Developers Corner

Economic principles are based on human behaviour.  The laws of supply and demand spring forth from how people act.  Whether the economy involves real-world goods such as apples and automobiles or virtual goods such as broad swords or orc hides, the principles are the same.  I'm not directing those comments at you ironore, but the readers in general.

With that said, the laws of supply and demand function exactly the same in a virtual world as they do in the real one.  Consumption patterns are different in virtual worlds than they are in the real world not because the laws of economics are changed, but because the cost/benefit structures have changed.  Using the same economic ideas that accurately model human behaviour in the real world is applicable to the virtual one.

Modern economies aren't purely free-market and aren't purely government driven.  Most are a hybrid of both.  Much of US GDP is a result of actions of the free market, but government does through various means impact the economy.  Players have the same free market abilities is an open-ended game that businessmen have in the real world.  The game designers have the same abilities open to them that government has in the real world.  Game designers have even more leverage in virtual worlds than do politicians because they can not only impact fiscal policy, but can directly manipulate the scarity of goods in the economy.  Thus, game designers have an even greater ability to impact a virtual economy than do governments for a real-world economy.

Again, i cannot stress enough that the laws of supply and demand remain intact when a players logs into your virtual world.  Human behaviour does not get checked at the door and the economic principles thrown out.  I know i'm repeating myself but people seem to get hung up on this issue.  Players behaviour is indeed different in the virtual world than it is in the real one but it's because of the costs, benefits, and incentives have changed, not the economic ideas themselves.

If you want your virtual economy to function like it's real-world analogue, then you need only model after the real world.  Early MMOs, such as UO, originally tried what we now call a "closed loop" economy.  Meaning that there was a finite -- and fixed -- amount of resources in the world.  Zach Booth Simpson who worked on UO explains their closed loop economy and its subsequent failure in the following essay:

http://www.mine-control.com/zack/uoecon/uoecon.html

To the casual reader his analysis might make sense, but much of what he purports to be true defies economic reason. He talks about how their original closed-loop economy failed and why they went to a faucet/drain system.  Clearly their closed-loop model was broken, but his "reasons" that the economy was broken are not sound.  Most modern MMOs follow UOs faucet/drain approach.  While the F/D model eliminates some of the problems with the CL approach, it adds its own problems to the mix.

The basis for the closed loop method was to elminate inflation by controlling the amount of resources in the economy.  This is an incomplete synopsis of the problem.  The F/D approach says that CL systems don't work and thus just abandon it in lew of an always on faucet feeds resources into the economy and try to control inflation by creating drains to suck the resources back out of the eoconomy. 

Most every MMO has a currency.  UO had gold, WoW has copper/silver/gold and most other games have either a single currency or multiple currencies.  The first question designers should be asking themselves isn't whether they should be using a CL or F/D system or whether their world needs gold or credit, and instead should be asking themselves "should we have any currency at all?"

This question is fundamental: Should your game even have a currency?  That might seem like a stupid question with an obvious answer, but its not.  Why do you need a currency?  What are you trying to accomplish by having a currency?  You need to ask yourself why central governments have currencies and whether those reasons apply to MMO designers.  Typically currencies are used for two reasons: a store of wealth and/or as a medium of exchange.

In Diablo2, for example, there's a gold currency.  It uses a F/D approach and the gold is dropped by monsters and from NPC merchants with infinite bank accounts.  The gold in D2 functions as a poor store of wealth and only facilitates trade with NPC merchants.  Players will not trade for gold.  High-end items in the game are worth magnitudes more gold than a player is allowed to carry and thus it's not used in player to player commerce.  So the gold in D2 function neither as a store of wealth or to facilitate trade for player to player interactions.  Early in Diablo 2, a de facto currency emerged: the Stone of Jordan.  SOJs, as they are known ingame, are a unique ring.  They are dropped by monsters and are very rare.  Gold is the "official" currency in D2, but it's so worthless that players created their own currency based on the SOJ.  Item duping bugs eventually caused even the SOJ to lose much of its value and today the currency are high runes (called HRs ingame). 

My point is that even though the D2 designers created a currency, no one uses it, and infact a "natural" currency emerged.  So before you go off saying "we need copper, silver, gold, and platinum currencies in our game" you should first ask yourself if you need a currency at all.

Let's say you decide you want an official currency -- like D2s gold -- instead of letting players create their own currency -- such as D2s SOJs.  So how much money do you print?  Again if we look at the two typical methods (closed loop and faucet/drain) we see that they print if fixed amount of gold in the CL economy and an infinite amount in the F/D one.  The first causes deflation -- that is the price of goods and services fall -- and the second causes inflation -- the persistent rise in prices for goods and services.  Economists argue that deflation is bad, as well as rampant inflation.  The goal of most central banks is for a small, upward price bias (I.E. very low, but positive inflation).  By low i mean perhaps 1 or 2% per annum.  Both methods are ill-equipped to achieve that goal.

If you have a fixed amount of money, but an increasing population base, then the amount of money that there is per person goes down.  For example say you decide you want exactly 1000 gold in circulation, so you add 1000 gold to your database.  If you have 1000 players, that means you have 1gold/player.  Now imagine that your player population increases to 2000 players.  Now you only have enough to give each player 1/2 of one gold.  When each player had 1 gold, they could spend up to 1 gold to buy a king sword of haste, but as they playerbase increases and the amount of gold/person decreases, they have (as an aggregate) less gold to spent on a king sword of haste.  At 2000 players, the average player now only has 1/2 gold to spend on a king sword of haste.  It's not that the KSOH is now less valuable than it was before, but there's less currency per person and thus prices will fall.

Note that if your player population is falling, just the opposite occurs.  If you playerbase declines to 500 users there is now 2 gold each to go around and as a result players will bid up the prices for goods and services in the economy and prices will rise.  Now your KSOH will cost 2gold instead of 1 which is 100% inflation.

The F/D approach says the above economic model is fundamentally flawed, so they allow limitless amounts of currency to enter the economy (usually through killing mobs and selling equipment to NPC vendors) and try to balance that with way to remove currency from the economy.  In WoW, for example, players get currency from mobs and equipment, and some of that money is reclaimed by having to pay fees to NPC vendors for such things as item repair and skills.  Players often complained when i played WoW that they wanted to be able to have an item repair skill.  Of course this doesn't work in WoW because of their F/D economy.  They need to force players to give up their copper/silver/gold to the NPC vendors as a way of draining the economy.  The same goes where you have to pay NPC vendors to "purchase" new skills.  Without the drains rampant inflation would follow and of course players would complain loudly.

Of course, the game designers have tweak the above system by partially closing the faucet or opening the drain.  They can decrease the amount of currency/items dropped by monsters or they can increase the costs paid to NPC vendors.  They hope to combat both inflation and deflation through those controls.  This is very similar to how the federal reserve uses the printing of money, the adjustment of interest rates, and changes in the reserve requirement to control inflation.

In practice, the F/D approach tends to be very inflationary.  This is because players will hang out near the faucet and do their best to avoid the drains.  Players will find out what monsters give the the greatest reward at the lowest cost and will sit there "farming" those mobs which greatly increases the money supply.  So called "chinese gold farmers" take this to an extreme because they do not play the game as the designers intended.  Their gaming consists almost entirely of bringing in new currency and avoiding many of the gameplay mechanics that would normally balance things out.

Ideally, you would want to avoid a fixed money supply like the CL economy and the infinite money supply in the F/D approach.  Tying your money supply to the total number of residents would be a good first approach.  Even better would be to tie the money supply to your games GDP -- the value of all goods and services in your economy.  Tying it to player count is easier to do, but GDP is more accurate.  This eliminates both inflation and deflation and leaves you with steady prices.

Of course Zach  Simpson from UO came to a different conclusion:  He stated that the reason closed economies don't work is due to "player hoarding".  This is wrong.  Go to any suburb in america.  Start knocking on doors and ask people to open their garages for you.  A fair number of those garages won't have any cars parked in them.  Why?  Because they are full of stuff.  People in the real world -- just like in UO -- hoard stuff.  Despite the rampant hoarding of items by people in the real world, the economy keep chugging along fine.

Again if you want to make your economy work like the real world, model it better.  The big problem with items in UO was scarcity and velocity of the money supply.  Simpson talked about players who sucked up all the supply of a given resource.  In the real world that doesn't happen for a number of reasons: 

1) Even the richest person generally isn't rich enough to accumulate all of a particular resource.  Even with 40 billion dollars, Bill Gates wouldn't be able to buy all the Ferraris on the planet, nor would he be able to accumulate all the Uranium 235.  Yet many of these games have very low numbers of many basic items/resources. 

2) Many of these worlds lack any sort of decay.  I collect all the wolf pelts and store them in my house.  Since the wolf pelts don't rot and my house is secure, they never get put back into the economy.  Another way of saying this is that the velocity of wolf pelts goes to zero.  If the wolf pelts rotted, or were used up in some crafting process, or if the house was less than secure, then the velocity (the speed by which they move through the economy) would increase. 

3) The velocity of money in general in the economy is often very slow.  In the real world most countries have progressive tax structures.  This means the more you make, the higher the tax rate.  This has the effect of keeping the money moving through the economy -- this is also called a transfer payment.  If we allow money to grow tax free, then eventually most of your wealth will end up in very few hands.  They in effect control the economy because they hold most of the wealth.  Again most central governments retard this consolidation of wealth through things such as estate taxes which help ensure that the velocity of money doesn't go to zero.

Game designers have another tool available that central governments do not; namely they can control the natural resources in addition to controlling the money supply.  The good news is the very same analysis applies.  If you tie the total resources in the economy to the GDP of your world AND if you put measures in place to ensure that the velocity of those goods remains high AND you have a progressive "tax" structure in place to keep your goods moving, then you can achieve a successful economy.

Again it's not even necessary that your game have some sort of official currency such as gold, plat, credits, or whatever.  Even in the absence of such a currency, players will devise their own.  It helps make trade much more efficient if the currency they designate has intrinsic value, and a steady/predictable supply (again this can be controlled by the game designer).  Infact, if you decide that you want your gold/plat/credits/whatever official currency, but don't want a faucet/drain approach, then you have to devise a way to get your currency into circulation. 

Typically the mobs are the way currency enters the economy.  If your currency, however, is tied to GDP, then the amount of gold the monsters drop would have to be based on GDP and the current gold outstanding.  This is certainly possible, although not exactly the most elegant way of gettting money in the system.  It would be nice if designers could devise a less obvious method for inserting currency into the economy.  In important thing though is that the amount of gold dropped would need to take into account the gold outstanding and GDP.

An aside:  This brings up interesting business models that many MMO developers use.  One is developers who want to sell their gold directly to customers.  This is problematic for numerous reasons.  First, if the money supply is tied to GDP, what do the designers do once they have sold all their gold?  Clearly, if they keep selling gold, this will cause inflation to ensue.  It's analogous to the federal government printing more money as it needs it.  Also, the game designers have strong reasons to inflate the money supply while at the same time being the shepards of the economy.  This is a clear conflict of interest.  Thus companies that want to sell you ingame gold -- and for the very same reasons ingame items -- threaten to ruin their own economies.  They would be much better off seperating their real-world business model from their ingame economies to remove any conflict of interest and help ensure the economic stability of their world.  Sony selling you ingame gold or ingame items is bad for the very same reasons allowing IGE to do it is bad.

Or we can just go with Randy Marsh's explanation to Stan about how walmart can sell stuff so cheap: "It's simple economics son, I don't understand it myself".

Regards,

~PD

If some resources are finite, you might want to instate some sort of recycling program in the game. You might also want to prevent objects from being "deleted" (as in once it is used or sold it is gone from the system).

From a psych aspect, players tend to behave differently in an MMO than in the real world because MMOs are more of a consequence free environment. If trees are a finite resource, or at least they are replenished so slowly that could be considered finite. I predict that in a week your world will have no trees left and wood will be sold at a premium. Players have been trained in other MMOs to strip mine any resource available.

In our world Logging requires expensive equipment, contracts with the government, and harsh penalties for overlogging. The average person could not deforest an area. In an MMO that dynamic is gone.