Friday, June 22, 2007

Testing an economic theory in World of Warcraft

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).

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