensures that even if the banks majorly screws up its investments, the depositors will be covered. But the FDIC is kind of doing the same thing to the banks, they don't actually have enough money to pay for every depositor up to $250,000; but they are betting that not all the banks will fail at once. The system is inherently flawed, but they are just counting on the probability of the flaw manifesting being improbable. So, the system is usually safe, and usually flexible, but an unlucky turn of events, and some bankers placing the wrong bet causes a chain reaction that puts a severe crack in the system. And it comes back to banks getting greedy with their drive for capital gains, rather than taking a more moderate approach to investing our money, because they know, ultimately, that they won't bear the responsibility for the losses.

Re:I for one...

[Red Flayer]

In 19th century the US economy was stable and after FED creation in 1913 we had several serious recessions.

What? That is absolutely, preposterously false.

The 19th century economy in the US was cyclical, just as today's economy is. But the recessions were much deeper than what we've had in the 20th and 21st centuries (though for the current recession, we'll need to see how bad it gets before passing judgment).

You need to read some economic history, and stop reading (and believing!) what random people have been spouting on slashdot and other places.

The recessions of the 19th century were actually much more severe than the recessions of the 20th century... the literature is quite clear on this.

I'm not sure where you get your information from... but it's obviously not a valid source.

Re:I for one...

[Red Flayer]

The problem I have is that the FED doubled the money supply in a year.

No they didn't. Citation needed, bady.

Every source I could find has the money supply increasing, but nowhere could I find record of it doubling.

The whole time very few will realize who actually stole the value of the dollar

Who stole the value of their dollar? Seriously? How about this scenario... the fed fails to act. Banking loans dry up. More businesses fail, and people lose their jobs. Would you claim that the fed stole their jobs?

What you should be angry about are the people whose actions have devalued a person's output. Some people think these people are the multimillionaire bankers (and partly, I agree). Some people think that these people are the multimillionaire heads of corporations (and partly, I agree). Some people think that these people are those that offshore jobs (on this one, I have mixed feelings).

But in no way does inflation "steal" money from you. Look at it this way... by withholding your cash out of the economy, you are "stealing" money from people who could put that wealth to good use (and pay you a decent return). Please don't use the word "stealing" wrt inflation. It's just inaccurate, and leaves the door open to ridiculous claims from all sides.

Re:I for one...

[tmosley]

In answer to your question, it was because they were afraid of defaults, which they are still liable for...sort of. What has happened is that we have gotten into a situation where the "too-big to fail" banks are able to lend, but only because of implicit baking from the government. The thing is, they don't because they know they will lose money in such transactions (even if the losses are backstopped--they don't get bonuses). It is better for them to take advantage of the interest that the Fed is paying them to not lend money (how much sense does that make?) by leaving reserves on deposit with the Federal Reserve. Why do you think excess reserves have risen by a factor of 1000 or more?

If you don't believe me, here it is from the horse's mouth.

In addition, the money that has been given to US banks in the form of zero interest loans has been finding its way into the stock market. This is bourn out by the evidence, ie the cash value of stocks purchased has not been accompanied by a decline in purchasing power in money market funds, which is always the case when a rally is from people moving money into the market rather than the market simply being an outlet for inflation.

Re:I for one...

[blahplusplus]

"Spoken like someone who really can't back up what he says with either logical or factual analysis."

Nonsense your response PROVES you've pre-decided what you think it is you know so discussing anything with you would be a waste of my time.

You have to understand that the concepts people hold consciously or unconsciously determine what the deem is true or false, when there are errors in those concepts and the people themselves are unable or unwilling to see those errors then you cannot ever have discourse with such people.

Your comment just proves my point 100% you have already pre-decided what's true therefore anything that goes against what you were taught you reject, and hence you resort to insults rather then addressing the points I made.

Re:I for one...

[azgard]

So, you've never heard of the "Greenspan put"? The bankers and Wall Street certainly have.

Tell that to Icelandic banks, for instance. I believe stupidity was first, then came "Greenspan put" to save their asses. By the way, you are ignoring whole 19th century if you believe bankers are not stupid enough to participate in Ponzi schemes.

Re:I for one...

[xelah]

Well, your premise was that you could increase the money supply without inflation when "everyone decides to hang on to their money more tightly". The response that should be to drop prices, so people will buy more. Not sure what else you were referring to - if people are holding on to money, they are not buying goods, yes? So maybe because prices are too high?

Yes. Precisely my point is that prices do not drop when they ought to. Contracts and mortgages lock people in to prices, people suffer from money illusion or haven't noticed yet that the price level is falling and so don't realize or don't believe that their real income isn't falling, etc. The adjustment is protracted and difficult and slow, and people hold on to their money even tighter when they see that it'll be worth more in a year. In the mean time prices stay too high, demand too low and there is unemployment. If prices did just drop as you are hoping they would then there wouldn't be a recession for us to worry about in the first place.

You're making a preconceived assumption that everything has to be centrally planned. BTW: when industries do this it's considered price-fixing and is illegal. Somehow government or the Fed should do it instead?

Yes, central banks and governments should involve themselves in the money supply. They should do it because it has the potentially to alleviate enormous levels of suffering and make life better, which is the whole purpose of the economy and the government. They should not, of course, involve themselves in relative prices without a further reason. Just the overall price level.

Why not just let the prices correct themselves. If people aren't buying buggy whips, maybe the buggy whip factory should just shut down. If people aren't buying much wheat, farms should cut back on production. If a labour union won't allow a business to lower wages or layoff workers even when people are buying less of their product, the company should go out of business. Yes, that means some will go through hard times. But that's better than putting everybody through hard times to keep a business going that is doomed to failure anyway.

Why is the business doomed to failure anyway? People want the wheat, the wheat farmers want things that those who want the wheat could produce. The problem is that the economy is not letting that exchange happen....destroying your physical infrastructure is not an appropriate response to a breakdown of the control mechanism. Fix the control mechanism instead.

Whether it's a fixed money supply or not is not the issue. The issue is that millions of people are better at deciding where that level should be is orders of magnitude better than letting a small group make that guess. They are far more likely to be wrong.

Millions of people are not deciding where the price level should be. Millions of people are making billions of little decisions about what to buy, what to sell, and so on. The price level emerges from the interaction of all of these people. Even if all of these millions agree they want the price level to fall by 40% that doesn't mean 40% falls will be the result of their interactions. And you most definitely don't want to be the only person to cut your price level by 40%, and then go out of business because you can't pay your ten year farm lease which hasn't changed. That farm lease price will fall sooner or later, once enough farmers have gone bust and enough land and people left idle. But that really is doing it the hard way.

The prices do fall, eventually. They fall because people are gradually, a few people at a time, forced in to it by unemployment, bankruptcy, hardship and misery. It involves huge waste of resources while this happens - labour is unused, houses are left empty, companies and their capital are destroyed. The process of price adjustment you're asking for is the recession.

Yes

Re:I for one...

[Curunir_wolf]

Bernanke, is that you?

No, people do not need buggy whips, and you're wasting resources by keeping that business going. And wheat won't last forever. If there's too much to be eaten you're just wasting resources by inflating the price artificially.

Sorry, but your pie-in-the-sky "we can fix the economy by fiddling with the money supply" is exactly the problem we are facing right now. Instead of the short-term, limited recession that you fear so much, we have an all-out crisis almost as bad as the Great Depression (which was also created and prolonged by exactly the kind of fiddling you espouse).

Please get out of the way, and stop doing this to us.

Re:I for one...

[tmosley]

No, you're looking for excuses. Try using logic and making an argument rather than waving your hands around and saying "Oh, you'll never get it, but I'm right, I swear!" Your arguments were long, rambling, and incoherent to the point that I couldn't even understand what you were saying.

Try again.

Re:I for one...

[blahplusplus]

You proved my point again. You claim that I haven't made a rational argument, yet you've made no counter claim, so what exactly do you have a problem with? Otherwise I can't address your claim. "You haven't made a rational argument" and saying "I'm just waving my hands" is not a response, it is you who's chickening out. If I made a mistake somewhere it has to exist by definition to say "all of it is a mistake" means you have to go through what I said and address it point by point otherwise: There are only two options 1) You don't have a clue as to what I said so you can't make a claim that it wasn't rational, because you couldn't even grasp it to begin with 2) you are too intellectually lazy to address my points because you might find something uncomfortable with the current view of the world you hold.

Either way I know you're immune from other viewpoints so as I said before it would be pointless to discuss this further with you unless you take an honest stab at it.

Re:I for one...

[wellingj]

I didn't say steal money, I said stole the value. That's what happens when money is created. The people who create the money get to use it at full value, while every one of us is left in the lurch when all that extra money hits the consumers. And this all seems justified to you because it has created "stability in the market"? I don't see this stability. And if the FED was powerful enough to prevent instability, then why didn't it? Oh so it didn't have enough power so it should have more now... I know those aren't your words, but that is what too many people are thinking.

Here's your source btw.

Re:I for one...

[jandersen]

Economic growth means growth in the value that we all extract from our economic activity

But where does the value come from? Ultimately from the efforts somebody puts in to them - ie. the use of limited resources. "Doing more with fewer resources" only means shifting the focus to using some other resources instead - if not oil, then wind or sunlight, with potentially harmful consequences for the environment. Of course, one can say that life itself is not sustainable in the log (very long) run; but if we contemplate what stable ecosystems there are in the world, we will see that they are stable because averaged over time, there are only very few changes in population sizes - ie. effectively zero growth.

Re:I for one...

[xelah]

But where does the value come from? Ultimately from the efforts somebody puts in to them - ie. the use of limited resources. "Doing more with fewer resources" only means shifting the focus to using some other resources instead - if not oil, then wind or sunlight, with potentially harmful consequences for the environment.

No, it doesn't. Moving 10000 tons of iron ore can be done with fewer resource now then 30 years ago. The same level of resources used to make a TV 15 years ago can make a better one today. Power generation is more efficient, we have better insulation materials for buildings, we have the capacity to make more efficient computers that can do much more than 20 years ago, someone has invented the post-it note, etc.

I'm not saying that we are doing more with less. We're undoubtedly doing more with more. I'm saying that technological progress, improvements in management and manufacturing techniques, scale through reduced trade barriers, capital accumulation, knowledge and skill diffusion and so on mean that even if we stopped increasing our overall resource use today we could still continue to increase economic output. It'd be a lower rate of growth, but it wouldn't be zero.

Re:I for one...

[Red Flayer]

The Monetary base != the money supply.

Your citation does not mean what you think it means.

The rest of your argument relies upon the notion that money is an absolute store of wealth. It is not, and should not be considered as such.

If you don't like the fact that inflation devalues your currency, you can easily avoid this problem by not storing your wealth in currency.

The real problem with inflation (from a common-man standpoint) is when we have price inflation without corresponding wage inflation. Usually this is a necessary market correction, and while painful to some, is necessary. Sucks to be on the down end of it, but people also need to realize all the benefits they got from the economic system. But I think I know where you're coming from, and no amount of analysis or discussion will get you to change your mind that inflation is stealing from you.

Re:I for one...

[tmosley]

I don't even care about your argument. You're using any response that takes a dim view of your arguments as reason not to continue. You're a weak willed individual.

And you can't make an argument against a non-rational argument, save to say that it isn't rational.

As an example, which you have begged for, take this:

"The problem is that money as a store of value is problematicc because people can't just wait forever for food/electricity/clothes/housing,"

I have no idea what the hell you are talking about here. Money is supposed to be a store of value, what does that have to do with waiting in order to exchange goods for services? The implied alternative is money that is not a store of value, in which case, money has no value, so nothing can be traded for money.

" an austrian run economy would quickly devolve into one where there would revolution I have no doubt, because they'd be forced to realize the world is a physical place and their theories of human action break under constraints of physics and physical systems and their transformation."

This is a hand-waving argument. Further, Keyensianism is the model that doesn't take physical reality into consideration. If it did, they would have realized that their model was completely wrong when stagflation occurred in the 70's, and even that was supposedly impossible (but one which was predicted by the Austrians).

"Any theory that does not account for how the world actually is physically integrated into the economy is laughably naive."

What the hell is this even saying? How should one account for a physical thing being integrated into an abstract concept? You might as well say that physics is out the window because it doesn't take "love" into account. Now, more examples:

"Theit whole big push of "no initiation of force" is a farce, since monetary systems require the initiation of force else you would have rampant counterfeiting."

You can't counterfeit gold, dummy. That's why it has been used as currency for 6000+ years. Further, a free market would select for the most secure currency, as easily counterfeited currencies would all rapidly lose their value. This is an extension of evolutionary theory. How's that for real world integration?

"I look at systems and how systems physically function, I do not start from theoretical propositions I will sit around and observe how people and systems behave"

Wow, you must be an Austrian economist, because that's what they do. That is why they have been able to predict every major depression that has occurred since their school of thought was founded years in advance.

and imagine an invisible line of monetary values flowing around like electricity around society

Imagination is right. You don't even know what money really is (it is representative of production, not just a means of exchange--this is why paper can't function as money without backing).

"to understand how money acts as a kind of matter and energy accounting system that has properties similar to thermodynamic systems.

More handwaving. I wonder if you imagine yourself as Neo, who sees the world as code?

I've done a lot of my own original research into this topic because it interests me and I know economists simply are not technically sophisticated enough in other sciences to see their own errors since it requires cross discplinary understanding to even begin to approach some of the things I've observed and have been working on in my spare time.

Sure, in your spare time you've overcome more than a century of thought by geniuses such as Ludwig von Mises, Murrey Rothbard, an Friedrick Hayak, not to mention the thousands of others who have spent their lives analyzing and interpreting (correctly) economic data, and predicting (correctly) the implications of that data. Surely, all should get down on their knees, for surely the second coming has arrived, and God again walks on the Earth...a

Real world?

[Anonymous Coward]

In the real world you don't have unlimited resources. In the real world you can't release an expansion and suddenly introduce new products to replace everything someone owns. Studying in game economics can be useful as an exercise or example of how some economic principles work, but collecting data from MMO's and then trying to use that information to explain how the real world works?

Re:Real world?

[causality]

In the real world you don't have unlimited resources. In the real world you can't release an expansion and suddenly introduce new products to replace everything someone owns. Studying in game economics can be useful as an exercise or example of how some economic principles work, but collecting data from MMO's and then trying to use that information to explain how the real world works?

I'll limit the scope of this comment to World of Warcraft as that's the one I have personally played. I would not be surprised if the other MMOs mentioned are similar, I just don't know for certain that they are.

I think the appeal is that it's a true laissez-faire free-market economy. Among those, it's unusual because the game rules effectively prevent any one player or group of players from forming a monopoly and locking out competitors. So I may have the market for healing potions cornered, but there is nothing I can do to prevent you from gaining crafting skills and harvesting herbs and making your own potions and competing with me. Your potions will be just as good as mine, and any herbs you harvest won't be available to me until they respawn, at which point they become available to both of us again.

I can see why this would be interesting to an economist. It incorporates a lot of our notions of what a free market is. In the real world economic freedom is generally considered a desirable thing, at least until players are so free that they can form trusts and otherwise monopolize markets. So in the real world, anti-trust laws and other government regulations provide the necessary restrictions that the game rules provide in the virtual world. If nothing else, it can provide a way to explore the degree to which such regulations are necessary and what happens when they are minimal. Perhaps this is to an economist what the computer simulations are to such scientists as physicists and astronomers. They can use it to model something based on how they think it works in order to refine their ideas of what works and what doesn't.

Re:Real world?

[Admiral Ag]

WoW also has a fairly large black market in the presence of illegal gold sellers.

If anything, the economics of MMOs are far less interesting than the socio-political aspects of the game. WoW is more or less set up to maximize character freedom. The police (GMs) are relatively ineffective, and apart from a few obvious things you aren't allowed to do, like call other players faggots in public chat, most anti-social behaviour is in practice insufficiently policed or not policed at all. I'm talking about things all the way from ninja looting and node stealing up to the use of illegal hacks (like the underground mining hack, for example). The small percentage of outright asshats on any server seem to be sufficient to prevent a general climate of trust from forming (even though most people are nice, and helpful).

The guild system is the only way where people can build decent trust networks, and these of course require human leadership. Even then, a good guild (meaning a guild with reasonable leadership and adequate policing) is hard to find and it can't get too large before it's too big to serve that function. But Azeroth as a whole suffers from severe social dysfunction.

I guess it just shows to go that any social environment would work just fine if only a way could be found to get rid of the 10% who are hell bent on exploitation, cheating, griefing and bending the rules to suit themselves (and these are the people who howl loudest at any attempt to fix things). WoW's economy suffers from many honest players having a disincentive to enter the market, because people who hack and cheat have an illegal competitive advantage. It's really no different from the real free market or the real world in that respect (a friend of mine who is a cop pointed out that the people who barely stay within the letter of the law are often as much of a social nuisance as genuine criminals - knowing some people I've seen in business, I am not surprised).

I think WoW stands as a living counterexample to all those who desire a lightly policed social system based entirely on consent.

Re:Real world?

[wellingj]

The FED is playing a game with unlimited resources.

Re:Real world?

[EpsCylonB]

The difference is consequence.

Even in a lightly policed real world, the consequences of illegal actions would have a much greater effect.

Re:Real world?

[vxvxvxvx]

They can print as much paper money as they want but that's not the same thing as unlimited resources.

Re:Real world?

[Kjella]

It's really no different from the real free market or the real world in that respect (a friend of mine who is a cop pointed out that the people who barely stay within the letter of the law are often as much of a social nuisance as genuine criminals - knowing some people I've seen in business, I am not surprised).

Of course, it's most scammers' dream to find a scam that's legal too. For example, finding the right pyramid scheme, I'm sorry that's multi-level marketing system, that has just enough legal content that you won't go to jail. Or the people that start weird religious sects which tends to make them rich and worshiped - not even BillG gets that. Or the unserious gray market sellers that'll leave you stranded with an imported device the manufacturer won't support. Or those that fool little old ladies into investing in their high risk venture company because it's a sure-fire way to secure their inheritance. Plus even when they skirt the law a little, there's proving that they were, boyond a reasonable doubt, on the wrong side of the law. Plus, they're annoyingly visible, you don't see the thief. But you do see the sleezebag that's gotten himself a cool hangout and hot wheels.

Re:Real world?

[brkello]

Whatever market you have cornered I can take over and not have to gain a single skill point in herbalism or making healing potions. I have lots of money, I just buy everything you sell and then sell it for 200% what you sold it for. As long as it is a market without an incredible supply, I can do this for awhile until people catch on and see what a great profit it is. Then I move on to the next item.

I actually don't do this, but saw it done all the time when I played the game (like for enchantment materials). This doesn't happen as much in the real world. You don't go to the movie theater to see the premiere of the newest Harry Potter...find out it is sold out...and then go buy it from a scalper that bought up the whole theater for double the ticket price.

Interesting? Sure. Applicable necessarily to the real world. Maybe not so much.

Re:Real world?

[bckrispi]

I think the appeal is that it's a true laissez-faire free-market economy.

There are still regulations. You can't sell or trade a soulbound item to any other player. If you want to sell it, you have to go go a merchant who offers you a fixed price. This game mechanic is actually a pretty good control on inflation.

Also, if you look at guilds, you see a system that's more reminiscent of Communism. Each guild member contributes (either to other players or to the Guild bank) according to their "ability", and takes according to their "need". This system is "centrally planned" by the Guild leader and officers.

But what simply cannot be overlooked, is at the core of WoW's economy, is good, old-fashioned militaristic imperialism. You want something another guy has, so you beat him over the head and take it.

Re:Real world?

[wellingj]

That would be the trick they are playing on us...

Re:Real world?

[randomencounter]

Just ask Bernie Madoff. Or whichever alt he passed the money off to...

Games too simple

[Manip]

While I myself enjoy playing the MMO economy micro-game, they are far too simple to really map anything close to the real world. Or at least I should say WoW's is. Some of the less popular MMO's have very realistic economies involving business entities, more niche goods, and even a kind of country proxy.

The examples of what the researchers have discovered also strike me as academically uninteresting (even obvious) and make me wonder if this is an excuse to play some games at work....

Re:Games too simple

[freak132]

It seems to me that research on MMOs usually happens the other way around. MMO economies and epidemics are noticed for their emulation of real world behaviors before the interest in MMO use as simulations comes around.

Re:Games too simple

[rcolbert]

I agree. I think that in games the percentage of discretionary income versus the fixed amount of income needed purely to survive are so fundamentally different from the real world that comparisons are going to be flawed at many levels. Even in the most prosperous of real world economies, much of the population is barely breaking even. What we've seen in the real world is also difficult to map to a game. Recently people have been working very hard to reduce their revolving debt, and this lack of discretionary spending has severely hammered the economy (among other factors of course). However, In games I don't feel that people really have the same fears and basic survival dynamics to motivate them. What games can show us is essentially that supply and demand is a fairly valid overarching principle. Nothing more.

Re:Games too simple

[Anonymous Coward]

They might be simpler than the real world, but at least it is some sort of valuable empirical data. This is far better than most things in economics which are mostly based on believes and circular arguments. One of them is the famous invisible hand (A.Smith really meant gods hand by that, but nowadays it is just a mystical side effect of markets). A second is, that the egoism of everyone results in the better (= in this case it means more wealth) for all. A third is, markets stabilize on themselves (meaning they are mono stable systems). And the fourth, growth is limitless (including we need to have more traffic for growth).

Re:Games too simple

[baldaufs]

When playing a game that can be largely economy based, it is very important to remember that a lot of the player based involved in the economy do not have real life pressures, such as the possibility of starving if they do not maintain a high enough income. This means that a lot of the actions a player may take economically would not reflect real life economic situations.

Re:Games too simple

[Eric93821]

Some people do see games as important as real life though, so it would not always be inaccurate.

Re:Games too simple

[mrrudge]

It's not about the importance of the game, it's about how well virtual spending habits map to irl spending habits.

Personally, in an MMO I'm likely to spend down to my last copper to buy a hat-of-awesome, knowing that nothing bad will happen from the purchase. I'll not starve, my house won't be taken away, and my gf won't leave ( not that getting a new one would be a problem now I have a hat-of-awesome ) and I can just grind as much as is necessary to get more cash as soon as I need it.

My irl spending habits are necessarily much more considered, so I'd consider any research done on one economy applied to the other to be seriously flawed at the core.

MMO gaming for science?

[freak132]

Should we be joining MMOs like these to help science? I, for one, would join to help the research but that would probably taint the results.

No, it can't work

[line-bundle]

The problem with that idea is that the game economy is built with assumptions in mind. These assumptions will generally be based on theoretical economic models. So generally all you achieve with such experiments is confirm your built in beliefs. Chicken, egg anyone?

A similar claim was made about SimCity when it was big, that it would teach about urban planning, but it had so many assumptions built in to be worse than useless.

Re:No, it can't work

[fermion]

Absolutely, Any computer program is based on models, and those models are based on assumptions. While something like a physics engine can work because the assumptions in physics preclude most superstitions, the same cannot be said for economics.

Economics often, for instance, still talks about the invisible hand and the rational deterministic consumer. Economics still insists that there is one or a very small number of persons that can be successful, and therefore this one or very small number of people deserve huge compensation. We see these models fail regularly. People are not rational. The money multiplier is just an approximation. Banks do not lend equally to equally qualified applicants, people do not spend and save rationally.

While I agree that models can be learned through game economies, the damage occurs when people see these simulated economies in full simulation and begin to believe them. As it is, a rational person understands that economics is a very limited approximation, and real wold experience keeps it in check. But if they see it a computer, more people may believe the approximations are more valid than they are. It is like sports. People play the relatively insignificant game, with relatively simple and evenly applied rules, and then go out and believe that is the way the world actually works. They get upset when rules are not followed in the rule world. They get upset when adjustments need to made to allow for real world variation. Because in a game a winner or loser does not matter, but in the real world. sometimes a winner has be chosen not on arbitrary rules but for the needs on the public.

Re:No, it can't work

[JackPepper]

The biggest problem with SimCity (the first one I'm not sure about the latter ones) is the zoning model. I could not build a city block that was half commercial and half residential. And a whole block for one police station is ridiculous.

People wonder why a person cannot walk to a grocery store in their neighborhood. It's because the neighborhood: gas station, bar, convenient, et cetera have been zoned out of existence.

Re:No, it can't work

[Anonymous Coward]

Trading is not limited in some form in these MMOs so you could observe classic economic processes. However, there are two biases. First, people sell and buy in-game valuable on eBay and other trading platforms. This changes the possession of resources, but the prices in-game are abnormal. Second, the in-game resources are limitless therefore they cannot model real economics. And third, I do not know any MMO where people trade derivates of in-game valuables, and even derivates of derivates.
 

Re:No, it can't work

[sgt_doom]

EXACTLY!!!

The only assumption should be (should one ever wish to exist in a true economic democracy) that neither the State, nor the Corporate Fascist State, can ever monopolize land and capital.

Think of how that would solve soooooo many of the world's problems, and America's obsession with Empire.....

Re:No, it can't work

[tmosley]

Economics is different, as in this case, it is REAL PEOPLE making decisions, rather than what a computer model would assume that people would decide. You can administer a MMO in many different ways and achieve many different effects, which would create any number of economic situations. In general, since the games are marketed toward players, free markets tend to reign, as that is the only way that each player can maximize their fun (rather than being subjected to the imbalances created by central planning).

Basically, you create a few simple rules, and the economy goes from there. In places like Second life, things can be replicated fairly easily, but it takes work to design, so people pay for designs. It becomes an economy based on abundance rather than lack. Etc. etc.

Really, MMOs are probably the BEST way to really study economics, and come to understand how exactly we should be running our own economy. That is, it's far preferable to haphazard tinkering by the administration du jour.

Re:No, it can't work

[TheRaven64]

I could not build a city block that was half commercial and half residential.

Actually, you could, but it required bulldozing. In the original simcity, you only deleted the 3x2 (as I recall, maybe it was 3x3?) block if you bulldozed the middle. You could bulldoze the edges and get a reduced-size or unusually-shaped block. The only disadvantage was that larger buildings could then not be built. Later games in the series let you place individual cells of residential and commercial.

Unfortunately, the cellular automata model used by the games was heavily biased towards the US model of cities and didn't work well with mixed residential and commercial regions. Possibly it assumed that the largest residential structures also included some commercial component, because otherwise building something like Manhattan was also impossible.

Limited Use

[Laminan]

These experiments are not as useful nor controlled as you may think. Let me break down into some experiment design principles here:

#1 You can only generalize to the population studied

--Thus your demographics will be that of a more computer savvy user, with leisure time. This is NOT a representative sample of a normal population. When using regression methods you will get a homogenous result only from 'game performers'. These experiments are not valid unless you can prove that there is no purposeful difference between this population and the general population.

--It still can provide interesting insights, but any quantified data must be taken with a grain of salt

--The population may have one net effect, but perhaps a different type of agent/actor would have an OPPOSITE or equalizing effect (games are an artificial setting)

#2 Process defined by agency

--Here the markets are designed by an all-seeing game developer. I don't know about you, but many MMO's I have participated in had lackluster markets due to poor UI or the mere fact that it is a new market.

--Product innovations are limited or non existent, and users cannot refine markets based on their experiences. These days the most interesting economic studies are looking at PROCESS which is understood much less than outcome. Neo-classical economic theory does a great job at explaining outcome, but is horrid at process. That is why many market failures are not forecasted, but instead studied post-mortem.

Re:Limited Use

[routerl]

Good points, though I doubt those issues would escape people whose day-job involves economic analysis. To me, this entire trend of studying MMO economies to somehow derive real-world conclusions smells of professional self-doubt regarding the status of economics as a science.

I know that some economists have, over the past decade or so, started performing little experiments, in the hope that this would lend more empirical credibility to their field. Of course, the main problem is scale, since getting a few million people to participate in an experiment is just a tad inconvenient. It seems that some researchers expect to overcome the problem of experimental scale by turning an eye towards already existing, large-ish, and confined economies (i.e. MMOs), although this endeavor is faced with far too many problems to be taken seriously. Which is why it seems desperate.

This self-consciousness if, of course, thrown into high gear given the utter failure of economics (qua predictive science) that we're all quite familiar with at this point.

Re:Limited Use

[dusqi]

#1 You can only generalize to the population studied

Is there any reason why a computer savvy person will act so differently than someone who does not use a computer? We're talking about making decisions based on many fundamental human drives such as self-interest, reciprocity, emotions, etc. These go all the way back through evolution.

Anyway, currently economics spends most of its time making sweeping assumptions about the whole of humanity based on the most simple theories about what drives behaviour - so any attempt to study real people is a step in the right direction. The current economic crisis was all about perceptions of risk, short-term interest, misunderstanding, and eventually panic - all experienced and acted on by real people.

Re:Limited Use

[Sapphon]

Mod parent up! He's like some academic type or something.. with understanding of statistics, economics and stuff.

Re:Limited Use

[Ambiguous Puzuma]

While you raise some good points, I think you overestimate the need to be computer savvy to play MMO games. I've met a number of people that use their computers almost exclusively to play EverQuest--I had to walk one through the process of copying and pasting text in Notepad, for example.

Re:Limited Use

[ukyoCE]

many MMO's I have participated in had lackluster markets due to poor UI

It's funny you say that -- I would actually say the opposite from playing WOW. The auction house in WOW is effectively a *single* source of all items non-NPC-purchaseable items.

Real life has a MUCH worse UI. I have to check Best Buy, then Newegg, then Amazon, and who knows if a place 1 mile away from me actually has a better price! The game also lets me (through addons) see historical prices, price averages, and let's me trivially undercut competitors when selling goods.

I don't think anyone is claiming that a game market is identical to real life, but that shouldn't stop us from learning from it either.

Re:Limited Use

[lawpoop]

Is there any reason why a computer savvy person will act so differently than someone who does not use a computer?

Asperger's syndrome and the Autism spectrum.

Re:Limited Use

[dusqi]

Is there any reason why a computer savvy person will act so differently than someone who does not use a computer?

Asperger's syndrome and the Autism spectrum.

It's likely that there are differences between people who play MMOs and people who do not, and the average position on the autism spectrum might be one of them. But MMO players aren't some tiny specialised group (since millions of people play). So despite the evidence from this website, most geeks are probably close enough to being human to usefully examine what decisions they make.

Re:Limited Use

[JAlexoi]

#1 You can only generalize to the population studied

Take WoW as an example, and you will have a really broad spectrum of population. I mean, very broad.

Central bank of Norrath droppped platinum standard

[Anonymous Coward]

And the ridiculous idea that every Orc has a right to a home is what lead to this bubble.

Monopoly

[gblackwo]

You can learn tons from games. Yesterday was explaining that when the taxes get rolled into the free parking kitty, money doesn't leave the system- it only gets redistrubuted leading to massive inflation from passing go. Also was explaining dice statistics and why it was better to build a house on this square versus that square based on the two people 5-7 spaces away.

Re:Monopoly

[fishbowl]

>the free parking kitty

Is not in the rules, and is the biggest reason Monopoly games turn into such marathons.

I don't understand how that particular house rule became so widely accepted, but the same people who play with it, also tend to complain about the length of the game.

Game economics

[girlintraining]

'Our own economy has turned out to be less stable than we'd all assumed.'

Well yeah, what do you expect when you hire a bunch of kids and people from India to grind away for hours and then sell it back to you at inflated rates? I mean, you've got a guy who's willing to hire a pile of workers from some foreign country to do all his work while he sits back with his level 80 character and monopolizes all the good stuff for his friends? It's just like outsourcing!

Re:Game economics

[Xiterion]

+1 Sadbuttrue

Re:Game economics

[selven]

It IS outsourcing.

Re:Game economics

[Anonymous Coward]

What was his first name? I think I worked with him once, the smelly bastard.

Real Money.

[olsmeister]

I suspect we could learn more if the game used real money rather than monopoly money.

Re:Real Money.

[AlexCorn]

I suspect we could learn more if the world used real money rather than monopoly money.

Fixed that for you.

Re:Real Money.

[Anonymous Coward]

The real world uses monopoly money.

Go down to your local central bank sometime and ask to have your currency converted to a non-fiat commodity like gold. See what happens.

Re:Real Money.

[TheRaven64]

They'll point you at a commodity trader (and many banks have commodities markets for their customers) who will let you turn your money into gold, currently at a rate of around 3g/$100. I can do this with a couple of clicks from my Internet banking page if I want to bother setting it up, but I'm not sure why I'd want to invest in gold (which has little intrinsic value and a price fixed by the current supply rather than its utility) rather than people (who create wealth).

Re:Real Money.

[Bai jie]

Must be too early in the morning and not enough coffee. When I saw 3g/$100 I didn't think 3g meant grams, rather I thought that you meant 3 gold (as in WoW currency) was $100. I was thinking that I was about to become a very rich man for about a fraction of a second.

Maybe not in that capacity...

[Jahava]

I agree with your point; on one hand, there are a lot of data that can be collected from the economies of video games. The challenge, as you mentioned, is making that data relevant outside of the realm of that video game (or of video games, in general). I agree that the games probably can't be valid models of real economies (or cities, etc.).

That said, I'd not be surprised if they could extract useful behavioral information out of the data. Not information about how the economy works, but rather how people act when faced with various economic events and circumstances. Players could probably be mapped to social and regional demographics by qualities such as their characters' net values, activity, and primary sources of income. Patches, updates, and expansions can be mapped to technological breakthroughs and innovations, and resource scarcity and overfarming can be mapped to depressions or natural disasters.

There are plenty of real-world economic events that might be mapped and studied to research how the players in various "classes" react, such as:

• Willingness to purchase (and purchase at risk) given stable versus inflated economies
• Price fixing behaviors between autonomous sellers
• Purchasing behaviors of players when faced with the forced obsoleteness of their assets (*cough* Blizzard *cough)
• General life cycles and paths that any given item takes between creation and final acquisition
• Distribution of wealth versus playtime, and how it varies under game circumstance
• etc.

To me, the practice seems legit (if done carefully), although I doubt any results are particularly useful by themselves.

Re:Maybe not in that capacity...

[Goghit]

This practice will never be legit until MMOs are programmed to debuff (starve) a character that does dumb things like dump a tonne of stuff on the auction house for considerably less than the cost of materials.

Re:Maybe not in that capacity...

[line-bundle]

I would think that even the behavioral information out of the data is especially tainted. People react to situations partly based on how they understand the system. The more they play with it the more they are able to game the system. It's going to take some very sophisticated analysis to be able to differentiate between gaming the system subject to the constraints they are given, and how people would otherwise react in real life.

Also, another critical problem is that the people who play these games are self selecting. I do not think you are going to find the 'movers and shakers' of industry because (even pretending to) move and shake the real world takes so damn much time. You won't have any time to actually play. More likely the people who play are naive to the way of the world.

Re:Maybe not in that capacity...

[MeanderingMind]

But this happens in real life too, though for different reasons and not in the same volume and scope.

Consider a going out of business or store relocation sale. Almost all goods, except those most easily transported, will likely be sold at a technical loss. The gain, however, is the vast savings on transport costs even if it's just down the street, or even the administrative costs/maintenance costs if it has to be housed in a warehouse.

For similar reasons, you can't assume that just because someone is listing something below the supposed cost of materials, doesn't mean they aren't still making a profit.

Re:Maybe not in that capacity...

[ergean]

I played WOW for a few months started with 0 gold... ended with 300 in a few days just by cornering the copper/tin market. I used to buy everything under a certain price and set all copper at that price. The players assumed that they can sell it higher and usually put their prices above mine. I ended selling all my ore at profit and making good money fast... In the end I got bored by my little scheme and stopped playing.

Economics, Schneconomics

[jeffasselin]

Economics is as much a real science as MMOs have real economies.

As someone else said, many of the basics of those in-game economies are designed by economists and mathematicians. Of course they'll reflect economic theory.

Re:Economics, Schneconomics

[Vintermann]

Up to a point. They may design the rules, the central banks, the inflation/anti-inflation schemes, incentives against cheating and farming, a big lot of stuff.

But they can't design player behaviour. If players don't act as they think they do, those economist designers won't achieve their goals. It should be a very educational experience, designing an entire economic system and seeing if it behaves as you think it will.

Economic ignorance as a universal standard

[MSTCrow5429]

'Our own economy has turned out to be less stable than we'd all assumed.'

Who the hell is we, and who is listening to someone so clueless in the first place?

MMOG's economy is fully controlled...

[emanem]

That's the point.
In RL governments can act and do something about the economy, make laws, bail banks... but all the bribes, the people in key position, the network of friends, will always allow the banks to be essentially free (eg. leveraging and taking more risk), and basically all the good words that are being spent now on the banking sectors will just be words.
Instead in a MMO everything is under control.
Too much gold?
Increase repair price/decrease loot, etc etc.... well add new taxes. If RL governments do so banks will move offshore or in other countries where taxes are acceptable (to their standard...).
The difference with RL is that Blizzard will never bail The Big Guild going bankrupt because too many wipes/enchantments/etc etc..., but RL governments had to.
In an MMO you just go grind and magically you get money. Then you have sinks like the gear/enchantments/etc etc.
Again, saying that governments had to bail the banks doesn't mean that the economy is controlled; btw in MMOGs you totally lack the investment part of the capitalistic economy; you can only throw away your money on some item that will become useless in 2~6 months, you can't use your money to make more money*

* practially you can....if you have some in game cash you can briefly get the monopoly of some kind of commodity (eg. reagents) and put the price you want; I've done it a couple of times in WoW...I invested 5k in one particular reagent, managed to get 6k in some hrs...
.

Re:MMOG's economy is fully controlled...

[Anonymous Coward]

The difference with RL is that Blizzard will never bail The Big Guild going bankrupt because too many wipes/enchantments/etc etc..., but RL governments had to.

no they had not and should not - running huge deficit for years and paying interest on it is not worth the temporary gain. Governments should never give up to such blackmail - "omg, if you won't give us fuckton of taxpayer's money the world will end!" The world would change somewhat but that's it.

Government intervention equals central planning - it's inefficient and produces a lot of waste and misallocation of resources. It also perpetuates faulty schemes and in effect economy is less flexible and unable to adapt. This is not what viable economy is about.

Re:MMOG's economy is fully controlled...

[vlm]

The difference with RL is that Blizzard will never bail The Big Guild going bankrupt because too many wipes/enchantments/etc etc..., but RL governments had to.

Regarding "had to", that is because in RL the equivalent of "The Big Guild" owns the equivalent of "Blizzard". If WoW allowed the players to purchase their own government, like we do in real life, then it would be a fair comparison.

Re:MMOG's economy is fully controlled...

[emanem]

Couldn't agree more, but everyone has his tag price, and just take a look at the so called Watchdogs... they don't do nothing and are all friends coming from the same banks/universities... too sad...

Re:MMOG's economy is fully controlled...

[Vintermann]

Increase repair price/decrease loot, etc etc.... well add new taxes. If RL governments do so banks will move offshore or in other countries where taxes are acceptable (to their standard...).

Well, there are other MMOs. If your MMO is sophisticated to have attracted "private" banks, you don't want to lose them to a competitor...

Virtual money

[noidentity]

As more people opened accounts and flocked to Norrath, spending money on new items, researchers saw inflation spike more than 50 percent in five months.

Yeah, but they can just create money out of thin air in the game, unlike the real world. Er, wait...

Missing pieces

[gmuslera]

In MMOs, everyone is "employed" or capable to make money (not to get rich, but still to participate actively in the economy) by themselves. Things like food or where to live are not big problems, neither is maintaining a family usually. And there aren't laws (like patents) giving individuals virtual monopolies.

But still there is commerce there, sharing several of the rules of with the real world one and behaving in good part like it.

Re:Missing pieces

[cbhacking]

This isn't universally true... some games have virtual monopolies (this actually used to be a HUGE problem in EVE Online, where a small number of people used to control the blueprints to make some of the most valuable ships) and while everybody has *some* ability to make money in all of these games, it amounts to what a kid could make cutting neighbors' lawns - irrelevant compared to what people who've actually made opportunities for themselves have.

Honestly, EVE's in-game economy is a better simulator of real-world economies than some "economic simulators" I've seen. There's rent, there's monopolies, there's trade (between relevant economic entities, for substantial amounts), the economy is largely based on supply and demand, people who can create and exploit artificial scarcity can become hugely wealthy, etc.

Re:Missing pieces

[Follier]

.. And there aren't laws (like patents) giving individuals virtual monopolies.

Oooohh, I would liked to have been the guy who patented the SoW potion back in the day.. I could retire now.

The original research

[Sapphon]

"As real as real? Macroeconomic behavior in a large-scale virtual world" (links to the abstract with option to download)

They picked the wrong games

[durrr]

Why not look at the Eve online economy? The Eve system is a lot more flexible, largely player driven and a LOT more players involved. This should more accurately model real economies.
Then of course, eve have already had a lot of attention for this reason, so perhaps they wanted to do a more novel study.

Re:They picked the wrong games

[Anonymous Coward]

***you have entered Dodixie local***
Mr. Economy> I'm doing a study on game economy, would anyone like to participate?
NiNjA_RaTtEr!1> I'll participate in taking your stuff
N0t_a_Scam> WTS FACTION GEAR CHEAPEST AVAILABLE GOING FAST
XxxDoom_PEENxxX> Invite me to your gang and I'll teach you about teh economies
L4_Superman> Go study WoWtard economy, noob
N0t_a_Scam> WTS FACTION GEAR CHEAPEST AVAILABLE GOING FAST
N0t_a_Scam> WTS FACTION GEAR CHEAPEST AVAILABLE GOING FAST
Uber_Allison> Here, there are studies in this can
N0t_a_Scam> WTS FACTION GEAR CHEAPEST AVAILABLE GOING FAST
****Notification: Uber_Allison has begun to warp scramble Mr. Economy****
Mr. Economy> I just want to help! And to study!
Uber_Allison> You'll have plenty of time to study your clone. 200m or you go splodey
Mr. Economy> THIS ISNT FAIR
Uber_Allison> haha, welcome to Eve, noob
L4_Superman> rofl, fair
Daerth_Smader> qq moar
TearsRbest> oh lawl, have fun @ clone bay, nooob
N0t_a_Scam> WTS FACTION GEAR CHEAPEST AVAILABLE GOING FAST

maybe they'll "discover" open-source economy

[h00manist]

the thing I don't understand about money is, why don't more people make it? there's no law against creation of local currencies. some cities do have them. fortaleza, brazil, has a community with a currency called "palma", switzerland has the WIR bank, ithaca has the hour... it's problably the best way for a community to change, develop and become self-sustained. economically, ecologically, and in other ways. money is, in reality, just a contract, a document - shows that if you help someone, give something, someone else will help you, give to you. as long as the contract works... who cares who filled it out, printed the form, bill, wrote the software, or if it's electronic, paper, or just a paper ledger. the only hard part is creating a community that realizes it's in their best interest to run their own economic system. open-source software could perhaps benefit from adoping something similar for rewarding programmers more.

Re:maybe they'll "discover" open-source economy

[Sj0]

I think in the United States, it's illegal for anyone but congress to create legal tender.

The purpose of creating a federal government was to standardize trade between the states, and the creation of a common form of currency was one of those standardizations. It's a power given to the congress directly by the constitution, rather than the later programs which are given by loopholes in section 8.

Re:maybe they'll "discover" open-source economy

[gtbritishskull]

The problem is that all currencies have to be backed by something. I can create my own currency and tell people to give me money for pieces of paper with my face on it, but who is going to accept it? The US currency is basically backed by the reputation of the US saying that it will be worth something in the future. Other countries may tied their currency to a mineral or to another currency. But, in the end it has to be backed by something, and it will then be at the whim of whatever backs it. Be that gold or a country's reputation.

Re:maybe they'll "discover" open-source economy

[h00manist]

'backing' is needed only if you're looking for a long-term value deposit. if you're looking for a currency useful for everyday trading, all that matters is that you can spend that currency on something you need. so if there's a few local stores that accept the currency, you're set. but of course, not just anyone can print the currency. it doesn't even actually have to be printed, in fact, but some places do.

Re:maybe they'll "discover" open-source economy

[tmosley]

States can't make currency other than silver and gold (if only they would...). The constitution does not restrict the rights of individuals to issue their own currency. If it did, things like "Disneybucks" would be illegal.

The Constitution would have done better to mandate that ALL government issued currency be in silver and/or gold to prevent the meltdown we are now seeing.

Re:maybe they'll "discover" open-source economy

[Anonymous Coward]

You mean like checks and money orders?

Re:maybe they'll "discover" open-source economy

[ajlisows]

I actually think that any entity (Your group of friends, your city, your county, your state) can print it's own money. However, if you are selling goods to the public you must ALSO accept United States Currency and must be able to trade between the two freely back and forth as long as the money is backed by the dollar.

At least one Massachusettes town (Southern Berkshire) prints and circulates its own money. It supposedly helps local business flourish in a way I don't understand. Basically you go to the Bank, exchange $90 US Dollars for $100 Berkshires and can spend those Berkshires in place of Dollars at any participating business. And no, I'm not making this up. A quick search for Southern Berkshire may shed more light on this, if you are interested.

Re:maybe they'll "discover" open-source economy

[TheLink]

Is it illegal? Don't US casinos issue casino chips? There are also places that issue coupons and tokens.

<matrix>Your mind makes it real</matrix>

Re:maybe they'll "discover" open-source economy

[Anonymous Coward]

If you really lived in an economy with local currency (I've lived the situation at least twice) you would know that there is a huge problem, confidence and commerce with people from other place. Why would you want some local currency (e.g. a state currency) when you have business with people from outside, they will NOT take your local currency, so you need money from the official currency to work.

Local currencies may be good for isolated or some special and well designed economies, but in my experience (I'm from Cordoba, Argentina, you can search for LECOR and LECOP http://en.wikipedia.org/wiki/LECOP in the internet), having my salary mainly in LECOR was a pain in the 4$$.

Re:maybe they'll "discover" open-source economy

[Anonymous Coward]

Traditionally the term "legal tender" only means that it must be accepted as the settlement for a debt. If I owe you an asset and I offer to pay with legal tender and you decline that method of payment you have forfeited your right to demand further payment. If I offer to pay by some other means (barter, work, cook you a dinner or a piece of paper you accept as settlement) and you accept it, it's perfectly legal. So, in theory alternate "currency" is legal.

Re:maybe they'll "discover" open-source economy

[gtbritishskull]

Actually, that means it is even more important that it is "backed". If it is short term, those businesses are going to want to know that when they go to exchange it (say, to buy more supplies from someone who doesn't accept your currency) that they will get the amount of money they expect. Paper money originally started with banks. People would deposit their money and the bank would essentially give them an IOU that said how much real money it represented. Instead of always going back to the bank to pull out the cash, people started exchanging these IOUs (which could hold value if it was a reputable bank). I think the FED was created because people realized this system was inefficient and prone to abuse (would each bank have its own "secret service" to prevent counterfeiters?). So, if you create your own currency, you are essentially creating a bank. And there has to be a way for people to know the value of the "money" they are holding, or they will just choose not to hold it.

Re:maybe they'll "discover" open-source economy

[TheRaven64]

I think in the United States, it's illegal for anyone but congress to create legal tender.

This is true, but it doesn't mean what you think it means. You can create any arbitrary tokens of exchange that you want, but you have to accept US Dollars as payment[1]. There's nothing stopping you from setting an arbitrary exchange rate, however. You can accept 1 Madeupunit or 100 US Dollars for something and people are free to pay you with either. If they can acquire 1 Madeupunit for 50 US Dollars somewhere else then they are going to prefer to pay in Madeupunits. If you want a real-world example of this, there are two that spring to mind. The first is the common trend in Silicon Valley of paying some proportion of an employee's salary in shares. These are, effectively, a currency that is backed by the company, rather than the government. The other is the Liberty Dollar, which is backed by gold or silver. It appears to be defunct now, although you can still trade it as silver or gold (the coins are made of these materials).

Of course, the US government will only accept payment in US Dollars and will require you to pay tax whatever currency you are using. There are special rules for stocks and shares, which say that you only pay tax when you convert them to something that isn't a share, but for other currencies there are no such rules, so you will need to pay tax on any Madeupunits you acquire at whatever the current exchange rate it (which may be difficult to calculate, so have fun with the IRS audit).

[1] Technically for settling debts, but this is usually interpreted as including the 'debt' that you get when you pick up an item in the shop and settle by either putting the item down or handing over money.

Re:maybe they'll "discover" open-source economy

[TheRaven64]

It needs to be backed by something for merchants to accept it. Backing just means some form of guarantee that, after accepting the currency, the merchant will be able to exchange it for something that has real value (a person's time, food, raw materials, manufactured goods, and so on). Currencies backed by gold work because the buyer and seller both regard gold as having some roughly-fixed value and are happy that, if no one wants to accept the money, they can turn it into gold and then turn that into something else (probably at a slight loss, but not an enormous one). Currencies backed by governments work because there are laws saying that people are required to accept them (although, usually, the laws don't say how many they must accept in exchange for any given goods or services, so the merchant may make a loss there too). Other currencies, such as shares, are backed by the reputation of their issuer.

For any currency to work, you need to be able to persuade the person taking it that they can, in future, exchange it for something that has roughly equal value to the goods or services that they are giving you. There are lots of ways of doing that. The simplest is personal reputation; if you write an IOU and the person trusts you then they can take that and either trade it back to you later or give it to someone else who trades it back later.

What about EVE?

[spedrosa]

Any researcher worth its salt will have to first and foremost look at EVE Online's economy. The game is driven by its economy, not the other way around.

They you can look at toys like WoW or Everquest, if you want a simpler model.

Re:What about EVE?

[KahabutDieDrake]

They ignored EVE because it's nearly as complicated as the real world and just as messed up. They obviously didn't want the hassle of studying anything of true significance.

Re:What about EVE?

[nulled]

The 'over all' economy is not corrupted. It is individual parts or it or major parts (like the loans and mortgages scandel ).

Wall Street is also a motivator or corruption. For instance, a publicly traded company having as CEO and members of the board owning stock shares will do anything to make those stock rise. People that literally have NOTHING to do with a company can invest money ( buy stock ) and make noise about when the stock value goes down? This is retarded.

Wall street traders, trying to make money with nothing more than trading money encourages more corruption than it seems to help. If a company goes public, it means it is already at a favorable size and profitable. The ONLY reason to IPO is purely for greed.

If a business needs capital, it should land a Loan from a bank or goto Venture Capitalists. NOT do the same or similar with Wall Street Stocks.

A perfect example is the LAME excuse that America's Health Insurance companies use to explain why they cheat and lie is because of 'Share Holder Pressure' to make the stock go up. This motivation is based on pure GREED to raise the stock, NOT motivation to increase value or good.

If you ask me, I think 'Day trading' should be stopped. But, it's too late for any of that now. The economy is tied to Wall Street and the world, globally.

MAYBE by some miracle the idea of a stock market and Day traders could be made good, but honestly I can not find anything to support it.

Re:What about EVE?

[Anonymous Coward]

Yeah, as you can look at marbles to study subatomic behavior ...

No offense to you, but they should have taken a look at EVE as well.

Economies?

[JAlexoi]

The study would be useful, only if we printed our money without any regard to the amount of it. That is the basic problem there, there can be no lack of credit in virtual economies, while we know there can be one in the real world.
Next, you have to transform most entities in the virtual world into entities in real one. Because, you will never have a raw diamond more expensive, than a well crafted diamond jewel in real life. Yet, in WoW it is usual to have items that are found raw more expensive, than those that are crafted.

Re:Economies?

[KingMotley]

Actually it is common in the real world that "crafted" items are less expensive than their raw parts. For example, go to a car dealer and order every part needed to make a car. It'll cost you 500% more for the parts than a fully assembled car itself. Or take the US penny, that is worth more in copper than it's face value. Even some raw diamonds can be worth more than if they are cut into a type that isn't popular.

Economics is like a game ....

[PPH]

... of Russian Roulette.

In Soviet Russia, economy plays you!

Linden Dollar anyone?

[fishbowl]

I'm surprised there's no discussion about the Linden Dollar (Second Life currency) which has a full-fledged external exchange. There have been quarters where the LindenX outperformed the Dow.

Of course, I do everything in SL Creative Commons gratis or for barter, but there are only a handful of players who seem to understand why I don't like the in-world economic idiom being "the Dollar." I think people who can conceive of an economic system that involves anything besides "shopping" and "paying retail" are scarce.

Skewed incentives

[Paladeen]

I very much doubt that online games can ever provide any decent economic modelling. The things that make most people risk-averse in the real world are largely mitigated online.

It may be terrible to lose your character or his equipment in the MMORPG universe, but you'd have to be pretty far gone in order to feel the same way about that as you would about losing your job / house / car.

Re:Skewed incentives

[Cro Magnon]

It may be terrible to lose your character or his equipment in the MMORPG universe, but you'd have to be pretty far gone in order to feel the same way about that as you would about losing your job / house / car.

Well, if you lose your RL job, you can't afford the internet to play WoW. If you lose your car you can't get to your job and you lose your internet. If you lose your house, the rain will short-circut your computer, and you can't play WoW.

I suspect the only reason some people value RL higher is BECAUSE major RL failures will keep you from playing WoW.

Irrelevant. wow economy = shit

[unity100]

wow doesnt have any real economy or crafting. its all related to 0.001% chance drops from some mob bosses. and some utility craftables heavily traded.

Re:Irrelevant. wow economy = shit

[brkello]

From the summary, they were looking at EQ2.

And I don't know what game you were playing, but when I played a few months ago there were plenty of things to buy...particularly enchants and gems. But raw materials for crafting sold very well. I always was buying and selling items on the market...so not sure what you are talking about.

Re:Irrelevant. wow economy = shit

[unity100]

'things to buy' doesnt make an economy. you buy things in flea markets. check pirates of the burning sea for an 'economy'

No! No no no no no!

[geminidomino]

This guy must be a member of the Guild Wars Guru forums.

Repeat after me: An economy with infinitely respawning resources can NOT model a real-world economy.

could have used this early in my working life

[GrassR00ts]

nice post though http://www.leatherbagsandmore.com/search.aspx?manufacturer=12