If historical cases of hyperinflation — real, and now virtual — have one thing in common, it is the instinct among its victims to blame the symptoms rather than the disease.
A very interesting but flawed article on virtual economies from the Mises Institute. I’m sure I’ll take some flack from my libertarian friends, but unfortunately in his effort to make this relevant to Austrian School economics the author misses several important issues. There are critical differences between Diablo III’s currency crisis and the failed historical fiscal policies of the Weimar Republic.
The major difference is that gold in Diablo 3 is created through individual economic activity. That activity, of course, is adventuring and killing monsters. Because gold is easily quantifiable and interchangeable it is technically a commodity good that is being used as currency in Diablo 3’s market. Because the game’s currency is based on a commodity that can be only found through prospect and labor, it’s actually a somewhat warped imitation of Mises’ Austrian School economics with tragic results.
The real issue, that the article does sort of touch on, is that Diablo 3’s gold sources proportionally diverge from its gold sinks over time. In layman’s terms, players are leveling up and taking on more powerful creatures that generate more gold. At the same time, their economic costs and risks are not growing in scale with their income. As a result, players not only accumulate gold but at rates that surpass any use they have for it. The in-game vendors don’t typically sell items that players particularly value, but the game’s player run auctions do. The result is that these auctions allow localized hyperinflation to quickly spread throughout the entire multiplayer economy.
Of course, nothing about Diablo 3’s world and economy is at all realistic so it’s not wise to make many correlations between it and real world economics. You have a world where new players are showing up all the time and the abundance of every good is directly linked to the frequency and duration of their participation. Consequently, you need a currency that will hold stable value regardless of the size of the player population and its distribution of classes and levels. It’s really no wonder that even Blizzard’s design teams would have issues getting that economy to work.
So the problem really boils down to the fact that the environment and goods created by the game do not change based on aggregate player activity. Peter Earle wants to compare this to the problems created by centrally controlled currency, but in fact Diablo 3’s situation is the exact opposite! The currency scaled of out of control because it was an uncontrolled ubiquitous commodity. Unfortunately, if they had tied the commodity to a strictly finite commodity like the writer (and Austrian economists) suggest then this would allow for speculative market investment with cycles similar to what’s happened with Bitcoin recently. Such a currency could behave very erratically and significantly undermine the market and game experience that Blizzard was attempting to craft.
In conclusion, the most reasonable solution is one that Mises could never endorse: a centrally controlled currency. Blizzard should have implemented a means of controlling the rate at which both currency and commodities were introduced to the market based on supply reserves and aggregate demand. Of course, keep in mind that Diablo 3’s economy is completely chimerical so this should not be taken as an argument to endorse specific real-world fiscal or monetary policies.