Using World of Warcraft to test Ron Paul’s economic theories
On the major planks in Ron Paul’s Presidential campaign is the abolishment of the Federal Reserve and a return to the gold (or hard currency) standard. This has led to a lot of arguments on sites like Digg.com of the “That won’t work. Yes it will. You’re a moron. No you are” variety as a bunch of non-economists (myself included) try and figure out what would happen if Ron Paul’s plan were implemented.
My personal guess is that the implementation of Ron Paul’s abolishment of the Federal Reserve and return to the gold standard would be disastorous leading to deflation initially and then to economic stagnation. But, then after reading this article on Chinese gold farmers in World of Warcraft it occurred to me that we don’t have to guess what would happen. We could model the effect on a World of Warcraft server (if Blizzard would go along which is doubtful even though given that they are headquartered in California they are sure to have a few Paulbots on staff).
Currently gold coin in World of Warcraft functions as a fiat currency. It is essentially unlimited if you kill enough monsters or make enough bags or buy enough from a gold vendor. The Auction house operates as a free market with no upper or lower price set on the price of goods there. To test the theory we would need to cap the amount of gold available on a realm and then monitor prices in the auction house, as well as monitoring the purchase of high value items such as horses that can only be purchased from vendors.
I predict the following would happen:
- As gold began going out of circulation prices in the auction house would begin to fall.
- If the vendors (automated shopkeepers) continued to pay the same price for goods the number of items for sale in the auction house would decrease.
- As gold became harder to accumulate the sale of high value items would slow. This could be measured by tracking the average level in which things like a mount are purchased. They are tied to level and are a status symbol so people really want them and it would be a good indicator of how hard it is to accumulate wealth.
- Classes which offer free mounts would proliferate. When compared to other servers they would be disproportionately represented. (same reason as above that horse means status)
- People would begin transferring to other realms without the currency restrictions.
I believe this would be a good model of the deflation and economic retraction that would occur if the US were to return to the gold standard. Of course it isn’t perfect, for example it doesn’t account for governmental debt service, but I think it would be pretty close. Unfortunately this is all guess work cuz Blizzard will never go along., but if any real economists want to chime in feel free.
It would also be interesting to see some variations on this theme in which an ulimited amount of gold can be purchased from Blizzard but items are strictly limited. Huge inflation I would bet. Or items and gold can be purchased from Blizzard. My bet there is the local trade economy would tank (Globalization analouge).
Ron Paul, Federal Reserve, World of Warcraft, Politics, Economics, Gold Farming
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June 22nd, 2007 at 5:44 pm
Can you elaborate on the mechanism how you think total amount of gold can be capped?
You mentioned that NPC vendors will remain in the game paying of the same amount of gold per item, irrespectively of auction house prices. To me it seems like it is a gold spigot ready to dispense any amount of gold to a player bringing vendor trash.
You predicted lack of items on the auction house due to presence of NPC vendors with fix prices, however, presence of those vendors, I believe will prevent implementation of your plan to cap gold amount.
It seems to me that to be able to run the experiment, all of the NPC functions that involve paying out or charging gold (repair, mount selling, training) have to be performed by other players.
For example, blacksmith will be able to perform repair services, jewelcrafters can mint gold coins from gold ore and thus injecting gold currency into circulation, disechanters will take care of transforming trash items into useful enchantment components, etc.
In this case, blizzard can cap the amount of gold by controlling respawn times of the gold ore nodes.
June 22nd, 2007 at 6:03 pm
I admit it wouldn’t be easy to cap the gold on a realm, but essentially vendors wouldn’t buy anything while the counter indicating available gold was at zero. Then when someone bought something from the auction house or a vendor (blizzard gets a cut off the auction house) whoever makes it first to the vendor gets their items bought.
A player could actually instigate a pretty robust black market economy by camping at vendors and wring a macro to sell stuff every second or so. He could then charge other players a fee for handling the transaction while they are out killing and gathering. What you would essentially end up with is Germany after World War II with out the charm of the Nuremberg trials.
There are a bunch of scenarios that could actually play out here and you’re suggestion is one in the form of a barter economy but given the environment I think players would just transfer off.
June 22nd, 2007 at 6:48 pm
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June 22nd, 2007 at 9:27 pm
There are a few flaws in the design which would taint the result.
Money:
Commodity-based money isn’t a fixed supply, it’s simply that the opportunity costs (e.g., capital, labor) involved in mining an extra unit of gold would, given market forces, approach the market value of gold. This is, in fact, the problem with fiat currencies, their supplies are not correlated to their marginal cost of production. On a long running server, where everyone was 70, the “value” of gold would approach the time-cost of farming it from mobs.
Prices:
The game has, as you mention, fixed costs. Since these costs are not a product of the choices of consumers and suppliers in a world of scarcity (I just thought of the new name for this game!), they would tend to skew the results. Items which were easily obtained, but sold to vendors for more than the current time-cost would tend to inflate the currency.
Innovation:
In the evenly-rotating, perfect-competition abstraction, the money supply never needs to change, since prices, supply, demand, and markets never change (never could figure out why this was referred to as “competition”). In the real world, innovation improves the productive capacity of the market, so too does the division of labor. Neither of these are particularly available. I can only do what the game allows.
June 22nd, 2007 at 9:38 pm
So, to address your critiques directly, since the WoW analogy is just a foil…
* As gold began going out of circulation prices in the auction house would begin to fall. [Deflation]
If the supply were fixed permanently, sure, but it isn’t in the real world. Also, should it turn out we’ve mined all the gold in the world, we can substitute other commodities in place of gold. Heck, we can even use multiple commodities at the same time, or even basket them.
The primary benefit here is the production of new money will only occur when the marginal value of the next unit of commodity is more than its cost of production. This will continue until the miner is about to spend more in getting the commodity than the commodity is worth. Market forces at work.
* If the vendors (automated shopkeepers) continued to pay the same price for goods the number of items for sale in the auction house would decrease.
Why? The supply of goods provided by vendors is almost mutually exclusive to what you can find on the AH.
* As gold became harder to accumulate the sale of high value items would slow.
Gold accumulation, or gold creation? Creation would exist how it always has, by farming. Accumulation requires first having produced something of value for trade, also by farming (or lucky drops), and likewise would remain unchanged.
* Classes which offer free mounts would proliferate.
Setting aside that class-mounts are not free, this would only be a factor in a world where the price of the mounts are fixed and the currency deflates. The former does not happen in the real world. The latter condition is an unstable equilibrium, which is soon corrected by someone farming more gold.
June 23rd, 2007 at 5:15 am
Cornelius - You make a good point about farming gold from the mobs which is why I said the total amount of gold in circulation would have to be capped. That would represent the gold held by the treasury or banks.
Regarding your points in your second post - I think that you are wrong. Historically when countries have returned to the gold standard deflation has occured and remained. That was actually one of the causes of the populist movement in the US which helped lead to the creation of the Federal Reserve system (and the far more insidious direct election of US Senators). Farmers wanted a “fiat currency” because they felt that the hard currency system in place concentrated money in the hands of outside interests who could then manipulate it. Free silver advocates wanted silver accepted as well as gold at mints in order to stave off the deflation that was occuring (and to have a market for their silver) what we ended up with is the Federal Reserve.
The other items are just the closest way I could think of to model the interaction of the US economy and the rest of the world. At 4:30 in the morning it seemed good although I admit it could use some tweaking. Another interesting experiment would to be to cap gold in the alliance areas and not horde areas and see how much trade increases at neutral auction houses. You also track activity in neutral and horde areas.
June 23rd, 2007 at 7:43 am
1. I don’t think your WoW experiment is all that good a model, given the existence of NPC vendors buying and selling at fixed prices.
2. But you don’t need it. There are lots of historical examples of commodity money systems.
3. Suppose, to take the limiting case, a 100% reserve pure commodity system with an absolutely fixed supply of the commodity. Why would that be a problem? If the economy was growing, prices would gradually decline, but why would you expect that to prevent economic growth?
I’m not arguing, by the way, that a gold standard is the ideal monetary system–just that I don’t follow your reasons to object to it.
June 23rd, 2007 at 8:00 am
The vendors maintaining fixed prices seems to be a hang up for everyone. To me it represents the economic activity outside the control of the US. It may not be the best model but its what I have.
You’re right there are lots of examples of commodity based systems and from my reading all of them have failed. THe reason for the experiment is the insistence by some that central banking systems don’t work.
Regarding your point number 3. Yes I would expect that economic growth would be hurt in the scenario that you propose. Historically it has been and historically commodity based systems tend to concentrate wealth more extremely than the system we have now.
Again I am not an economist just trying to come up with a small scale proof.
June 23rd, 2007 at 8:16 am
Let’s see if we can make the experiment more realistic.
First, we need to eliminate all exchanges with NPCs that pays fixed amount of gold and their functions performed by players (fixed prices will distort the experiment)
)
Second, auction house interface should allow to specify prices in alternative currencies
Third, a guild can get a charter to mint coins (say guild needs to provide 40 signatures and a head of Onyxia to get the charter
In this case I envision that a few currencies will develop. Possible candidates will be a currency backed by Major Health Potions.
Major Health Potions has a few “gold like” qualities, such as it is universal desirability and relative scarcity.
There is one big difference though. Real world gold is virtually indestructable, not directly consumable and nevertheless desirable.
Any ideas how we can model it in WoW?
June 23rd, 2007 at 8:31 am
That might work. Of course the real solution is to design a game that is both fun to play and will test the economic theories in question. I still think that the fixed prices at the auction house are the best model of non-US economies with the auction house funtioning as the US economy but it’s possible I am wrong.
June 23rd, 2007 at 10:13 am
Chad, it’s worth noting that past commodity-based currency failures were not, in fact, fialures of the currency system, but a direct result of the respective government printing up more notes than they had gold in reserve. Usually this was done to finance wars.
Now ask yourself, is a system in which the government can arbitrarily create more paper notes really a commodity-based currency? How would the people react if, instead of the government, it was a private company which printed up extra notes? I would argue in a private commodity-based system such behavior would be treated as the fraud it is, and would allow the government to fulfill its proper role as protector against violence and fraud.
June 23rd, 2007 at 3:59 pm
Cornelius you misread what I said. I addressed returns to a commodities based system and two specific examples that I recall off the top of my head are the return of the US to the gold standard after the Civil War and Englands return to the Pound Sterling after WWI.
June 24th, 2007 at 7:29 am
Chad, so far as my reading goes, commodity based standards not so much failed as they were defeated by those who wanted to switch to feat money.
Yes, there were problems with bimetallic standard in US but hopefully lessons are learned and nobody goes back to that standard.
If you are concerned with how transition to commodity based standard can happen, you can review “The Case for Gold: A Minority Report of the U.S. Gold Commission” chapter VI.
http://www.ronpaullibrary.org/books.php
As with regards to concentration of wealth and concern for the poor under the commodity based money. I don’t believe that fiat money are friends of the poor. Under the fiat money you can argue there is a transfer of wealth to those who gets the freshly minted money first from those who get them last. Fiat standard also robs people of their savings.
September 23rd, 2007 at 7:52 pm
This analogy is idiotic. A gold standard doesn’t mean “Prevent people selling their goods if the “gold cap” has been reached”.
To implement a gold standard in WoW you simply remove all NPC vendors and gold quest rewards from the game and create a gold mining profession which is responsible for the creation of gold, and various other professions (eg, mount trainer) to replace the current vendors.
A “gold cap” is an inherently half assed way to try and mimic the gold standard without actually implementing it, and has obvious flaws.
Under a true gold standard the denizens of WoW would experience economic prosperity (that is, they would progressively have to “farm” for fewer hours to accomplish the same goals) and price deflation. Under your half assed imitation of a gold standard with price/money volume controls you would see the effects of socialist intervention - “queues” outside vendors waiting for the gold cap to be breached so that item sale was available.
September 23rd, 2007 at 8:18 pm
Thanks for the comment Glen. Firs off the cap on gold i propsed was on money not gold mining. That is exactly what a hard currency standard does. Secondly mining in WoW is much more productive than in the real world so maybe that should be capped too.
“The best estimates available suggest that the total volume of gold mined over history is approximately 153,000 tonnes, of which around 63% has been mined since 1950. The upward trend in annual production is now leveling off, due not least to a considerable slowdown in exploration spending in the late 1990s. Independent analysts are of the belief that mine output will remain flat for the next few years and may even drop slightly.” (Year-end 2004)
153,000 tonnes x 32,150.75 ounces/ton x .8875* = 4.37 billion ounces
*100% - 11.25% attrition.