Video games have come a long way since the early days of Pac-Man and Space Invaders. Massively Multiplayer Online Role-Playing Games (MMORPG) represent a genre of role-playing video games in which a very large number of players interact with one another within a virtual world.
The ‘massively’ term refers to the numbers involved: World of Warcraft, for example, has more than ten million subscribers. Many MMORPGs have become so complex that game companies have asked economists to help them model their virtual economies. Without such an input from economists, things can go badly wrong.
For example, in January 2008, the US gaming firm Linden Lab shut down several pretend banks that were funded with actual money from some of the 12 million registered users of its hugely popular Second Lifegame. In this elaborate online world, players created new identities for themselves called ‘avatars’. These avatars could own land, run businesses and build homes. The link to the real economy existed because players used credit cards or PayPal to convert US dollars into ‘Linden dollars’, which were deposited using pretend ATMs into Second Life’s virtual banks.
The bankers in Second Life operated like real-life banks by offering to pay a savings rate on deposits by other players. While some banks were run prudently, in a mirror of what was happening in the outside economy, some banks used their deposits for unsuccessful Second Life land and gambling deals. In an effort to bring these rogue banks under control, Linden Lab revised its banking rules to allow only supervised – what they termed ‘chartered’ – banks. However, because they did not make the new regulations clear, players rushed to withdraw funds from all Second Life banks, thereby causing a real-life bank run. Though some players managed to get their Linden dollars out, others found that the ATMs were empty and they weren’t able to exchange their Linden-dollar deposits back into real US dollars. A lot of real money was lost, with one bank alone costing players $750,000.
Such events prompted several games companies to recruit their own full-time economists or, at the very least, employ academic economists who study virtual worlds as consultants. A good example is provided by the massively multiplayer video game Eve Online operated by the Icelandic company CCP. Players of Eve Online can participate in a number of in-game professions and activities, including mining, piracy, manufacturing, trading, exploration and combat. They can buy and sell commodities and can form banks. With over 400,000 players, Eve Online has more people than live in Iceland itself. CCP have hired the economist Eyjólfur Guðmundsson to oversee a team of eight analysts that monitor Eve Online’s virtual economy.
In a mirror to what happened to the actual Icelandic (and Irish) economy, the virtual economy can experience a boom-and-bust cycle. Eve Online’s economy had its own ‘Tiger’ phase when it grew by 42 per cent in the 12 months to February 2012 before experiencing its own recession when it then contracted by 15 per cent over subsequent months.
The CCP economists also act as the game’s virtual central bank. They can try to rein in inflation by unveiling a new weapon to soak up excess money in the same way that the ECB or Federal Reserve might sell bonds to shrink the money supply. This is why in a recent interview, Guðmundsson was quoted as saying, “For all intents and purposes, this is an economy that has activity equal to a small country in real life”.
Economists are enthusiastic about studying video games. These virtual worlds populated by millions of people allow economists to work with much richer data and make it easier to run economy-wide experiments – say, abolishing the central bank or having a different banking system – that cannot be run in real life. Overall, it is the possibility of experimenting on such a massive scale that could help move economics forward into the 22nd Century.