[Mud-Dev] Broken currencies

[Phillip Lenhardt]

On Tue, Apr 03, 2001 at 10:24:46PM +0000, Matt Mihaly wrote:
> On Tue, 3 Apr 2001, Brian 'Psychochild' Green wrote:

>> A basic tenet of economics is that value is determined by utility
>> and scarcity.
 
> Not to split hairs but value is not so neatly defined.

Regardless, players value things. And many muds want players to
quantify their valuations in terms of the mud's currency (presumably
this is desireable because "that's the way the real world works"). The
art is in how a game designer achieves that goal.

> It is influenced by scarcity and utility, definitely. More
> importantly, they're influenced heavily by the _perception_ of
> scarcity and utility, which is an important distinction.

<snip>

> And that's what mind-bendingly smart professional economists forget
> all the time. That's what nearly sunk the world economy in 1998 when
> Long Term Capital Management went down (with 2 Nobel Laureates in
> economics on their staff) in response to the baht's fall.

Many economists disagree. If the Federal Reserve Board _hadn't_ bailed
out LTCM it may not have failed at all. And even if it had failed, it
wouldn't have taken the "world economy" (whatever that is :) down with
it. Moreover, LTCM didn't nearly fail because of people's perceptions
of value (though that may have been a factor in the bailout itself).
It nearly failed because LTCM's analysts thought that their portfolio
was diversified over markets with very low cross-correlation. And when
all those markets all moved in the same direction, against all their
data, boom! In fact, perception _couldn't_ have affected LTCM, since
their strategy was secret (and so complex that the majority of LTCM
didn't even understand it).

>> Currency is a bit odd in this respect.  While gold or the funny
>> colored paper in my wallet doesn't always have inherent utility,
>> society has agreed that it can be exchanged for goods and services,
>> thereby giving it utility.  Of course, a measure of scarcity makes
>> for a better currency; for example, the paper in my wallet tends to
>> have very specific identifying marks to separate it from forgeries.
 
> Gold has utility though. It looks pretty and it's very
> malleable. That's the original reason for its value. Now, of course,
> it's a bit self-fulfilling as just saying "gold" conjures up images
> of wealth.

The use of a currency is not about scarcity or utility. It's about
volatility. Forgable currency is volatile currency. Currency tied to a
quantity of a stable physical object (eg gold) is less volatile than
one tied to an unstable one (eg the number of cows you own not yet
infected with hoof and mouth). The sucession of mediums of exchange
has mostly increased in stability. If you can't make assumptions about
the value a currency will have tomorrow, you are safer bartering.

>> What happens in many games is that game currency somehow becomes
>> more common than it should be.  This usually happens because a)
>> more money is found than is spent by the players, and b) there are
>> bugs in the game (dupe bugs, etc).  If game currency becomes too
>> common, then people stop using it as a medium of exchange.  Items
>> with more scarcity (or a stable scarcity) become the new medium of
>> exchange because the value of the items are higher.

[This is in response to Brian, not Matt]

It's probably a little more complicated than that. For example, if a
mud admin magically doubled the number of coins everyone and at the
same time doubled all the prices the economy doesn't change at all.
Adding or subtracting coins without changing prices or changing prices
without adding or subtracting coins _would_ change the economy.

> It actually sounds to me like the fundamental problem with
> Everquest's currency is just that it's a physical currency rather
> than a virtual currency like modern currencies. I can buy a
> Rembrandt from Christies by wiring them money, and incurring only a
> very very small transfer cost. If I had to physically haul 10
> million 1 dollar bills, that'd be a significantly more difficult
> task.

Barriers to use of a currency can actually be good for an economy, as
it can greatly reduce its volitility, providing stability and
predictability to the economy based on it.

> The other problem I can see is that since there isn't really a way
> to earn interest, or to invest, then _any_ currency inflation is
> going to kill much of the value of the currency. Some inflation is
> acceptable to people in the physical world because it's a natural
> effect of economic growth, and because you're able to make money
> with your money at at least an equal rate to the rate of inflation.

There many ways to earn interest and invest currency in a mud. If I
give you 100 gold to buy platemail so you can tackle richer monsters,
on the condition that you give me 110 gold in a week (presumably from
those monsters), that's an investment. A guild could easily manage a
pot of money they use for buying shops or equipping raiding parties
that is repaid to those who threw in plus a profit share, that's
interest.

The problem with a lot of mud currencies isn't in how they can be
used, it's in their volitility.
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