Recently saw this post on [Boing Boing](http://www.boingboing.net) about virtual economics. Cory Doctorow’s take on the inflation endemic to these games:
> I think that this has profound implications for in-game democracy — democracy requires that you play together for a long time, in order to establish civil society. But inflation is such a fixture in virtual worlds that they are necessarily short-lived — only by beating inflation can games sustain themselves.
Cory is right, I think: dealing with these things is an essential
step for the kind of virtual world that [Second Life](http://secondlife.com/)
wants to create. I suspect that [World of Warcraft](http://www.worldofwarcraft.com/) (where the main focus)
is not really the economic parts of the world) doesn’t need to
worry so much.
The simplest economic theory for inflation is the [quantity theory of money](http://en.wikipedia.org/wiki/Quantity_theory_of_money). In simple terms, we can
> M . V = P . Q
where M is the total money supply, and V is the velocity of money (how quickly money changes hands), P is the price level and Q is the number of ‘things’ in the
economy. So what causes inflation (that is, changes in P)?
> Change in P = Change in M + Change in V – Change in Q
(Strictly that’s in log change terms, but just think of it as percentage changes)
So the simplest version of inflation is that it happens when
growth in the money supply outpaces growth in output in the
How do virtual worlds generally try to control things? Well,
there are some significant problems to do with growth in the
money supply, because there are lots of in-game tasks that
create money. In Second Life, for instance, many players
get a weekly allowance from the system, all of which is new
money. Most of the systems involve ‘sinks’ that remove
money from the game, which are adjusted to try and keep the
system in balance.
But what would we call this system if it happened in real life?
Well, the government of the system is printing money to finance
welfare payments. Inflation isn’t really a surprise.
Can we use this real life analogy to inform the system design? How
could they get inflation under control?
First, the government could run a balanced budget. The taxation
in these systems is pretty implicit, making it explicit would
allow a proper government budget to be produced. Then welfare
payments could be balanced against income. I suspect that
the system most games use is actually pretty close to this,
but the democracy element that Cory suggests would really
require that this power be taken out of the ‘god’ of the
system and placed in the hands of some explicit government
within the system.
Secondly, an independent monetary authority or central bank
could play a part. Real world countries rely on monetary
policy to control inflation, through setting a price on money.
It’s not as clear to me that this could work in a virtual
setting. In particular, in the absence of a functioning
credit market it’s hard to see how the normal monetary
transition channels could work.
(Setting up a banking or credit system in a virtual economy
wouldn’t be that hard. The tricky part is distinguishing
it from a [Ponzi scheme](http://en.wikipedia.org/wiki/Ponzi_scheme)).
All of this is just a long way to say that so long as the
key government functions, such as welfare, taxation and
control of the money supply, are in the hands of the ‘god’
of the system, then democracy in virtual worlds is probably
going to have a hard time getting started. What’s needed
is a virtual world that hands over more of the control
of these types of levers to the players through the
form of some kind of government.
So in actual fact, the elements that Cory suggest need to be
solved to create a virtual democracy are actually some of the
things that might help such a virtual democracy grow.
But until then, Second Life and its friends look to just be
[a bunch of hype to me](http://valleywag.com/tech/second-life/).