[MUD-Dev] DESIGN: Active and Inactive currency

[Eric Random]

--- "Freeman, Jeff" <jfreeman at soe.sony.com> wrote:

> As I understand it, when a person put money in the bank in the
> real world, the bank then lends that money to other people, so it
> never really 'leaves the system.'  But in an online economy money
> put in the bank is removed from circulation: It could re-enter the
> system later, but it might not do that for a very long time.

In Economics, there is the circular flow model. Savings is
considered a leakage from the circular flow, and loans are
considered an injection.  Savings is, simply, any income that is not
spent. In MUD terms, the faucet-drain model is a simplification of
the circular flow model.

Savings in the faucet-drain model is no different from savings in
the circular flow model. I think you are mainly pointing out the
lack of similar injections (ie. loans) in the faucet-drain models in
current MUDs as the main difference from today's economy.

> For that matter, even money which 'leaves the system' due to an
> inactive account could re-enter the system some day, should the
> person ever re-activate their account.

This is still considered savings.

> What I think would be more useful to us would be to track economic
> activity.  My thinking here is that money changing hands
> frequently is the sign of a healthy economy, whereas a lack of
> economic activity is the sign of a weak economy.

Money changing hands indicates an -active- economy but is not a
single indicator of an "healthy" economy.  For example, in a failing
economy, sellers may rush to liquidate assets for pennies on the
dollar; numbers of transactions has increased, but the economy is
failing. I think what you are getting at is more, perhaps, that
strong activity is a prerequisite to a strong economy.

> I think anything which stymies economic activity is bad, and
> either extreme of inflation (too much or too little) would result
> in fewer transactions and a 'weak economy'.

Let's say, for example, you have an extreme demand-pull inflation
condition; demand-pull inflation meaning too much money chasing too
few items, pulling the prices of items up. Normally, when people
face an extreme condition where the value of money is falling, they
convert their savings of money, which is declining in value, into an
object which better holds value in relation to money. Therefore,
fast rising inflation (money losing value) makes people want to get
rid of money, which may increase transactions in relation to when
the value of money is stable (all other things being equal). The
opposite case, extreme deflation, people hold on to money, as it
will be worth more in the future (and they may need it as the
economy shrinks along with their income). The important factor in
both these cases is expectation. If people can -see- the value
change, or expect it to, with reasonable certainty (whether correct
or not), they act in their best interest.

> In order to properly track their economy, we need to monitor
> transactions in both number and amount.  I would consider money-in
> and money-out as a transaction, but player-to-player transactions
> ought to be of primary importance in a player-driven economy.

[snip]

> Could the number of transactions be more significant than the
> total amount of those transactions?

Take in consideration Fisher's Equation of Exchange, MV=PT. M is the
money supply, V is the velocity of circulation, P is average price,
and T is number of transactions. What you are asking is if T is more
significant than PT.

> Looking at online economies, do you think it important to look at
> it from the standpoint of active to inactive cash, or is inflation
> (or the ratio of money-in to money-out) the only economic
> indicator worth tracking?

If one is simply monitoring in-flow and out-flow, one is literally
looking at whether M is increasing (in > out), decreasing (in <
out), or staying the same (in = out). V and T are directly
proportional to your player-base (where S(t) is number of
simultaneous players given time t in hours for a given shard,
player-base P on the shard is the integration of S with respect to
t, or integration of Sdt over the time interval i-168 <= t <= i
which is one week). As the player-base increases, V and T should
increase. As the player-base decreases, V and T should decrease. To
track inflation is not to track total money (M) or the ratio of in
to out, but the average price of items, as inflation is literally a
sustained increase in the general price level. If you are monitoring
in-flow, out-flow, and player-base, you may have a good
understanding of the average price. If M is increasing (in > out),
and player-base decreases, meaning V and T will decrease, then P
will tend to increase.

The ratio of in to out (or expr(in/out)) is actually a measure of
leakage or injection. If in/out > 1, that's leakage. If in/out < 1,
that's injection. This is because the faucet-drain model is similar
to the circular flow model. In the circular flow model, households
buy from Product Markets which buys from Firms which buys from
Factor Markets which provides income to Households, closing the
circle.  Leakages occur through taxes, interest, and
savings. Injections occur from payments, interest, dividends, and
loans. In a MUD, the Households are characters, which are buying
products from the NPC's (game engine and drain), and the mobs (game
engine and faucet) are providing loot to the characters. The drain
can be widened through item decay, hunger, death tax, item
destruction and cleanup, character deletion, etc. The faucet can be
widened through quests, and NPC's buying items from characters. The
in and out variables are actually monitoring the in and the out path
of households (characters) in the circular flow model, and thus
their ratio measuring injections and leakages for households.

But as the discussion is progressing, I see it moving toward
crafting, which is where characters creep into the other agents of
the circular flow model.

I've some thoughts on the whole matter, but I'll save it for another
post. I just wanted to add some economics vocabulary into the
discussion.

   - Eric Random
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