Wednesday, July 11, 2012

Virtual World Needs Laissez-faire Economists

By Jon Matonis
Forbes
Friday, July 6, 2012

http://www.forbes.com/sites/jonmatonis/2012/07/06/virtual-world-needs-laissez-faire-economists/

The latest announcement of a prominent economist joining the team of a gaming company sparked a lot of questions for me. Why study and analyze the empirical data of a virtual game economy? Isn't designing economies the same as central planning? Doesn't regulating a virtual currency imply monetary manipulation?

This is capitalism within capitalism. The most successful virtual world game companies will be the ones that can out-compete their peers in the quest for economic activity. And, that means providing the most robust and open platform for virtual economy/real economy integration.

After almost deleting the original email from Gabe Newell, Yanis Varoufakis accepted the post as in-house economist for gaming software powerhouse Valve Corporation. I like Yanis. He has been a fellow guest on the Keiser Report with Max Keiser. He currently contributes via the Valve Economics blog. Here are some of his observations related to Steam which is the trading house for Valve virtual games:
"In short, Steam trades are not always pure exchanges happening in some moral-free zone where social obligations are perceived to be non-existent. An unspecified (and impossible to compute accurately) number of trades take place at exchange rates that do not reflect the relative bargaining of buyer and seller but, instead, are determined by other social and gaming factors. In technical terms, this means that, while our arbitrage data is not affected (since the volume of arbitrage opportunities is independent of the reasons for which some items are sold cheaply and resold expensively), our relative price estimates are. Ideally, we would like to have some ‘gift exchange’ radar that alerts us to all instances of Steam ‘trading’ where people are far from trying to get the best possible ‘bargain’ for themselves. If we possessed such a radar, we would use it to decide which trades to turn a blind eye to when computing relative prices. Of course, that ‘radar’ is missing. So far we are utilising crude methods of ‘visual’ inspection, leaving out of our calculations those relative prices that seem, economically, silly. Clearly, we need to work on coming up with such a radar. Any suggestions from you will be most welcome."
Who cares? My economic instinct tells me that I should be concerned here because I don't separate out the exchange prices determined by social and other gaming factors. The market price is the real price. As economic actors, men possess different data and make different value judgments reflected in pricing so the mere act of gifting may have immeasurable value to one and not to another.

Allow me to fantasize. The job description of an in-game economist should be the same as the job description for a White House or Federal Reserve economist -- get out of the way of the free market and "let it be." Support and protect property rights and maintain an economic environment free from stifling regulation and free from outcome prediction. Valve's job description reads more like an economist for the Politburo.

Of course, virtual world game designers have a right to design socialist economies just as much as free market economies. It is the gaming experience that is the commodity here and certain games will survive and thrive based on their attractiveness and value to end consumers. However, whether or not their economies survive on their own will depend on their adherence to laissez-faire principles.

As I outlined in Virtual Currencies and Roach Motels, in-world economies are the perfect crucible for launching unrestricted currency competition and that competition will enable further opportunities for transporting virtual world earnings to real world value.

In To Truck, Barter and Exchange? On the nature of our digital economies, Yanis Varoufakis concludes by hinting at a future of two-way currency convertibility, but I am not sure what outcomes he and Valve have in mind:
"Many economists believe that philosophising over the nature of exchanges is a luxury they do not need in order to analyse and understand an economy. They are wrong. The nature of exchanges, whether they are pure (i.e. asocial) or impure (replete with social norms and part of intertemporal social relations), makes a difference when it comes to predicting economic activity. Thus, to understand the exchanges we observe on Steam, it is crucial that we grasp the network of social relations within which they are embedded. The prevalence of gifting and the fact that no specific item has emerged as a form of money in trades of TF2 items should alert us to the intriguing social conventions that are part and parcel of our community’s trading decisions. How will these conventions change or mutate when participants are given the capacity to buy and sell, among one another, using real dollars? Would it make a difference if any dollar profit made through such trades can be taken out of Steam (i.e. monetised)? I suspect the answer to these questions are in the affirmative. But we must wait and see."
Who cares about predicting economic activity? We don't have to "wait and see." Apologies to Yanis, but he is wrong to focus on the nature of pure or impure exchanges and economic prediction. Economic activity should not be predicted -- it should be protected. Establishing and protecting the platform for competition, especially monetary competition, will yield the most beneficial results. In a free market, the users will determine what good to use as a barter currency and if a free market payment platform is provided then the most ideal virtual currency will emerge.

Monetary calculation rests on these market prices so a freely determined numéraire is vitally important. There can be more than one numéraire and it can be introduced externally rather than provided internally within the game. A true, and ideal, virtual currency will have the attributes of two-way convertibility, an independent floating exchange rate, and a nonpolitical unit of account. If dollar profits could be taken out of Steam, as you say, it will make a huge difference because the Valve grid would then be on the path from a closed economy to an open economy.

An open economy in the virtual world with a freely-determined currency would eventually facilitate the many other transactional features that are so important to users, but maybe not to game publishers, such as unrestricted person-to-person payments, user-defined anonymity and untraceability, near-immediate bearer settlement, transaction irreversibility, reliable store of value, multi-grid capable, and decentralized processing. These principles don't have to exist only on the black or "grey" markets because there shouldn't be a black market -- just one market environment for free exchange.

I think where Yanis and I primarily disagree is on the level of monetary freedom that is acceptable for sovereign individuals (real or virtual). I believe in maximum monetary freedom and I see it as the overriding liberty issue related to political economics. Within monetary economics, the sub-discipline of cryptocurrencies rests on the premise of public key cryptography in a decentralized nature being the bulwark against encroaching State monetary interference.

My brief holiday foray into this subject was sparked by this titillating but impoverished article. Fortunately, I just learned about an exciting new company that provides two-way convertibility for your Diablo 3 gold.

For further reading:
"How Valve Will Single-handedly Save PC Gaming", Anshel Sag, July 10, 2012 
"5 reasons grids should use Bitcoin", Edmund Edgar, July 4, 2012

1 comment:

  1. I can't wait to see whatever economic model Yanis comes up with go crashing into the ground after it launches. I'll LOL my pants off.

    I'll wager that Yanis didn't initially want to take the job because he knew he'd have to apply his bullshit theories to a real world setting, and I think deep down he knows that everything he learned in school about economics is junk science.

    ReplyDelete