Runescape worked that way nearly a decade ago, although there were NPC merchants. If you had a character that could mine runite and smith rune items, or a character that could craft dragonstones, you'd usually receive payment in coal (or fish). Gold was kind of worthless, and you needed tons of coal, which was a real pain to get. The only useful thing you could really do with gold was buy coal certificates, but dealing with greedy and unreliable kids usually took almost as long and was almost as annoying as mining it yourself.
Not sure if this is still true nowadays, 6 years have passed since I last looked at it. A lot of content (and huge gold sinks) has been added since then, so it might be a completely different story now.

Ryzom was a similar story. NPCs existed, but anything you could buy at a NPC was total crap. Every piece of equipment you used (except for craft tools) was crafted from harvested or looted raw materials. No items were dropped, only raw materials. Money was abundant from selling crafted junk to merchants, and there was nothing to spend money on once you had bought your packers and your apartment. Most people would just give out most items for free. Special outpost materials (experience boosters and special item ingredients such as maga or egiros) were bartered in the beginning within factions, usually on a one-to-one base. A kind of "commonwealth" system was established within factions to give OP produces to guilds that did not own an outpost but contributed in defending the faction.
Later, as players diminuished and outposts kept generating stuff every day for free, things were traded across factions, too, and finally given out for free in dozens to just about anyone. Making room in your guild vault was the bigger problem than getting something in return. Charging money (dapper) for anything was quite unusual (I've seen it maybe 3 or 4 times total).

Now, the idea of faction war on areas and resources is another story... this can work, and it can fail. EVE is quite successful, but I daresay that "faction issues" was one of the major reasons for Ryzom failing so bitterly. I've seen people leave in dozens due to faction issues. Dozens leaving are not much of an issue if you have 750,000 players -- but they matter a lot if you have a total 500-1,000.

Insofar, I could in principle imagine that such a thing could work, but a lot of care is necessary.

Removing the NPC economy has several (possibly undesirable) effects:

1) You lose control of the economy. It is now subject to chaos and market forces.

As others have pointed out, it can be hard to balance such an economy or fix issues. Also, there are much research on the unpredictability of the economy, even by PhD economists. E.g. www.nytimes.com/2007/04/15/magazine/15wwlnidealab.t.html?pagewanted=all&_r=0

2) It becomes more capitalistic.

It has been said that MMORPGs are appealing because of its differences from real life: everyone starts equally broke, there are opportunities (grind) everywhere in return for time/work. E.g. realityisbroken.org

An economy that mimics real life also mimics its problems - inequality, shortages/high-prices of desirable goods, lack of opportunities, little gain from hard work etc. The overall result might not be fun.

An economy that mimics real life also mimics its problems - inequality, shortages/high-prices of desirable goods, lack of opportunities, little gain from hard work etc. The overall result might not be fun.

I don't know if it would take on all the real problems. If all characters have the same abilities then it doesn't become like the real world. If I'm able to mine ore, chop down trees for lumber, farm crops, & bake food all in a 3 hour playing session then it means the lack of opportunity or inequality isn't there. Nobody is doing all that in the real world in such a short time span and being able to do everything would change the economy to not exactly mimic the real world economy which means it won't share all of it's problems. However, it might create new problems that are unforeseen. Guessing we'll have to make it to find out

1) You lose control of the economy. It is now subject to chaos and market forces.

As a game designer I think that's a little of what makes the idea fun. Designing something that the players take control of and make it their own. The players of the game would decide on the outcome. I know in my game I'm going as far as making public officials that have even more control over certain things like taxes, public land, etc. Players vote other players in and can vote them out too if they don't like how one is running things. I'm interested to see what players do with something like that. This is where indie's have the creative control to test stuff like this out. I think most game designers are terrified to give power like that to players in fear of them using them for evil and killing their game, but if you give all players the power of the vote, then they all feel empowered that they can change the game.

An economy that mimics real life also mimics its problems - inequality, shortages/high-prices of desirable goods, lack of opportunities, little gain from hard work etc. The overall result might not be fun.

I disagree with a lot of that. A game economy that mimics real life's free market aspect mimics its wealth of opportunities. Being able to initiate high risk, high payout business maneuvers is exciting. Being able to make long term plans is exciting. Being able to actually affect the market is exciting. That becomes entertaining gameplay by giving the player strong enough economic tools so they can concentrate on making interesting deals, instead of stupid busywork.

And it's easy to get started from zero. Most MMOs offer you a straightforward grind outside the player economy with which you can reliably build initial capital. Your virtual dude doesn't have taxes to pay or mouths to feed. Even if you drop down to zero, you can start again; failure isn't really risky. When you start doing business, there will be no patent troll lawsuit or overzealous government bureaucracy to bankrupt you. Most importantly, the participants in the economy are extremely loose with their money, because for the majority of them the entertainment of the game lies strictly in the sections where you get to bash dragons in the head; it's a heaven for a new virtual entrepreneur.

The opposite is the economies MMOs like WoW have: fixed plumbing, carefully designed to transport the bodily waste of the grind engine which is the game. The only "opportunity" you have is getting bored out of your mind camping the AH for the rare deal you won't get anyway because there are 10 other people doing the same, or constantly manually re-entering tens of sale orders for your bulk goods, with no way to even keep track of your inventory, profits and sales history, and no way to turn a profit that makes this worth your while.

I don't know if it would take on all the real problems. If all characters have the same abilities then it doesn't become like the real world. If I'm able to mine ore, chop down trees for lumber, farm crops, & bake food all in a 3 hour playing session then it means the lack of opportunity or inequality isn't there.

Just like in the real world economy, anything characters can do easily will not be worth much.

Spending 3 hours doing simple resources gathering and then selling them for meaningful profit only works if there are NPCs to sell to. But if there is only the market driven economy, then they are unlikely to be able to sell easily obtainable stuff for good profits. Just like in real life, you can spend 3 hours getting wood or baking food, but you are unlikely to make any profits doing that.

www.entropiauniverse.com tried making basic resources vital to crafting all items - to artificially generate demand for them so people lower down on the food chain can gather resources and sell for profit. This didn't work because those resources are easy to gather, and thus the market is flooded with them.

Next, they created a basic resource that can only be harvested in limited quantities - to drive up prices and ensure that everyone can gather some valuable resource with little effort everyday. This has the problem of "if supply is too low, profit is too low to matter. if supply is high, everyone harvests it, profit becomes low".

The thing is, in a solely market driven economy, most things are worthless. So its hard to find opportunities to succeed. Also, prices are driven by demand (the whims and fancy of the crowd) instead of efforts.

I too think MMOs in general need more interesting economics.

And that you need to go all out and skip all kinds of NPCs and "fixed" prices, except possibly some of before mentioned "seed" NPCs that really just try to simulate a rational agent in the economy, to give it some momentum.

And a complex crafting system that starts from a few simple resources that should be easy (skillneed/gear) but time consuming to produce. I also really like the recycling of EVE, to be used instead of sink NPCs.

But I do not see why you have to throw out money and go barter economy... That I think will only slow the economy down, and make it harder to manage.
Money was invented for a reason you know...

Being able to initiate high risk, high payout business maneuvers is exciting. Being able to make long term plans is exciting. Being able to actually affect the market is exciting.

These options will unfortunately be limited to a few people who can afford to do so...just like in real life.

And it's easy to get started from zero. Most MMOs offer you a straightforward grind outside the player economy with which you can reliably build initial capital. Your virtual dude doesn't have taxes to pay or mouths to feed. Even if you drop down to zero, you can start again; failure isn't really risky.

Precisely why we need NPCs to buy from the player - to give a way for players to start from zero.

Or a way outside of the economy to earn significant gold. Again, requiring NPCs in the economy.

I did play entropia universe for a while...

The economy has some interesting parts, but I think EUs largest problem is that the whole gameplay is basically just a slotmachine hidden in a grind-game, and equipment/skill has only one purpose, enabling you to shuffle more $/hour through the slotmachine... Some like to tell themselves that some of the gear is more efficient, and give a better return, but I don't think anyone have been able to really prove that...

Margins are really slim before it gets painfully obvious you are on a slipping slope just waiting for your money to run out.

(In its defence, it does offer a bit more then that, specially if you focus more on the social aspects of the game, but speaking purely gameplay mechanic...)

Spending 3 hours doing simple resources gathering and then selling them for meaningful profit only works if there are NPCs to sell to.

I don't agree with that. If your characters have needs that have to be met (think The Sims), then all these resources that help meet your characters needs will be purchased by characters. You simply make it so one cannot possibly meet all their needs on their own. Do this by requiring a variety.

Let's take WoW for example. Buying normal food is basically worthless because it's not a need, it's a perk. But lets say WoW required that you eat a balanced diet to perform at your max. Anything but a proper diet and you would start being docked efficiency in damage and armor. This gives people an incentive to get food. Now let's say this means you have to eat meats, veggies, fruits, grains, dairy, and even sweets! That's 6 different kinds of food that you need in a decent amount of quantity. You couldn't possibly gather all that yourself to be efficient. So now if you give people a way to grow these resources but it requires a decent amount of time and care to do so, then these resources just became valuable and the AH will have a thriving market for them of people selling to other people.

Precisely why we need NPCs to buy from the player - to give a way for players to start from zero.

I don't think this is true at all. I can start from zero and start gathering resources that I know other players want and sell them to other players to make my fortune. For example again in WoW I could sell off all my gear and give away all my gold, and in a couple weeks of gathering resources I could have my fortune back from selling it to players (not NPC's) because there are resources that players want/need and don't have the time to do it themselves. If you think about it almost every need in the real world are needs we could all meet ourselves. We used to a long long time ago. Buying our needs is easier and so people will do that over spending huge quantities of their time in trying to meet their needs 100% on their own.

In my game for example, if I want to build a house for my character it'll take, for example, 10K lumber. That could take me a month or so to gather myself because I can't JUST gather lumber, I have to meet my other needs or food, water, clothing, entertainment, etc. So it's more efficient for me to go to the market and buy lumber. How do I get the money to buy lumber? When players start the game they are given x amount of money, so everyone has some money to start with. If I need to inject money into the game at all (print money) I can get creative and introduce treasures that people can find!