“Inflation is always and everywhere a monetary phenomenon.” Milton Friedman, the most important and second most influential economist of the last century, died last week. You can see the fundamental truth of his work every day in some of the oldest and most popular online games.
Most online games print currency the way that third-world kleptocracies do: whenever it is convenient and in demand, with little thought for long-run consequences. This works in the extreme short run and leads quickly to ridiculous inflation.
In-game currency usually becomes greatly devalued in the first year the game exists. Your game may track wealth in gold pieces, pyreals, ISK, dollars, or something else; you will start by scrimping to get 100 of them but quickly need 100,000,000 to get anything useful. This happens at several levels for a few clear reasons.
First, let us set aside the problem of twinking and the low-level game. Your game scales, and a level 50 earns as much gold in one fight as a level 10 does in a day. If you kill a dragon and give the loot to your alt, he will have enough money to last him for twenty levels. In EVE, I borrowed money to buy my first ship and skills, quadrupled that in a few days, then repaid Ethic. The low-level game is usually irrelevant to the economy.
So we advance to the case where the base cost of everything is measured in the millions. Maybe your game hides that behind a tiered currency, where one platinum piece is million copper pieces, but you are still using numbers that are vastly higher than what you started with. The vendor cost of a Sword of Leetness is 12,500,000 (gold, ISK, whatever). Strangely enough, that same vendor will only pay 5,000 for it, so he must get a heck of a markup.
Around this point, the vendors start to become irrelevant, and the game switches to a de facto player-based economy. The vendors do not sell anything you want, except for basic supplies that you need at all levels. Odds are that the vendors will never sell that Sword of Leetness, even at 250,000% markup; it instead gets deleted when you get your money. If you want to buy a Sword of Leetness, you need to talk to a player, and you will need to give him something he wants.
How much will someone need to pay you for your Sword of Leetness? You already get 20,000 (gold, ISK, whatever) per fight. Is it worth 100 fights to you? 1000? Your second Sword of Leetness is practically useless to you, unless you can fight Two-Fisted Monkey Style, but you know it is still worth something to that guy, so maybe you can get 100 or 1000 fights worth of gold for it.
For the first few Swords of Leetness on the server, that relationship holds pretty well. The price is astoundingly high, there are various complaints, and the economy functions as you would expect it to under conditions of scarcity.
Now you are at the level cap, with all your necessary skills and some good equipment. You have enough money to twink every alt you can make on that server. Your in-game expenses are near-zero, as is the case for every level-capped character. Money exists to pile up into larger numbers. Hey guys, why don’t we farm for an hour just to see how much gold we can get?
Let everyone on the server do that for a month. Let a number of level-capped characters quit and give away all their money before they go. Hey, why does the Sword of Leetness cost 250,000,000? The old “astoundingly high” price is now what you tip newbie characters who help you with some little task.
Currency has ceased to be a store of value because it never really was. The game is not a place like your job where the money you get is received from someone else. The money you get from the enemies is created ex nihilo, *poof.* Every time someone kills something, money comes into existence.
Every time someone shops at a vendor, money goes out of existence. The game is not a place like a store where the money you spend is received by someone else. The blacksmith is not investing in an upgraded forge to help him produce better items. Better items *poof* into existence when dragons die, so no one needs to make them (and no one can make them anyway).
Games use this creation and destruction of money to simulate the circulation of currency in a real economy. The world works as if the blacksmith donates all that money to needy goblin orphans, who are then slain as their parents were so that a new generation of heroes can buy spell components.
That simulation breaks down when more money enters the economy than leaves it. A potentially unlimited number of players can spend every waking moment slaying an endless supply of immaculately conceived monsters, each of which is a walking bag of xp and gp.
Do I need to belabor this point? You have seen it a dozen times. Players exchange money by the wheelbarrow. If wallets were not weightless, every hero would be crushed by the mass of gold that he carries around. Asheron’s Call used to have a currency that was neither weightless nor spaceless; you would frequently see characters literally paralyzed by fortune.
Players then implement a new de facto currency that is somewhat less subject to inflation. This is generally some in-game item that is either consumable, useful, and portable (similar to how salt was once used in the real world) or else so hard to get that the economy will not be flooded (for a while). This new item will have a floating exchange rate against the official currency, and you can watch its price rise into the millions over time, then sink as people successfully farm it until a new de facto currency comes along.
Alternately, just watch eBay. The first currency sales for a game might be $20 for 100,000 of the official currency. A year later, the gold farmers are selling 10,000,000 for $9.95.
Alternately, watch the new gold sinks that are implemented. Developers frequently create new ways to destroy currency, often for limited gain, but what else are you going to do with it? When City of Heroes implemented bases, you paid for them by ceasing to earn money while playing. Do mounts in your game cost 1000 gold? Someone needed to fix a big hole in the economy.
Of course, some of this then encourages the gold farmers. Would you rather farm trash mobs for twenty hours or work at your job for a half hour and just buy it for cash? As many governments have discovered, big interventions in your economy create big distortions elsewhere.
Can we really say that inflation is under control if the fix was to make the new stuff cost 100,000,000? We are still tossing around those multi-million numbers, but this time the price-gouging jerks are the ones who are already getting your $13.95/month.
So what do we learn from all this? The spontaneous creation of currency is a dangerous thing. Games try to control this with money sinks, but no one has yet perfected that, usually causing both excessively tight money and massive inflation at various points of the game.
We should not expect developers to get this right. Real world governments and economists have been trying to manipulate currency and markets for centuries, and most interventions have increased suffering while decreasing efficiency. Developers have the added advantage of controlling the laws of physics, but few of them have strong economic backgrounds.
A few games have tried interesting experiments. A Tale in the Desert has no official currency. Instead, players can build mints and make their own, which game physics protect against counterfeiting. There are competing currencies, usually backed currencies similar to a real-world gold standard, and players work out prices without NPC interference.
Actually, having any monetary policy for a game could be a big step forward. I have never seen “stable central banking” as a box feature for any game.
A difficulty in shifting away from the “gold miraculously appears on monsters” model is that players will quit and disappear. If you have a finite amount of currency, and Bob cancels his account while holding 500 units of it, you have started a deflationary cycle. Do that enough times and there will not be much currency left.
Some models reduce the amount of in-game currency and have a parallel system based on real world money. Yohoho! Puzzle Pirates and Bang! Howdy used paired currencies, one magically generated in-game and another bought from the developers (and traded between players). Second Life has a similar market exchange for converting $ to L$, and EVE Online does something similar with time cards. This creates a hard currency in the game that only expands when someone is willing to pump real dollars into the in-game economy.
Are there games with a real finite pool of money? Project Entropia has some ideas along those lines but, well, it’s Project Entropia, so who knows? Horizons flirted with a vaguely ATitD-like economy at some point in its development. I sense that I am in the weeds of niche games and obscurity, but there we can find the testing grounds for ideas to be adopted by the great powers.
I have a new variant model in mind, but I will push it to its own post after I think it through a bit more. Your responses there will help me find the huge flaws in the idea.
Do we have enough experiments yet on the viability of in-game economies not involving gold that pops into and out of existence? What are your thoughts on the success or failure of gold sinks?