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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.'"
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.
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.
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.