Sink or Swim: Markets and Money in Online Games

What the economies of MMOs can (and can't) tell us about our own, and why everybody should start paying attention.

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Dr. Eyjólfur Guðmundsson has a small, dedicated team. Its eight members are solely responsible for analyzing scads of economic data that flow from powerful servers. They analyze the innumerable data points and convert them into useful information. This information, in turn, informs the economic policy behind millions of interactions between individuals and corporations.

Guðmundsson works in Iceland. But his data comes from the far reaches of EVE Online. The currency he tracks and plots in his position as lead economist at EVE developer CCP is ISK, the legal tender of a fictional future. His official role since 2007 as CCP's "own [U.S. Federal Reserve chairman] Ben Bernanke" (CCP's words) may seem absurd, but he is not alone. Trade plays a prominent role in games and developers are paying more attention than ever: Valve recruited its own economist-in-residence to inspect its burgeoning cross-game economy, and ArenaNet recruited one for the newly released Guild Wars 2. The economies are virtual, but they're real.

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EVE Online, or Capitalism: The Game.

Trickle down

"In all MMOs you have what we call a sink-faucet model; money comes in through certain activities and money is taken out through certain activities … and money changes hands within the game," Guðmundsson said in an interview with GameSpot. "If too much currency is piling up in the game you will have inflation, and you could even have hyperinflation, where the currency simply becomes valueless."

The sink and faucet model differs from real economies in that currency is created and destroyed--not just cycled around--as a much more regular part of its use. But if it is properly managed, with the flow from the faucet (finding cash and selling junk to vendors, mostly) matching the drainage of the sink (buying stuff from vendors), the difference is moot to end users. Nearly every massively multiplayer game now employs a sink-faucet model--from EVE to World of Warcraft. But this wasn't always the standard.

"A real life vendor isn't going to buy a hundred iron bricks all for the same price, so why would we do that?"

The creators of 1997's Ultima Online, the forebear of today's massively multiplayer online role-playing games, wanted their economy to match their medieval setting. Isaac Knowles, an Indiana University Bloomington Ph.D. student focusing on the economics of virtual worlds, has studied their efforts and shared some of his research with GameSpot. "[Real] worlds don't have infinite amounts of gold, so why would we have that? A real life vendor isn't going to buy a hundred iron bricks all for the same price, so why would we do that?" He said Ultima Online's carefully crafted model of limited resources was meant to make the world more real, but "players hated it."

A few users hoarded huge portions of resources, Knowles said. Players doing business were encumbered by gold coins which had appreciable weight. Realistic? Yes. Fun? No. On at least one of the game's servers, iron bars were widely adopted as the new tender of inter-player commerce. Eventually, to combat the game's robber barons and the unwelcome complexity of much of its economic systems, Knowles said Ultima Online adopted a sink-faucet model.

Farmers' market

Other problems remained after most games got over their distaste for apocryphal cash flow. While some players corner the market for kicks, others do it for a living. Knowles said World of Warcraft's gold farmers (users who play solely to harvest in-game currency and then sell it for cash through a third-party service, which is forbidden by the game's terms of service) had a major impact on its early life. After a mass deletion of farming accounts in 2006, average auction house item prices dropped by 40 to 50 percent, he said. "When they were all deleted from the system, it probably caused kind of a recession in game while people were adjusting to this fewer-farmer system."

But while selling a game's wares for real cash may put farmers at odds with developers, it does have some positive effects. Their many auction listings made for a much more complete market. With multiple separate servers and much of each server's population unable to meaningfully interact (thanks to opposing player factions), transactions are limited even further. "You're not going to have an efficient market unless you have a large number of buyers and sellers, a complete market where you can find whatever you want as long as you're willing to pay the price," Knowles said.

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The Great Farmer Culling of 2006 was very dramatic.

That's part of what makes EVE intriguing to gamers who like to play the market; their population is not divided by servers and neither are their commercial ventures. "It's cut-throat. It's an intense, winner-take-all kind of thing where everyone is looking to screw everyone else and some 300,000 people really, really love that," Knowles said (CCP reported EVE had 361,000 players as of May).

"Some people actually make … arbitrage trading as their main gameplay," Guðmundsson said (arbitrage means buying low in one market and selling high in another). Preserving the fun for price-speculating users while making necessary adjustments to the game--thereby indirectly impacting prices--requires finesse. Guðmundsson said CCP's policy is to never directly interfere with the game, and his team does not try to impose any layers of regulation past its built-in mechanics. With the basic rules of trade as incorruptible as any of EVE's other systems, he said, players know "if you trade on the market you will be getting what you think you're getting." Of course, that doesn't keep them from crashing the market on their own initiative.

Limited use

But can MMOs--by definition artificial experiences shaped by unbendable rules--ever present a truly free market? Guðmundsson thinks so. He said EVE's economy is "definitely the closest thing … to a true Laissez-faire that humans have interacted in." (Laissez-faire economies have only the bare minimum of regulations needed to protect property rights.)

"There is someone out there who is holding the strings in a very real sense."

Knowles was less certain. "By giving you the rules and saying, 'okay, go out and play,' that's as Laissez-faire as it gets," he said. But the developers set price floors (the minimum a commodity will fetch on the market, in this case how much non-player vendors pay), and they control the sink and the faucet despite leaving the basin mostly untouched. "In that sense it's not a free market," Knowles said. "There is someone out there who is holding the strings in a very real sense."

That is, of course, also how many real economies work, with cash flow monitored and modulated by the central banks, fiscal policy, and taxes and fees, Knowles said. So studying MMOs can tell us a lot about real-world economies, right?

Sort of.

Economic data is generated automatically when every interaction is run by the same system. Virtual economists need not worry over the estimates and potentially inaccurate polling mechanisms that plague their real-world colleagues. "It's a central banker's dream," Knowles said. This data can yield some useful trends after careful analysis.

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The fact that they can do this is amazing. Trust them. (Source: EVE Insider)

Looking at the markets of virtual worlds helped Knowles better understand monetary policy and how people respond to different kinds of wealth. Guðmundsson said his submersion in EVE's figures "strengthened my belief that any regulation that is put on people's behavior on the market should be … only based on issues that relate around the efficiency of the market, rather than trying to steer consumption or trying to steer people's behavior through regulating market activity."

"We can do stuff on a daily basis that economists would never dream of doing but on a quarterly, or maybe just bi-annual basis," Guðmundsson said. "But at the same time … you start to see different kinds of behavior once you start looking at individuals, rather than aggregate numbers."

The problem may be endemic to the habitat: "It's a game," Knowles said. "People aren't playing the game necessarily because they want to play the economy. They're playing the game because they want to play the game. If the economy isn't fun, they can leave." Real life offers no such easy exit. "It doesn't matter, it's not like they'll die if they don't have any money. So maybe they just live out a cool fantasy, to just blow a huge wad of cash."

A non-representative sample is another big problem: Knowles said the MMO playing populace is more economically privileged and less diverse than the real world. These issues severely limit real-world applications of wisdom from MMO environments.

(Virtual) Reality

So translating knowledge from virtual worlds to real-life economies is difficult. But the two may become inseparable in another way. Guðmundsson said the markets of online worlds will matter more as virtual goods and services begin to displace real-life ones. More perfect simulations mean things which previously consumed significant materials and labor--like expensive cars and clothing--could be satisfyingly replicated and enjoyed by users.

"People would see that as production declining, which would be wrong because production is still happening, it's just happening in another universe."

"So [users] have moved their labor from real life into the virtual world. But they're still working and they're still providing value to other people. So from an economic perspective, nothing has changed. But from the way we think about real life today, people would see that as production declining, which would be wrong because production is still happening, it's just happening in another universe. How do governments take that into account when they think about their [gross domestic product]? How do people take that into account when they think about their income? Is having virtual income so that I can use that virtual currency in my virtual world and consume items there enough, so I can minimize my income in the other universe?"

These are questions many gamers may already ponder. Should I bring my lunch to work instead of getting take-out so I can buy a new champion in League of Legends? Should I get a fitted cap for $50, or buy 25 of them in Team Fortress 2? More people may begin to consider these trade-offs as substantial parts of their lives shift from the physical to the virtual.

Gamers, who have surprised Guðmundsson and Knowles with their intricate economic interactions in entirely fictional worlds, may just be ahead of the curve.

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