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Economics of MMO, avoiding inflation

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This question relates to the economy of an MMO. I have some limited experience of Ultima Online but not enough to judge how they solve this problem. If anyone has any design suggestions how this has been solved in the past, by all means, please post. Imagine you have a trading-centered MMO, to make trading simple you want your players to be able to carry out transactions between themselves with money. To avoid money to be created out of nowhere all players start with zero money. The players can then extract various natural resources and eventually trade it with other players for money. As more and more players join the game more wealth will be created and there will be a steady flow of money entering the game, depending how much people play, more wealth will be created over time. BUT, where does this money come from in the first place? Do all MMO''s have to have some sort of central bank that regulates the inflow of money into the game, i.e. by buying resources from the players in exchange for money (and by selling resources to decrease money supply)? But in this case how does the central bank know what exchange rate to set for natural resources to avoid inflation? And a follow-up question, is there any current MMO where money has been rendered useless due to hyperinflation? Best regards, Nick

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There was a thread just a week ago called "Economics" in which we discussed some of the fundamental ideas behind an economy. The simplest way to prevent inflation of currency is to create a static amount of resources. What this means is that you pick a number out of the air, and that number represents how many resources are in the game, resources such as gold pieces.

However, I''d like to reiterate just what the concept of money actually represents. Paper currency is a representation of a unit of trust. By exchanging paper money for goods, we are in fact exchanging a promise. Holding the money means that we performed some useful capitalist labor to achieve it, and that the purchase of goods has been warranted.

In a ye olde medieval setting, money is not trust, money is a representation of resource. A queen''s coin would represent a collection of treasure given to the queen. I''m generalizing and simplifying, but it was usually the case that official currency was created as part of a banking system, in which they bank away wealth and give a smaller and lighter currecy to represent the wealth.

Stepping backwards even further, currency is the literal resource. Gold Pieces were melted down to make the goods.

Hope this helps.

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Why do you want to prevent inflation? Now I understand why you want to LIMIT / REGULATE it, but not prevent it. It is inflation that encourages reinvestment of money into usefull endevors.

In a system that has small levels of inflation, large wealth holders are encouraged to INVEST to money, to bring back returns which keep up with inflation, in a system with deflation, wealth holders are encouraged to HOARD their money, and watch their wealth grow. Obviously a static system would have neither of these effects, and simple allow each person to decide what they wanted to do with their wealth based on personal feelings and goals.

The idea of having a FIXED amount of resources does not model ANY real world system and does not work correctly with an increasing number of players. A FIXED amount of resources means each player eventually must take those resources from other players, as they would all be owned by someone (WAY INTO THE FUTURE) ... this does NOT correctly model the fact that each year new fruit and tree grow, and each generation animals breed. In this (the real) system, the total USEFULL wealth of the world in almost always increasing, as humans do things like improve farming skills, setup mining operations, etc ... we MAKE usefull weath, by consuming the less usefull natural resources.

Oh well, gotta go back to work ... i''ll be back

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See, the fundamental assumption you make when you state that people "trade goods for money" is that people trade for some arbitrary unit which you have defined as money. This is not necessairly true. As Inmate mentioned, the money (or gold, as it is commonly known) is not some Godlike super commidity. The fact is that is is merely an adopted commodity that exhibits three characteristics:
1) Staticism: The commodity must have a relatively static supply, such as a precious metals. Thus, the value of currency will not rapidly vary over time, making it a "constant" that other commodities are valued against.
2) Portability: It must be able to be both mined easily and produced in a form that is easy to carry. "Currency", as we know it is merely a pre-weighed form of a commodity. The British "pound" was originally equal to one pound silver upon exchange.
3) Commandability: it must be possible for a given istitution, like the state or a bank, to stockpile this resource. Thus, the commodity can then be detached from itself, and "bank notes" (i.e. bills) can then be issued which can be exchange for an equal amount of that commodity. Thus, the vast stockpiles of gold at places like Fort Knox are really used to fix the value of the US Dollar, by backing it with a real good.

So, inflation is simple. It is merely the rate at which the commodity that you have based your economy on is being produced. Over time, prices rise as more gold enters the market. More to the point, this is a necessary evil. As Xai pointed out, inflation helps the economy move. Inflation causes people to take their money out of storage and spend it, as the money is worth less and less each year. For example, if I told you that the interest rate on your bank account was -2%, you would remove it and spend it elsewhere. However, that is what it actually is. When people save, their REAL interest rate is equal to the rate charged by the bank minus the inflation rate. Thus, the intelligent investor will invest instead in businesses, moving the economy forward.

The essential problem in your argument is that you refuse to let the free market determine the prices of goods. Inflation tends to arise when a central agency, such as a bank, fiddles with the value of commodities. The best way to solve your problem is to adopt one commodity as a currency, set a production rate for intoduction into the market, and let the rest work itself out. I''m sorry, but there''s really no way that doesn''t involve either a command structure wherein prices are "set" by the GM (and hence is not an accurate trading simulation) or a painful growth period wherein bartering is tedious and widespread.

The economy is a dangerous thing, and not one you can easily just ''create'' for an MMO.

Cheers,
-Operator

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Guest Anonymous Poster
quote:

1) Staticism: The commodity must have a relatively static supply, such as a precious metals. Thus, the value of currency will not rapidly vary over time, making it a "constant" that other commodities are valued against.
2) Portability: It must be able to be both mined easily and produced in a form that is easy to carry. "Currency", as we know it is merely a pre-weighed form of a commodity. The British "pound" was originally equal to one pound silver upon exchange.



These two points are at odds with eachother. If something is easaly mined, why would it stay static? The harder to find/mine metals are the ones that are worth more.

quote:

3) Commandability: it must be possible for a given istitution, like the state or a bank, to stockpile this resource. Thus, the commodity can then be detached from itself, and "bank notes" (i.e. bills) can then be issued which can be exchange for an equal amount of that commodity. Thus, the vast stockpiles of gold at places like Fort Knox are really used to fix the value of the US Dollar, by backing it with a real good.



In 1968 the gold backing requirement for Federal Reserve Notes was eliminated.
This means that if you go into a bank and hand over 10 us dollars you will get exactly that back (assuming no fees of course). This is why some people will hord gold coins.

As for inflation causing people to take their money out of storage and spending it..... Last time I checked people invested money to make more money, inflation is only another reason to invest.

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Whats the system of needs driving your economy?
In other words why do people need or want money in this game world?
Whats is it used for?
What purpose does it serve?
If the sole purpose of the game is to aquire money, then how do I showcase my supieor wealth to rivials?
What regular expenses do players have?
You said all players start with 0 money so where does money come from?
Are NPC to trade with?

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Writer, Programer, Cook, I''m a Jack of all Trades
Current Design project
Chaos Factor Design Document

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Can players purchase services, or somehow MAKE wealth? If I''m a blacksmith, and I buy a bunch of iron ore and turn it into fine short dirks of poking, then I''ve increased the net wealth of the world. If I''m a hero, and I run off a dragon in exchange for the Shiny Gold Helmet of Psionic Healing, then I''ve gotten something for nothing, if you discount the risk and effort.

So trade isn''t the only way for wealth to move around.

As to inflation, I''d say that in a barter system there''d only be fluid value, based on geography, supply and demand. But I''m no econ guy.

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Okay, here are some clairifications on essential turn-of-the-century economic theory:

Number 1:


These two points are at odds with eachother. If something is easaly mined, why would it stay static? The harder to find/mine metals are the ones that are worth more.


Okay, the "easy to mine" relates to the relative simplicity of producing large quantities of a resource, i.e. gold, in a sort amount of time in order to create enough currency to allow the economy to function. The "static" relates to the fact that past this first short "boom" the supply of that resource remains either constant or grows very slowly. For example, gold was amoung the most easily mined (and minted) metals for a long period of time, thus it made a perfect currency, as gold deposits, although easy to exploit tended to be rare. So, a static supply ensures a set value for the resource in relation to other resources, and in no way contradicts portability.

Number 2:


In 1968 the gold backing requirement for Federal Reserve Notes was eliminated.
This means that if you go into a bank and hand over 10 us dollars you will get exactly that back (assuming no fees of course). This is why some people will hord gold coins.


Yes, this is true. The vast majority of currencies today are no longer tied to the gold standard. However, the US still retains gold supplies as a hedge against inflation, and they can be sold in order to prop up the American dollar by strengthening the American economic situation. However, the sheer complexity of this situation is such that it is probably undesirable in a MMO, as it would involve rather nasty currency flux due to GM tweaking.

Number 3:


As for inflation causing people to take their money out of storage and spending it..... Last time I checked people invested money to make more money, inflation is only another reason to invest.


You''re precisely right. Inflation is a way to force people to invest - however, where you go wrong is in the nature of investment. Static investments, like hoarding money or buying bonds, tend to pay small dividends for little risks (I mean, when was the last time the US decided "not to pay" for it''s bonds?). However, with inflation the set level of these investments is so low that they actually lose money on them! So, they are forced to go in for riskier investments, by buying into companies that they feel are valid. Thus, it encourages saving being placed in companies hands or in productive uses like upgrading machinery or other capital.

So, I hope that clears this up a little.
Cheers,
-Operator




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Someone pointed out in a similar thread somewhere (I did try to search for it) that in the real world metals used as currency (or to prop up a non-precious metal currency) had utility beyond exchange for goods and services. Useful objects (well, useful as the symbols of wealth and royalty) can be fashioned from all the raw materials (renewable (silk) and otherwise) valued in such an economy. In any game that I have played, cp/sp/gp/pp are only used as currency; players that have everything that they otherwise need (good armor, weapons, health/mana potions, whatever rations they might need, some amount of currency used to buy things at NPC driven shops) have no use for the currency. Thusly, it is of little/no value to them.

Perhaps if currency could be fashioned into other items (enchantable rings, weapons, decorative (status symbol) clothing) it might be valued more by players.

Better yet, if it works within the game''s setting, have players exchange something like mana for spells, ammo for weapons, etc. The economics of using (needful) expendable goods for exchange of other goods and services might get rather odd; however, I think players play games to immerse themselves in a world different from reality.

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Well, the real world aspect seems to already have been exhuastively dealt with. The summary being that in the real world wealth IS created as more people joins the system, mine resources, manufacture products or provide services.

From a game perspective a game perspective as well you need to consider the effects of limited wealth.

quote:
Original post by Xai
A FIXED amount of resources means each player eventually must take those resources from other players , as they would all be owned by someone (WAY INTO THE FUTURE) ... this does NOT correctly model the fact that each year new fruit and tree grow, and each generation animals breed. In this (the real) system, the total USEFULL wealth of the world in almost always increasing, as humans do things like improve farming skills, setup mining operations, etc ... we MAKE usefull weath, by consuming the less usefull natural resources.



On one hand you might consider it a way to encourage conflict, ''cuz if anyone wants to get something he has to either buy or steal it.
But from the perspective of a new player just joining who has nothing to buy resources with and isn''t strong enough to fight or steal from anyone else the best option will prolly be to log off.


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Love... and Wudan!

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