Video Game Economics Boom/Bust

Sebastian Mallaby argues that video games can be educational.

Meanwhile, computer games have some advantages. They train players to master complex rules, to weigh odds and solve problems and make quick decisions. Indeed, players learn how to learn: The mysteries of a new and unknown game must be unlocked by trial and error. Marc Prensky, the author of the book "Don't Bother Me, Mom -- I'm Learning," tells the story of Stephen Gillette, an entrepreneur who picked up his leadership and organizational skills by playing online games. "I remember my mom and dad yelling at me," he quotes Gillette as saying. "They didn't know I had a 200-person [online] guild to manage."

Some games feature academic content. Spinach-pushing parents can buy games that teach algebra or engineering, and "America's Army," a game with some 6 million players, includes an opportunity to learn how to be a medic. Even the rampantly entertaining "Age of Empires III" conveys a sense of history. You begin at the dawn of the 16th century, and work your way into the mid-19th; you can choose among eight European civilizations; and you'd better build up the technological base of your home city if you want your empire to flourish.

He also describes an example of what he calls a "boom-bust" cycle that happens in these virtual economies.

Edward Castronova of Indiana University has just come out with "Synthetic Worlds," a book on the economics of these online universes. He explains that currencies in games such as "RuneScape" are subject to inflation: In a shamelessly populist bid to keep players happy, game masters tend to be monetary doves. Players can earn money by hacking down trees or killing monsters. Because there's no limit to the number of monsters and trees available, the money supply grows steadily.

When I first heard of this insight, I went home triumphantly to tell my son. He listened politely and told me that I'd only scratched the surface. Sure, the supply of money grows steadily, but the supply of swords and magic herbs grows, too, so prices move in both directions. For example, waves of aspiring bowmakers periodically flood into the industry, driving log prices upward. This pushes established bowmakers to quit, so log prices collapse. Although he didn't use the phrase, my son was describing a classic boom-bust cycle.

That last bit about log prices doesn't quite make sense to me.


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Logs are presumably one of

Logs are presumably one of the resources needed to make bows. So when a new wave of "aspiring bowmakers" shows up, the demand for logs increases and drives up the price. Likewise, when the frustrated bowmakers all quit, the demand for logs drops, depressing the price.

Right, but that seems like

Right, but that seems like simple single-good supply and demand, not some sort of "boom-bust cycle".

Some of you economists look

Some of you economists look over my shoulder and make sure I get this right.

A "boom-bust cycle" is a large scale miscalculation in predicting future supply and demand that leads to inefficient investing. Two independent reasons for such a large scale miscalculation are 1) force is used to compel people to make irrational choices, and 2) people try to profit from the irrational calculations of others.

An example of 1) is the US health care system. Employers are compelled (through the tax laws) to provide comprehensive third-party health insurance for their employees. This leads to an over-investments in aspects of health care (such as insurance abuse investigation) that would not otherwise be profitable. When either the law is changed, or the market has learned to circumvent the problem more efficiently, the industry that received the over-investment collapses.

An example of (2) is llama breeding, where everyone wants to breed llamas and sell them because there is such a good market for llamas, particularly among new llama breeders. You know there are many more llamas being bred than the market would "normally" support (scare quotes show that we could write volumes about what is normal for a market), but you calculate that you can get in and out of the market and recoup your investment before everyone else gets out and demand collapses.

Presumably, something like (2) is going on in the game.

They train players to master

They train players to master complex rules, to weigh odds and solve problems and make quick decisions. Indeed, players learn how to learn: The mysteries of a new and unknown game must be unlocked by trial and error. Marc Prensky, the author of the book “Don’t Bother Me, Mom – I’m Learning,” tells the story of Stephen Gillette, an entrepreneur who picked up his leadership and organizational skills by playing online games. “I remember my mom and dad yelling at me,” he quotes Gillette as saying. “They didn’t know I had a 200-person [online] guild to manage.”

Finally, an apologist for my laziness! Maybe I should hire the writer full-time...

There is no question that

There is no question that the virtual economies of MMORPG's can be educational. I used to dabble in a bit of Ultima Online some years ago and I was exposed to economic concepts I hadn't yet experienced in real life. Inflation was the big one, the supply of virtual gold would spawn much faster than it was destroyed and prices in player to player exchanges were always rising. To compensate, players learned to hold their virtual assets in some form other than virtual gold, the best option being virtual real estate. And while I didn't experience this myself, I read somewhere that in one of these MMORPG's, an alternative and unsanctioned currency actually emerged (some sort of inexpensive armor) to compete with gold in player to player exchanges.

I know that kids who aren't being taught these things in school are experiencing them online. I'm not sure if they are connecting the dots between their virtual experience and the real economy, but the potential is there. I'm not embarrassed to admit that I was 22 years old and a college graduate BEFORE I understood why you can't make everyone richer by printing more money. Had I been playing UO as a kid, I would have appreciated this long before.

As a sidenote, I was

As a sidenote, I was inspired to begin reading the Western civilisation classics by Sid Meier's Alpha Centauri. The full version quotes from important works when new advances are made, and it sparked my interest enough to read them.

- Josh

For example, waves of

For example, waves of aspiring bowmakers periodically flood into the industry, driving log prices upward. This pushes established bowmakers to quit, so log prices collapse.

That last bit about log prices doesn’t quite make sense to me.

(Finally, something economical comes along that I know about!)

(Assuming the guy is still talking about making bows in Runescape) In order to make bows, you need logs and flax, (in order to string the bows).

Simple supply and demand: if alot more people want to make bows, they can't just go out and get 1,000 logs each. They have to buy logs from somebody else. That causes the price of logs to go up, thus, the people who want to make bows to "get rich quick" stop buying logs because it gets expensive due to inflation [of the price of the logs].

Everything evens out in the end, but if the researcher wanted to find out about virtual economies, (in RuneScape) he should have looked at coal which I can explain if anyone is interested. :grin:

That last bit about log

That last bit about log prices doesn’t quite make sense to me.

He probably meant "log utility".

( :) )