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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.'"
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....
Right... as if someone with knowledge of real world economics could actually be put in a place of authority.
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.
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.
And the ridiculous idea that every Orc has a right to a home is what lead to this bubble.
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.
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:
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...
It is a miracle that curiosity survives formal education. - Einstein
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:
To me, the practice seems legit (if done carefully), although I doubt any results are particularly useful by themselves.
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.
It is a miracle that curiosity survives formal education. - Einstein
"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.
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.
"by that I mean people who don't sit on slashdot all day wondering why everyone else isn't building robots" DECS
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.
"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
"Somebody has to do something. It's just incredibly pathetic it has to be us."
--- Jerry Garcia
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.
"Science flies us to the moon. Religion flies us into buildings." - Victor Stenger
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.
Antiquis temporibus, nati tibi similes in rupibus ventosissimis exponebantur ad necem.
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.
xkcd is not in the sudoers file. This incident will be reported.
"As real as real? Macroeconomic behavior in a large-scale virtual world" (links to the abstract with option to download)
Antiquis temporibus, nati tibi similes in rupibus ventosissimis exponebantur ad necem.
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.
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.
Build your own energy sources from scratch. http://otherpower.com/
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.
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.
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.
"Somebody has to do something. It's just incredibly pathetic it has to be us."
--- Jerry Garcia
The X dollars in circulation just have to circulate fast enough.
...building on bubble after bubble. But blaming it on FRB is just plain wrong.
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.
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.
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
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) ...???
Do not mock my vision of impractical footwear
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.
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.
"Somebody has to do something. It's just incredibly pathetic it has to be us."
--- Jerry Garcia
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.
http://marriedmansexlife.com/
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
I am Chaos. I am alive, and I tell you that you are Free. -Eris
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
"Somebody has to do something. It's just incredibly pathetic it has to be us."
--- Jerry Garcia
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?
> There are two ways in which people can deal with one another. Money, or guns.
Spoken like a true virgin slashdotter.
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.
"Trolls they were, but filled with the evil will of their master: a fell race..." -- J.R.R. Tolkien on Olog-hai