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The future of macroeconomics
Several months ago I noted that a virtual world, Eve Online, had hired a real economist. Here is his first report. What makes virtual worlds important for economics is that for the first time ever, macro-economists will be able to do experiments. I predict that we will see some very interesting experiments in the near future. In the meantime here is an interesting bit from the report - the laws of supply of demand work in many worlds.
EVE consists of more than 5000 solar systems in 64 regions. The solar systems are connected in a complex web allowing for goods to be moved from one end in the Universe to another. Pilots have to be careful because in low sec and zero-zero security zones there is always the danger of being attacked by gangs of pirates looking for easy prey....
EVE is so large it is difficult for anyone to grasp what is going on in all the regions at any given time. Yet the markets seem to be very efficient at distributing information resulting in symmetric prices throughout Empire space (and even further). This is clearly visible in figure 11 which shows the price for zydrine in three different Empire regions.
Examining these time series in more detail reveals the price difference between regions is declining over time and price fluctuations within regions are also decreasing. This can be seen as evidence for increased efficiency in arbitrage trading over time resulting in symmetric prices and an overall more efficient market.
Thanks to Ambrose for the pointer.
Addendum: Be sure to check the comments for insightful details from Mike K., solarjetman and others.
Posted by Alex Tabarrok on September 10, 2007 at 07:17 AM in Economics | Permalink
Comments
I wonder if they have fractional-reserve banking in EVE online?
Either way, these virtual markets can't possibly be compared to real ones until they have had a couple of bubbles, depressions, ponzi schemes and revolution attempts...
Posted by: Harald Korneliussen at Sep 10, 2007 9:00:26 AM
Very interesting, indeed.
Posted by: sa at Sep 10, 2007 9:25:27 AM
Who did said the EVE market had not bubbles in the past?
The prices of the good produced from the players that are quoted on the open market change in a much with time.
What is interesting is the fact that there is no way a government in EVE is able to impose its will on the people.
Posted by: Mirco at Sep 10, 2007 9:45:43 AM
Without sythesized Human Motivations how "virtual" can this be?
Posted by: R. Richard Schweitzer at Sep 10, 2007 10:07:03 AM
Herald:
It just so happens that every single one of the events you described has occured in Eve.
There are only three game-controlled factions that control the space in the core of the galaxy. This exists to ease new players into the game. The real game starts at the edges, in what is called 0.0 space.
Players join corporations (complete with a board, and C-level officers), some of which specialize (mining, research, manufacturing) and some are more general. One of the distinctive features of Eve is that nearly all "items" in the game, past those low-level ones for beginning players, have to go through a complete production chain: mining asteroids for raw materials, researching blueprints for the items to be manufactured (office space on space stations has to be rented for this purpose), then the items are actually built in fatories (also need to be rented), and finally, they enter the maret (distributed by courier atd shipment corporations whose routes are protected by mercenary ones).
A famous story is that of a player who started a bank, and gathered capital from players, only to run away with it. The total in-game loot he escaped with was worth over $10,000 USD at the exchange rate then.
I'm a recovering addict, and no longer play. One of the restrictions the game places upon players, is that you can only query market prices within the space sector you are in. Thus, my corporation was in the business of collating cross-sector data to find price differences, and then follow the old buy low sell high story.
The high degree of player freedom Eve alsows as well as the large market size make it ideal for this type of experimentation. (Other similar games segment the player population into small chunks of a mere several hundred, while in eve over 25,000 may be online at the same time).
I forgot to mention that corporations can band in Alliances, which make war with each other, as well as deal in internal politics. They can and do enforce laws within their territories. Backed by both military force, and the threat of expulsion (upon loss of protection, a weak corporation may get raided by pirates who have heared of the split).
Posted by: Mike K at Sep 10, 2007 12:10:48 PM
To elaborate on the meaning of this graph.
"Zydrine" is one of 8 different base minerals which are the basis of all production in the game. These minerals can be refined from ore, and can also be "re-processed"; just about any item in the game can be recycled into minerals (naturally, a fraction of the minerals required to produce it).
The main way to analyze a video game economy is in terms of the one truly scarce resource: player time and effort. In Eve, in order for a player to perform arbitrage, he has to physically move the good from one place to another - thus players will only do so if the profits are worth the time spent moving the goods around. Zydrine is a relatively dense good, in terms of value per volume; a small ship can haul thousands of units of zydrine, so a 200 isk/unit price difference between regions can be exploited for millions of isk in one trip. Another mineral, Tritanium, is only worth on the order of 3-4 isk per unit; its price can be a lot more volatile, especially in uncivilized regions where a large cargo ship can be attacked and destroyed.
As for the comment that no government can impose its will on the people in EVE, I'd disagree. The designers and programmers of the game serve as a government with power beyond our government's wildest dreams: the power to define the attributes of the world itself. You'll note that on that graph, in around January of this year, the price of Zydrine crashed, after holding steady at around 4000 isk/unit for years. This happened as a result of the developers adding a new region to the game, in which zydrine could be acquired much faster than it could previously. In essence, there was a virtual gold rush, created out of thin air by the developers of the game. The developers can and do make changes to the game with far-reaching effects on its economy.
Posted by: solarjetman at Sep 10, 2007 12:17:08 PM
The developers also have the power to change what computer-controlled corporations want. One way of making funds is to transport good from computer producers to computer consumers in different parts of space. If you have the central controls, you can decide that computer-controlled corporation X no longer wants quite so many units of Quafe this quarter, or perhaps it is not willing/able to pay as much, or the price it offers change more/less quickly as its quantities change. You do not need to do so much as the government when you also control every non-player character corporation.
As solarjetman says, the developers also control the laws of physics. They can add new regions, they can create a process to turn Tritanium into Zydrine, they can do just about anything that will not drive away massive numbers of players. Corruption (or rumors thereof) within that system have been one of EVE's larger problems. When the developers (who control the laws of physics) play the game, people get very suspicious when their friends suddenly get a windfall. "Huh, that new region with easy resource access is only available through [corporation]-controlled areas of space."
Posted by: Zubon at Sep 10, 2007 2:10:58 PM
I find it very interesting that even with God-like control of the world that centralized systems rarely work.
In the same vein here is an older article about one of the first MMO's Ultima Online.
http://64.233.167.104/custom?q=cache:DNHKlDoLL20J:www.gamasutra.com/features/gdcarchive/2000/simpson.doc
Chapter 5 is probably the most interesting.
Posted by: Apostate at Sep 10, 2007 3:39:30 PM
"""Without sythesized Human Motivations how "virtual" can this be?"""
Posted by: R. Richard Schweitzer at Sep 10, 2007 10:07:03 AM
Why in the world would you need synthesized human motivations when you have game players with real human motivations?
Posted by: mike at Sep 10, 2007 5:21:38 PM
I'm no macroeconomist, but I understand that one of the thornier issues in international macro is that almost all estimates of PPP convergence are "too slow." In the real world, we are hampered by aggregation bias, composition bias, not knowing actual transactions and transport costs, etc. I would think that examination of zydine and other resource prices at different solar systems in EVE would be an economists dream for disentangling what might be causing our estimates to be so far off.
Posted by: MW at Sep 10, 2007 5:57:19 PM
I'm no economist either, but I am under the impression that these "regions" in this game can be compared to countries if we were talking about the real world. If this zydrine can be compared to crude oil, or gasoline, I don't think the markets in this world of EVE are accurate. For example, gas prices in San Juan, Puerto Rico in 2005 were $1.74. While gas prices in the Netherlands were $6.48. The prices don't always run simultaneously that close together as they do in this graph from the EVE game. Supply and demand go hand in hand in the real world, and they don't seem to in this graph.
Posted by: AV at Sep 10, 2007 8:24:52 PM
AV-- that's true, but remember that gas prices are a partial consequence of how much the government taxes each gallon.
http://www.msnbc.msn.com/id/12452503/
According to this article, the Netherlands has a pretty similar wholesale gas price to the U.S.-- it's just that they levy a tax of $4.00 per gallon of gas.
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Posted by: Firozali A.Mulla MBA PhD at Sep 11, 2007 5:16:53 AM
There are indeed differences in the prices of items between regions. For example, in "lawless" 0.0 or low-security space, manufactured goods (i.e. ships and ship modules) command a much heftier price than they do in high-security space--a reflection of the costs incurred in transporting goods in a dangerous environment and player demand for convenience (some trips between "low-sec" space and "high-sec" space can involve hours of tedious and potentially dangerous travel.
On the other end of the spectrum, certain rare raw minerals which are only available in "low-sec" space are sold very cheaply out in the frontiers but command much larger prices in the manufacturing and retail hubs located in "high-sec" space. For example, while you might be able to find buyers for zydrine (a rare mineral) at 2000 isk per unit in a "high-sec" manufacturing region, you would be lucky to find people willing to pay half that much in 0.0 space.
And yes, there are taxes in space. Alliances that have sovereignty in 0.0 space levy taxes on all transactions in their regions at their discretion. The smart alliances keep these taxes low. The dumb ones have high taxes and watch their miners, traders, builders and retailers flee for low-tax havens.
Posted by: Rol at Sep 11, 2007 2:08:44 PM
It's important to recognize that the author of this document was comparing zydrine prices in "empire" or "core" regions where transit lanes are safe and there are no tariffs. Therefore, the only cost involved with of shipping equipment and resources between one Empire region and another is merely time, thus, it makes perfect sense that the prices would roughly mirror each other as opportunitsts fill all of the zydrine trading niches.
Posted by: Dana Smith at Sep 11, 2007 4:57:27 PM
In my opinion virtual worlds like EVE or SecondLife will become more and more important in the future as the number of players increase. It has now reached a critical level where technology and the amount of participants are sufficient to be interesting for the economic world. Consequently it is a matter of time where economists will do various experiments in the virtual worlds. They might become a basic tool for economists, where a lot of research and experiments can be done, even though other tools like simulation software will also have the right to exist. The main advantage is that virtual worlds are more “realistic” than any software computing results. I am confident that for some economic problems or experiments virtual worlds give us better results than anything else, except the real world.
The important point is that behind every virtual character there is at least one human being. Decisions, for example to buy something in the virtual world or spending “money”, taken by the character are reflecting REAL human behavior. You can find evidence for that also in the price for zydrine in the different Empire regions of the Online Game EVE. Symmetric prices can also be observed in the real world, the time needed for that process (to get symmetric prices) may of course differ, especially the internet facilitates that. The quick and cheap information distribution is a basic point why search costs are low and thus leads to efficiency in arbitrage trading.
Besides this I believe that virtual worlds are also interesting for a company. For instance, reaction for new products could be tested in those worlds first. Consequently the flop rate could be decreased.
All in all, with the popularity and an increasing number of participants in virtual worlds, they will become the basic tool for macro- and micro-economists. Not only because it will be much cheaper to do experiments or research but also because they will provide more realistic data. However, the disadvantage as an experiment tool is that you will have no influence on certain variables which you might want to adjust. Anyway, the following point is worth to think about it. To what extend can a “virtual world economy” have an affect on the “real world economy” and wise versa? How strong are the links between those worlds? Is there something like an economic cycle in virtual worlds? I would say yes, as long as there are enough participants in that world. For me it is partly a shift to another “place” where the basic market rules particularly demand and supply will remain the same, because the players are human beings.
Posted by: hameed at Sep 11, 2007 7:06:26 PM
As a character in EVE, you have the opportunity to do just about anything on the market you want with the exception of a stock/bond market. My human holds an MBA, and knows how to use that in calculating price differentials for arbitrage, placing buy and sell orders based on the relative mineral values and costs of production, and the any other aspects of the game. The one massive bonus that EVE has is that there are no politicians (except for the Caldari-leaning game devs) to impose tariffs or unnatural barriers to trade. There are taxes levied with each transaction that have to be accounted for, but these are generally so low (and can be lower depending on your skills and connections) that they are usually ignored.
There are both buy and sell markets for every good, and the market system even allows you to view historical trends and price ranges.
In addition to the markets, which are for more common goods and parts, there is the contract system, which allows for combinations of items, sales and auctions of rare items or packages, and more, providing for a robust market economy. Contracts are subject to a small brokerage fee.
While some here have argued that it isn't a true market, I would argue exactly the opposite. There are "Angel Investors" in the form of corporation members and friends who can give you money to buy say a battlecruiser or a skillbook. Although it is lacking a capital market for stocks, bonds, hedge funds, index funds, etc., this only improves the creativity of the players to exploit the four main ways to make money - market arbitrage, mercenary missions, bounty hunting, and mining/manufacturing.
All in all, it is one of the most realistic RPG's in existence.
Posted by: Mordanian Ryff at Sep 11, 2007 11:07:46 PM
Being new to economics I think a "game" would be ideal for someone like myself to understand theories and to try different ideas in a virtual world. I agree that maybe human emotion is impossible to replicate, but with an unlimited scope of governance the crators and programmers should be able to simulate to a degree the need for action one way or another.
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Posted by: Bob at Mar 13, 2008 10:51:10 PM
By the way, Eve-Online has hired a full-time economist to manage that aspect of the game.
http://www.reuters.com/article/technologyNews/idUSN0925619220070816
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