Hello, folks! Sorry this update is a bit behind. I still don't have beta access, which is actually kind of a good thing. The tail end of this school semester has been a little overwhelming. Over the past week, I've written 20 pages for papers and worked on three separate 20-minute presentations. Hell, I haven't been able to do *any* work for my independent study. However! I managed to create some overlap between one of my papers and WoW, so I could upload it here for an update (and also hopefully annoy the hell out of a professor)!
This isn't to be taken entirely seriously. I would actually be kind of upset if the United States government started dicking around with the Warcraft economy. Still, the tools ARE in place for them to experiment with the two things the Federal Reserve is supposed to control, unemployment and inflation. If you just want the summary, you can skip down to "evaluation of hypothesis" toward the bottom. In any case, enjoy this trip into Warcraft academia!
World of Warcraft: Simulating Elves -and- Monetary Policy
I. Introduction
While the Federal Reserve houses educated personnel and is
well-trained in its decision-making, it is surely a source of tension that
their judgments, when implemented, will have a pronounced impact on the entire
United States. Their dual mandate of low
unemployment and stabilized inflation is an ever-retreating goal that demands
constant pursuit, and failure to make the proper choices can "butterfly
effect" its way into large consequences felt nationwide. As a result, it stands to reason that, beyond
modeling, an actual simulation of the effects to be had by implementing a
particular policy could prove exceptionally useful.
There are several distinct ways to run simulations, of
course. I would contend that the most
effective to use as a learning tool would also be the most organic. A system already in place that can be
subjected to various stimuli would provide a base from which to make predictions
on how the United States economy would respond to similar stimuli, if the
system was inherently and provably similar to that same economy.
II. Proposal of such a system
It may seem a bit of a logical leap to some, but upon
close inspection, such an organic simulation tool exists, with a sample size of
roughly ten million people. The
massively multiplayer online game (hereafter referred to by the industry term "MMO")
World of Warcraft, produced by
Blizzard Entertainment, features a robust, realistic economy that is entirely
player-driven, and thereby human-driven.
While the economy in Azeroth, the setting for Warcraft, is based in gold pieces instead of dollars, they actually
behave in remarkably similar fashions.
Before delving into the actual economics of World of Warcraft, however, I would like
to establish the premise that such a game could be used to model real-life
scenarios at all. Take into
consideration what has become known as "The Corrupted Blood
Incident," an unintended event that took place beginning on September
13th, 2005. A computer controlled boss
character of the game world, named Hakkar, afflicted player characters who
engaged him in combat with a disease known as Corrupted Blood. This disease dealt damage, taking away a
player character's "hit points," and if those hit points fell to
zero, that player character would die. Game
developers never intended for Corrupted Blood to leave Hakkar's combat zone. Regardless, players discovered that if they
used teleportation spells while diseased, they could make their way to large,
populated cities where Corrupted Blood would immediately begin spreading to
other players, and even non-player characters (NPCs) who were vital to the
normal functions of the city.
An outbreak followed shortly after this discovery. Weaker characters were rapidly and repeatedly
killed off, and higher level players found themselves struggling to survive in
a city that could no longer offer the services they needed. Many fled to the wilderness, while others
eagerly experimented with methods for causing the most chaos. Key NPCs and the most populated areas were
constant targets for Corrupted Blood attacks, and virtually no area of a
capital city was exempt from the infection.
Eventually, Blizzard's developers had to step in and restart the various
iterations of the game world to end the pandemic. The results proved fascinating to the science
world, however.
Kyle Orland of Gamasutra (2008) discussed the panic with
epidemiologist Nina Fefferman, who stated that the Warcraft population responded to the pandemonium in precisely the
manner she would expect to see in real life.
Quarantines were broken and allegiances were severed as unpredictable
human behavior fought for self-preservation and sometimes acted in otherwise unintuitive
ways. She told BBC News (2007) that the
sandbox of Warcraft allowed a case
study on human responsiveness without the ethical issues of releasing a
real-life disease, or the problems associated with models using mathematical
approximations of human psychology. In
addition, Charles Blair, deputy director of the Center for Terrorism and
Intelligence Studies, told Wired's David Thier (2008) that the game provided a
very realistic dimension that most studies lack. The inclusion of myriad dependent and
independent variables, and the unique psychological background of every single
person involved, gave insight to how terrorists might use a similar biological
attack to their advantage, and how a victimized population might react.
III. Hypothesis
I hereby propose that World
of Warcraft could function as a testing ground for monetary policies that
the Federal Reserve might implement. The
"sandbox" element mentioned above would allow the Federal Reserve to
actually utilize a smaller-scale version of whatever they may decide to put
into practice. This would avoid any
ethical concerns associated with what may be a radical approach in the real
United States economy, or any "invisible" factors that an
interally-produced computer model may not predict.
This hypothesis hinges entirely on whether or not World of Warcraft's economy is provably
similar to that of the United States. If
it is, then it can serve as a valid analogue for use as a testing ground for
the implications of monetary policy. If
it is not, then it would fail as a proxy and be of no use.
IV. Evidence in support - Comparisons to the
US economy
One does not need to be told that the United States
economy is remarkably deep, given that it encompasses trillions of dollars and,
by definition, every industry contributing to the nation's GDP. If we attempt to break up defining characteristics
of it, however, we can analyze how the economy in Azeroth might operate in
similar manners.
First, a form of money is required. The United States Dollar (USD) is broken up
into a smaller denomination, cents, at 100 cents per dollar. Similarly, 1 Gold in World of Warcraft is equitable to 100 Silver, and 1 Silver is
equitable to 100 Copper.
Next, to have any measure of unemployment, there must be systems
in place to allow the creation of output from resources. World
of Warcraft has eleven primary professions available to players. Three of these "gather" resources,
while the rest "craft" items and equipment from those resources; a
player can choose a combination of any two of the eleven total professions. Each crafting profession creates output that
is unique to that profession, though all draw from the same pool of resources
generated by the three gathering professions.
Despite being able to choose any "job" they desire, players
may encounter frictional unemployment in World
of Warcraft because of the time and money necessary to switch professions -
a profession must be "leveled up" extensively before it can be of any
use to the player. In addition,
structural unemployment is common when new craftable projects are introduced. Even if they are of the appropriate
profession, a player character may have to wait a considerable time to have the
opportunity to find a "pattern" item that will teach them how to make
the new product. Most dangerously,
cyclical unemployment is known to occur in the fictional universe, as
well. The Engineering crafiting profession
is widely known as a subsistence operation.
While an Engineer may craft equipment that they can use, they offer very
little that would be in demand to the rest of the playerbase. They are often cyclically unemployed as a
result of this lack of demand.
Additionally, for any economy to function there must be an
infrastructure in place to support trade.
In Azeroth, trade takes place between players through an interface known
as the Auction House. In the Auction
House, players may take equipment, items, gems, enchantments, resources, or any
miscellaneous items that they have found or crafted and list them for sale at
whatever price they choose. Buyers, on
the other hand, can browse all of the available listings, and purchase what
they need if they feel the listed price is fair. Clearly, this is evocative of the
prototypical supply and demand curve. Appropriately,
markets find a general equilibrium price, and as time passes and a resource
becomes more common, those prices invariably begin to fall. For a very recent example, the Auction House
database The Undermine Journal (2012)
reports that between April 3rd and April 13th of 2012 on the Shandris server,
the current high-end crafting resource "Essence of Destruction" has seen
its price fall from 3,160 Gold per unit to 1,430 Gold. As players collect more of the resource sell
them on the Auction House, supply rises, as does output, while prices fall. As one might logically conclude, flooding the
market with large numbers of one resource is a guaranteed way to cause a
significant price drop.
Entire markets have sprung up around the Auction
House. Jewelcrafters can purchase raw
gems, cut them into various character-boosting forms, and resell them for
higher prices, only incurring the opportunity cost of the time it takes to do
so. Sophisticated analyses have also
arisen. WoW Insider's Fox Van Allen (2012)
asserts that Tuesdays are the best day to sell, for example, because server
resets mean more people are playing, causing demand spikes that far outweigh
and supply increases. Furthermore, Basil
Berntsen of Gold Capped (2012) argues
that the resource "Maelstrom Crystals" have a hard price floor on the
Auction House of 146 Gold - he supports this claim by demonstrating a method to
invariably acquire them for no lower than that price. The investigations into the market
"meta-game" are extensive, with countless software add-ons, blogs, and
purchasable (as in, with USD) guides on how to make money in World of Warcraft.
Another key characteristic of a functional economy is
inflation. In spite of price declines as
resources become more common, inflation is a phenomenon that World of Warcraft does experience. The databases of Wowhead (2012) show records
that in 2004, max-level quests most commonly rewarded players with 70
Silver. The maximum level has increased
over time, and that number has seen a parallel increase. In 2012, the typical quest reward has risen to
16.54 Gold, an increase of over 2,000% from the 2004 value. As one might intuitively reason, price levels
have risen comparably over that span of time.
I can speak firsthand on the subject: in 2009, my characters never had a
portfolio valuing over 10,000 Gold. Today,
the money and items I have breach a net worth of 25,000 Gold, though my
spending power has not noticeably increased over that span of time.
Moreover, Blizzard has reason to try to control inflation
in World of Warcraft just as the Federal
Reserve does in the United States. While
the value of quest rewards has increased by over 2,000%, the change did not
take place gradually. When an expansion
pack for World of Warcraft is
released, the quest rewards spike, but remain fixed at their new value for the
rest of the expansion. If players
continued to earn more and more money during an expansion, Auction House price
levels, being driven by players, would increase monumentally. However, those fixed quest rewards would
become increasingly devalued as they fell to proportionally less worth. In addition, any items sold by NPCs would be
of inconsequential cost to a player that would experience such nominal money
gains, since those prices would not rise with the inflation rate.
The last comparison I will draw in the inherent economy is
the implementation of taxes. When a
player makes a sale on the Auction House, a percentage of their revenue is
taken as the "Auction House cut."
This money is not put back into circulation. Just as quest rewards "create"
money, the Auction House cut removes it from the economy entirely. Beyond that, there is another effective
income tax to be found in repair costs.
As players engage in combat, their equipment becomes damaged, and an NPC
must be paid to fix it. The more a
player fights, the more resources and items they gain to sell, raising their
income; this is offset by the higher income tax of repair bills they
incur. Clearly, these functions differ
from a standard tax in that the money is not gathered and then spent by the
government. As a result, they are not
useful in terms of fiscal policy.
However, from the Federal Reserve's perspective of monetary policy, they
serve the same function of taking money out of the hands of the population,
lowering the money supply.
V. Evidence in support - Comparison to the
Federal Reserve's tools
According to Frederic Mishkin (2010), the Federal Reserve
has three utilities that it can manipulate to implement monetary policy. As with the economy as a whole, these tools
are mirrored in the Warcraft universe
through values in Blizzard's control, to an extext. Without a banking system, World of Warcraft cannot emulate the
discount rate. Still, it can reflect the
effects of the reserve requirement and the Federal Reserve's open-market
operations via their Azerothian parallels.
a.) Reserve requirements
The function of the reserve requirement
is to determine how much of the money deposited into banks is loaned back
out. A 1% increase in the reserve
requirement should correspond to a 1% decrease in the amount of money loaned,
impacting the amount of money people can spend.
While World of Warcraft does
not feature loans, the money supply can still be affected. Consider the equation MB = C+R, where the
monetary base MB is equal to the sum of currency in circulation C and reserves
R. Since a player carries all of their
money with them at a given time, all money they earn qualifies as currency in
circulation, defining both World of
Warcraft's money supply and monetary base (which, without reserves, are
equal to one another). Now consider the
Auction House cut mentioned earlier. While
I compared it to a tax, I also asserted that for the purposes of monetary policy
it serves the function of removing money from the population's hands. If Blizzard were to raise the Auction House
cut by 1%, as well as lower quest rewards by 1%, it would reduce all income by
1%, thus lowering the money supply and monetary base by 1%. The impact that this would have on price
levels and unemployment (gauged by sales stemming from particular professions)
could then be analyzed.
b.) Open-market operations
The use of open-market operations
involves the buying and selling of bonds.
If the Federal Reserve wishes to increase the money supply, they can
purchase bonds from banks, giving those banks more cash as a result. Similarly, to lower the money supply, the
Federal Reserve can sell bonds, sucking cash out of the banks. In World
of Warcraft, these sorts of operations are known as "Gold
sinks." Periodically, Blizzard will
introduce highly desirable items or features that cannot be traded between
players, but cost large amounts of Gold.
In the Wrath of the Lich King
expansion, materials needed to craft a stylish motorcycle were only purchasable
from an NPC for thousands and thousands of Gold. As with repair costs, any money given to
these NPCs was completely removed from the economy. There also exists trainers who allow a player
character to move at a faster speed while mounted, and additional spaces for
item storage, both of which cost increasing amounts of money. By adding Gold sinks, Blizzard can
deliberately remove large amounts of money from the economy, just like the
Federal Reserve selling bonds.
VI. Arguments against World of Warcraft as a proxy
As with any model or simulation, World of Warcraft does not provide a perfect analogue for what the
Federal Reserve would like to attempt. The
marketplace is divided strictly into eleven sectors based on the professions, and
price levels offered by NPCs are computer-programmed, and therefore fixed at a
nominal value independent of the inflation rate. In addition, without a banking system, there
is no element representative of the discount rate.
Additionally, for the tools they could, in fact, test,
the Federal Reserve would have to find means to merely replicate their results. They cannot institute a reserve requirements
in a world without banks - they would have to use other means to reproduce the
inherent effect such a change would have, and only then could they observe the
results. Also, worth noting is that the open-market
operations of Gold sinks only work one-way.
Short of simply giving each player money, Gold sinks can only be used to
reduce the money supply, not raise it.
VII. Evaluation of hypothesis
The terms regarding the validity of my hypothesis were
that if the economy in World of Warcraft
was provably similar to that of the United States economy, it would be valuable
as an analytical tool in predicting the outcomes of monetary policy. There are a few shortcomings to using this
approach, though I feel they are not a hindering force any stronger than the
one found in other modeling and simulating methods. On the whole, the World of Warcraft economy is very comparable to the one seen in the
United States. It is robust and driven
by an immeasurable number of unpredictable human psychologies. It also undergoes similar phenomena and is
susceptible to supply and demand shifts and shocks.
Perhaps most importantly, it has in-depth interactions
with both components of the Federal Reserve's dual mandate, unemployment and
inflation. Associated with those
components, World of Warcraft even has
metrics in place that could be manipulated to mimic the underlying mathematical
effects of monetary policy. While the
outcomes will not be absolutely representative of the effect monetary policy
would have in the United States (I don't recall encountering a domestic market
for Drakehide Leg Armor or Chaos Orbs), they can still be analyzed to gain
better understanding of the human reaction to them and the unforeseen effects
that can entail.
References
BBC
News. (2007, Aug 21). Virtual game is a
'disease model'. BBC News. Retrieved from http://news.bbc.co.uk/2/hi/health/6951918.stm
Berntsen,
Basil. (2012, Jan 20). Gold capped: How to make 146g in Maelstrom Crystals in 5 minutes. WoW Insider. Retrieved from wow.joystiq.com/2012/01/20/how-to-make-146g-maelstrom-crystals-in-5-minutes/
Mishkin,
Frederic. (2010). The economics of money,
banking & financial markets: 9th edition. Boston: Pearson Education.
Orland,
Kyle. (2008, May 20). GFH: The real life lessons
of WoW's Corrupted Blood. Gamasutra. Retrieved from http://www.gamasutra.com/php-bin/news_index.php?story=18571
The
Undermine Journal. (2012, Apr 15). Essence
of Destruction: Price and availability history. Retrieved from https://theunderminejournal.com/item.php?realm=A-Shandris&item=71998.
Thier,
David. (2008, Mar 20). World of Warcraft
shines light on terror tactis. Retrieved from http://www.wired.com/gaming/virtualworlds/news/2008/03/wow_terror
Van
Allen, Fox. (2012, Feb 7). What days should you buy or sell on the Auction
House? WoW Insider. Retrieved from wow.joystiq.com/2012/02/07/what-days-should-you-buy-or-sell-on-the-auction-house/
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