Chartalism in MMOs

This was originally meant to be a lead in to my thesis paper for Economics. However, I learned fast that most professors frowned on linking games to "pure" economic theory. I hope it helps link "Money as a Medium of Exchange" to my metanomic research better"

In the long expanse of my playing history of Massively Multiplayer Online games (MMOs), currency has always been a frustrating existence to my way of thinking, even before ever studying economics. Money just didn’t work. Most of the time, it became hyper inflated, out of control, and to a point that convinced me that it was much better to barter for items needed for survival than to actually buy and sell. The acceleration in which currency accumulated made it worthless to hold, but yet, people still held onto it. It had an alternate worth beyond its monetary value.

And then, early 2003, I visited a MMO called A Tale In The Desert (the first telling, newer telling may have changed). It was unorthodox in many of the philosophies it took on for game play, and the money system was no different. The world started with raw resources, and nothing else. No imposed currency, nothing at all. The world quickly became a mix of a barter society and a valued commodity one, where the commodity shifted as needs grew with the evolution of the society. At some point, before I joined however, players were given the ability to print money. Multiple currencies arose, with one in particular, the Trade Note (TN) being widely accepted as a value.

And therein laid the problem. The TN was at most unit of account, and nothing more. It had failed as a modern currency, for it was never circulated wholly, used as a medium of exchange, or used as a store of value. The TN served only one of the three key properties assigned to money that could be found in any introductory textbook (O’Sullivan, 1998). The first real attempt by any MMO to have a fiat currency had underachieved.

When one first looks at it, it’s a problem that seems to defeat any notion of a forward advancement in the MMO systems. However, when the results of why and how current MMO currencies have failed or succeeded, it actually sharpens the view on how such a currency can exist. Implications of a fiat currency in MMOs can be immense, in comparison to the mainstream faucet-drain variations in place now (Simpson, 1999; Breau, 2002), the fiat system could allow for a steady monetary supply.


Examining the approach to money

Most approaches in MMO economies take the orthodox approach to money, called the M-form, or Metalist, taken from Charles Goodheart’s analysis of Money (Goodheart, 1989). M-form theory takes the approach that money was invented to facilitate a need for exchange. The value of money was also initially determined by the weight and value of the coined metal, and later the backing (usually in gold) against a paper money.

This is probably the most well-known and easily believed approach to how money came into existence. M-form theory begins with a society that existed solely on barter, and then moved towards commodity money, on the premise of reducing transaction costs. It was thus at some point that precious metals became the commodity of choice.

There is, however, a second theory of how money came into existence. Chartislism theory is based on the central idea of issuing authority, and not of backing value of metals. The central role for the evolution of money then comes from the state, and it’s needs. The states authority to issue taxation, and its power to spend creates a currency.

What this means is that the taxing body, or for that matter, any creditor in power, may command in what form that debtors (including taxpayers) must pay them in. Because the creditors demand a specific payback from the debtors, this creates a demand amongst debtors for that currency. This in turn makes payments by the state in that currency acceptable, since it is known that it is demanded among debtors. It matters not what the currency is, so long as those in power as an acceptable currency to pay in have decreed it. Wray explains clearly:

“If the state issues a hazelwood tally, with a notch to indicate it is worth 20 pounds, then it will be worth 20 pounds in purchases made by the state so long as the state accepts that same hazelwood stick in payment of taxes at a value of 20 pounds. And that stick will circulate as a medium of exchange at a value of 20 pounds even among those with no tax liability so long others need it to pay taxes.” (Wray, 2000)

The most important part of that quote may actually be the last sentence. “That stick will circulate as a medium of exchange at a value of 20 pounds even among those with no tax liability so long others need it to pay taxes.” This means that only a portion of the population needs to be indebted for a currency to actually circulate.

For example, assume the following equations for demand of money:

1) MDTP= T + b(Y-T)
2) MDM = b(Y)

3) MDTP= tY + b(Y)(1-t)
4) MDM = b(Y)

Where 1) and 2) are the money demanded by the taxpayers (TP) and the mediums (M) where there is a flat tax involved, and 3) and 4) are the money demanded with a tax rate (t). (b) is then the standard fraction of disposable income for each group that is paid to other taxpayers who need the currency. Adding the two equations together we get two functions for total demand for money:

5) MD=  MDTP + (1-) MDM

6) MD= T + b(2Y-T)
7) MD= Yt(1-b) + bY

We can easily see that for either system that as the number of taxpayers  increase, that there will be a positive change in the amount of money demanded, and as long as exists, the money is demanded to some extent. This of course makes intuitive sense, as if there are more people that need to pay the state in the currency, the more of that currency will be demanded/circulated.

Lerner states that nearly the nearly universal situation now is one where the nation state sets the unit of currency within it’s own borders (Lerner, 1947). This is hard to argue, as it has been noted that every time a nation gains independence, one of the first things it does is set it’s own currency (Wray, 2000). What it does bring to the picture though is the fact that the state does have a controlling power over the circulation of currency within its own borders by establishing laws as well as demanding payment in the currency.

Where did the TN fail?

The TN failed for a few, now obvious reasons. First and foremost, it failed because of the restrictions of the design in the game. The game itself fell back onto an M-form theory of how currency and economic exchanges evolved, and forced players to start in a barter society and try to change from commodity money into a paper money. The TN was even backed by a basket of goods equaling 100TN, but yet failed to even come close to any of the velocities or volumes of circulation in other games.

Secondly, it failed on the front of not having a large creditor, be it a state or a large bank. There was no central power that spent/credited and collected, thus, from the equations above, is such a low number that money demanded among the population was close to none at all.

Examining the situation a little closer, there is more to it than just saying “there was no bank” that created the problem of no central creditor. There were no enforcing punishments and rules to abide by either. Whereas nation states have the ability to enforce taxes to be paid through criminal punishment, ATITD had no such mechanism for those that skipped paying their debts. As such, the incentive to actually create such a system just didn’t exist.

Where does currency exist?

Currency was given a chance to exist in ATITD, but the rules to lead up towards it just didn’t allow it to happen. What’s the really amazing part isn’t only in the fact that the M-form theory didn’t work in practice, but the C-form has examples that run throughout, given the right context.

Nation states, or ruling governments for that matter, are not of the same sense that exists in real-world macroeconomics. As I have stated in previous papers, the ruling government is the game mechanics that are implemented by the developers of the game (Breau, 2002). The game mechanics itself has the power to control what can be accepted currency. The mechanic is simple really; under the faucet drain systems that most games use for their currency circulation. Payments to the players from the “faucet” are determined by the game, and payments of all things that enter the “drain” and return to the mechanical void are in identical currency as to that which is paid out. In this sense, it becomes a commodity currency that has an input value for other final goods, so that it has it’s own value accordingly. A more direct way to look at it would be that, if there was an ulterior currency than voided the circulation of the current on, the current currency would still have sellable value as a production input.

Most major Pay to play MMOs are a really great example of how this comes into effect. The mechanics of the game are such that players are given contract jobs/Quests, and paid in money for completing the contract. These moneis are also the only legal tender allowed for use in the auctions that transpire in an Ebay-like system in game. As well, in sandbox games where housing exists, there are taxes for player cities collected in credits, and maintenance (input) costs that are drained from the system in credits. And to top off the cycle, all sales from non-player characters (NPCs) are done in the money currency, as well as transaction costs for bank transfers done in credits. The NPCs can be considered as tax collectors for the system, accepting the payment of issued government currency back at equal value.

These games have a total different environment when it comes to money than that of ATITD. Currency actually is used to make the community transactions more efficient. The trades happen on a daily circumstance. In my own playing experience of being a weapons crafter and resource miner in Star Wars, for example, I had multiple sales daily, and purchased almost as much and as often as I did sell. Growth and inflation both were positively increasing over the weeks and months of play, apparent by the increased number of goods for sale on the auctions, and their increased prices. These trends mimic those seen in real world economies, giving light to the idea that the economic situation may actually contain elements that create human behavior to mimic real world behaviors. (I am in the midst of trying to attain statistical data of some form from the game about it’s trends to try and prove or not that the trends do actually mimic common economic theories)

The only immediate difference between ATITD’s currency woes and SWG’s successes in circulating and using a common currency is in the fact that the governing body assigned a currency that was paid out and collected, and under it’s use of power and lawmaking abilities used other avenues of trading to only accept the currency. Without the issuing and collecting by the governing body, SWG would have a barter system much like ATITD does, relying on the players to agree on a commodity currency, or a common unit of measure of some sort.

A third example of the power of the governing body to issue the trading currency comes from Ultima Online (UO). UO is a much older, more economically primitive game than SWG, WoW, and AoC are, but the premises are somewhat the same. Gold coins were issued by the game mechanics for killing monsters, and was the only accepted currency by the mechanics when it collected for the large, durable items used as drains for the economy. From the start of the game, much like SWG was/is now, gold was the traded currency, as players needed that currency to return to the system in order to gain the items. However, as time passed, players soon accumulated all of the durables, and had no other items to pay for to the system.

The result was a failing of the currency. Gold was no longer the accepted medium of exchange between players for larger goods, such as the durables purchased (which included houses). Instead, the currency of choice became real world money, as players sold durables on Ebay. Because the players no longer needed to pay the system in gold, and neither did no one else, gold became a near-worthless commodity. However, as real world money was needed to pay real world governments, such a currency was accepted as a medium of exchange. It was a twisted jump from the virtual to the reality, but it happened nonetheless. SWG seems to have learned from the previous failings of the game, and are trying to control the flows in and out of money constantly so that there is always a need for the virtual economy.

Conclusions

Primarily, the main conclusion that can be drawn from this paper is the observation that even in an experimentally simple setting, devoid of all other externalities, trade is not the only motive to how a currency becomes circulated and used. However, when a currency is handed down, and then demanded as payment of debt, the currency circulates much more. This is not to say that this is the only motive to the demand for a currency, but there is a strong observational showing from above to be at least a factor.

Secondly, it gives some weight to my idea that the MMO environments can be used as an observational tool for some economic theory. It may be all fun and games to look at these MMOs from the viewpoint of what real-world economic theory stands up in a virtual setting, such as Castranova did while studying inflation in EverQuest (Castranova, 2001) but to me, it’s a lot more interesting to see it the other way around. In examining virtual world behavior, one may be able to extract real-world behavior as well.
Human behavior remains a constant, what changes is the amount of variables involved. To an experimental economist, a MMO is a giant laboratory playground. Each game has its different rules that cannot be observed in the real world, where thousands of people interact daily. It’s not to say that you would always find the same behaviors exhibited, but even so, one could analyze why the behavior differs.