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The EVE Online Real Estate Crisis
Back in 2003 when I was helping CCP with their new economy in EVE Online, the biggest problem with their design was that the factories that were central to the player based economy were too cheap to buy and maintain. Since the game was released in the UK a day earlier than in the USA, by the time I was allowed to log into the retail version of the game all of the prime factories had been grabbed. This forced me to race to Minmatar space, where the ships were generally held in lower esteem by beta testers.
There I managed to buy the factories in a key star hub and set up shop. I produced the first Mammoths (a massive transport ship critical to trade) in the game, and also the first Minmatar battleships. I would have loved to expand my production but within days of the retail launch all factories had been bought up and idled by speculators who were charging $300 to $400 per factory, without any way of knowing if they really owned the factory or not.
One week after the launch of EVE I handed a report to Reynir Hardarson explaining, among other things, how this weakness in the economic design threatened their game and how to solve it. My solution was to greatly raise the rents on these factories so that only those that were actually actively running them would want to hold them. The idea was to create a “hot potato” effect where no rational person would want these factories unless they were doing a lot of output with them.
While it took several months to implement the fix, once it was in it worked perfectly by causing the speculators to abandon their stranglehold on the economy. In the meantime a handful of players who did have factories (myself included) got exceedingly rich. Thus the effect of this speculation was increased wealth stratification, reduced economic competition, increased consumer goods prices, and crazy real estate inflation.
Parallels in the “Real” Economy
When I began creating virtual economic systems and theories in 2005, I looked to the way our “real” economies were designed to see if I could find parallel systems. I wondered if excessively low property taxes would do the same thing in real life. The way this works is that if the tax or overhead on property is lower than the rate of increase of the value of that property, then this becomes an investment that generates profit. If the tax on property exceeds the value generated by appreciation, then this becomes a losing investment.
Because of this interaction, high property taxes reduce the value of property, again due to the “hot potato” effect. Low property taxes raise the value of property and trigger speculation. In a “high tax” environment, only those that really need the property will be motivated to hold it. Families would be a good example of a group that “needs” property, some place to live. In a low tax environment, speculation makes property values so high that people seeking homes have a hard time affording them.
I wanted to see how this translated to the real world so I looked around for examples. The most obvious such example was California's Proposition 13, which was passed in 1978 when I was only 12 years old. This not only lowered property taxes, but also increased property values as described above. Its effects were exactly what you would have predicted from the scenario generated in EVE Online.
There was one additional difference in the real world, however. EVE Online is not a closed system. By this I mean that when a tax or rent is paid in EVE, this does not cycle back into the economy, it just magically disappears. In the real world, when a property tax is paid it cycles back into the economy through expenditures on public infrastructure such as education and road maintenance. Thus when the property taxes were lowered the result was a widespread degradation in public infrastructure, an effect not observed in EVE.
Real Estate Bubbles are Pyramid Schemes
When you speculate on real estate, you are gambling that the value of that real estate will continue to rise, at a rate greater than the overhead on that property. This does not occur unless the number of speculators increases over time, otherwise demand would stay flat and property values would not rise. A rapid influx of new residents in California would have also increased property values by increasing demand, but the population growth during this time was relatively flat in California.
A rapid increase in the pool of speculators allows each generation of speculators to unload their investments on the next generation and to generate a profit. Like all pyramid schemes, the system is unsustainable as it would need to approach infinity to continue. The faster the pyramid grows, the greater the profits for the early entrants, and the greater the losses for the last generation of participants (before the crash).
This pattern of real estate speculation in California is a basic part of life there. When a new “bubble” (this is what we like to call the pyramid in California) is forming you get a pattern like this: http://firsttuesdayjournal.com/the-rises-and-declines-of-real-estate-licensees/
Note the huge rise in real estate agents as the bubble heats up and approaches detonation. But this bubble was different. In 2006 I noted the proliferation of the Adjustable Rate Mortgage (ARM). Its use was increasing at a rate that was positively non-linear. The ARM is designed to let new players enter the pyramid that normally would not have the means to do so. This allows the pyramid to go on longer than it normally would, increasing the profits of early entrants. It also ensures that the last generation will be historically large.
Not only was the last generation of this pyramid unprecedented in size, but also in quality. These participants had little or no assets to give up when they got left holding overvalued property at the time the bubble burst. This means that the banks, who were seeking to profit off of the use of ARM's to foreclose on valuable California real estate, ended up with a massive amount of real estate that was not as valuable as they had hoped. It was “under water”. This further drove down property values, creating a negative feedback loop.
The result, which I predicted in 2006 in a conversation (and bet) with a friend who was a retired but powerful financial expert, was a system collapse that threatened to force our banking system to fail. This forces the government to step in to shore up the collapse. What is happening here is that the banks, the instigators of the ARM, did not realize that if the pyramid got too large they would end up being the last generation of the pyramid. Because the government feared what would happen if the banks collapsed, the government stepped in and volunteered to be the last generation of the pyramid.
You might find it interesting to note that I won that bet in 2008 by mutual agreement, and my friend fronted me the money I needed to return to school to study “real” economics. Now I consult to three international gaming companies with net revenues in excess of $1B each, as an applied virtual economist. Thank you CCP and EVE Online for teaching me so much.
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In the real world many of our economic systems are archaic, and changes are made incrementally in order to prevent disruption. Equality has never been the objective. Nonetheless, there are inefficiencies associated with unequal distribution of resources, and these inefficiencies magnify as the resources become ever more poorly distributed. I believe a big part of the purpose of economics is moving resources in a timely fashion to where they are needed to optimize production and wealth creation.
In the real world, if a member of the economy sees a better economy elsewhere, they will likewise seek to travel there. We have numerous systems in place (immigration, customs, etc.) to prevent this fluidity, even if it would lead to greater efficiency and productivity. There are two reasons we spend so much of our wealth on trying to reduce our efficiency.
The first is that while all workers as a whole would benefit by being able to move where the jobs are, those who already have jobs might fear greater competition. This is isolationism, and while it is understandable, it is inefficient. It also ultimately leads to unemployment as high labor costs force companies to move to locations with more attractive labor costs. Companies would rather move the people than the factory, but if they are not permitted to do this, they will move the factory.
The second reason is that in economies that tax labor, the movement and behavior of labor needs to be regulated. Failure to do so might mean that public goods and services will go underfunded and over used. If you were to instead tax land, which tends to be incapable of immigration, then all of these problems and inefficiencies disappear. If a lot of people want to live in one place, land values go up, rents go up, taxes go up, and all services are fully funded.
The primary objective in making any real world change in an economy is to minimize disruption. The secondary objective should be to increase efficiency. Thus incremental changes in the direction of improved efficiency are ideal. Taking no action in a competitive environment, or worse still taking action that reduces efficiency (as the original article describes), increases the risk of an uncontrolled disruption.
I also find it kind of awesome that you've used a game simulation to hilight the land tax theory, much like "The LandLord's Game" did 100 years ago. (That board game is known to us today as the commercialized rip-off "Monopoly")
When the uneducated hear "let's lower taxes", this of course sounds very attractive to them. In a world with no public goods and services you don't need taxes. This is anarchy. I don't think these people realize they are anarchists. I'm not here to tell them anarchy is good or bad, but they should understand what they are voting for.
I haven't visited in quite a while but, in theory someone could test and collect data on complex economic theories in Second Life. However, this would require a substantial real world financial investment and would become the equivalent of a full time job. Because you would need to own and manage several large, high traffic sims in order to gain the ability to collect data, manipulate prices, rules, regulations, etc...
But it did get me thinking how a classic resource-gathering RPG would work if the money spent by the player didn't disappear.
I guess there would be massive inflation, and the system would break down, as generally the player is the only one in the game that is designed to make money.
I would be keen to try some of these games that you have worked on with differing economic models (or even ordinary ones for comparison).
In response to Michael, you would expect non-renewable resources to expire in all scenarios I could model, but renewable resources would not. This leads to some sort of stability that looks very different than our current society. The real problem is that if you allow warfare in the simulation (which I am) then those that try to conserve get wiped out by those that try to consume. So we would have to remove the threat of warfare first to achieve the sort of equilibrium you would envision.
We hear about gamification being used to educate people but simulations of virtual _______ (such as economies) I think is, as you've shown, where the real power of using interactive simulations lies to help people to understand the fundamentals of complex real life systems such as economies and examine them in a way that takes advantage of the strengths of computing. In other words, gamification usually tries to make learning fun, but is not otherwise using the strengths of computing to create controlled simulations and experiments.
You mentioned how getting private companies to open up their virtual economies for research as being something hard to do. Even if it was opened up, there would likely still be restricted access. I wonder if universities are developing virtual economies for undergraduate educational as well as post grad research tools.
Weather prediction used to be the stuff of comedy because it was notoriously inaccurate. Weather forecasts were wrong more than right. Once we learned to model the weather, our weather predictions became fairly solid. Now it seems to be economists that are wrong more than they are right. If they could similarly learn to model economies and run simulations, I think the field (and our species) would enter a Golden Age.
So you used insider information to position yourself in an underdeveloped and undervalued segment of the market... then you lobbied the lawmakers to change an existing law in a way which allowed you to exploit your position and become exceedingly rich in the process. Sounds exactly like real life economics and politics to me lol! Just incase it's not clear, I'm only joking. This is actually a fascinating topic and article!
But if I can ask... what is your opinion of the economic system in World of Warcraft? After six months of nearly non-stop play and reading about the different methods players use to game (or poison) the auction system, I've decided WoW's economic system could be used as a model to prove why "the American Dream" is only a pretense. I'd love to hear your opinion, if you have one.
After I told CCP how to fix their factory problem, it was something like 4 months before they actually implemented it. I wasn't advantaged by knowing how they would fix the problem some day, I just kept making due with the broken economy that was in place at that time. I actually quit EVE about the time the fix went in so that I could test....
World of Warcraft. In my opinion one of the primary reasons WoW was so successful was that it launched with a weak economy. This was a lot better than NO economy, which was what the competition (except EVE) had. But it was ravaged horribly by gold farmers, what I would later (in 2011) describe as RMT3 activity. Watching this grotesque abuse of WoW, with Blizzard apparently helpless to stop it, was what caused me to start researching passive RMT defenses in 2005. I studied the WoW economy, and the activities of IGE and their ilk intensively through 2005 and used the information I gathered in building up to my 2009 "Sustainable Virtual Economies and Business Models" tome. Dr. Mike Zyda, the founder of the USC Gamepipe lab, introduced me to Blizzard's senior recruiter in late 2009 so I could discuss presenting my findings to them. The recruiter said "I have no idea what you are talking about" and that was as far as it ever went. I have not played WoW recently so I would be unqualified to discuss their economy now, as it has hopefully evolved somewhat.
Although your solution quite obviously worked, might I suggest a slightly different mechanism? The usual service that speculators provide to a market is liquidity. That is, when someone who was actively using the property wants to sell it, he will more easily be able to find a buyer who, in turn, will be better at finding a buyer that the original seller (because he specializes in doing so). However, in the situation you described in EVE, it appears that the speculators were actually accomplishing the opposite and actively decreasing the liquidity of the market. To that end, they effectively acted more like stock manipulators than speculators. The solution (increase the cost of holding) thus made the act of manipulation unprofitable and ended the practice. A way to verify or debunk this could be to monitor the churn of factories and determine if there are any people who tend to hold properties for short periods of time (thus avoiding the tax), but do so rather often (thus "making it up on volume").
I just want to say that I am not here to solve the world's problems. I am just suggesting a way by which we can come up with and test, in a relatively safe manner, future solutions to the world's problems. Ideally this would be a multidisciplinary collaborative process.
When you create a closed virtual economy (my ultimate goal), then all sorts of complexities that are difficult to predict can be observed with real people making decisions. I believe the results would teach us a lot. Currently all virtual economies are open systems. Given how countries such as the USA "print" money, it might even be argued that real world economies are open. Further, since all modern economic models seem to assume that environmental inputs are infinite and can be borrowed from forever without repayment or interest, again "real" economists act as if they are in an open system. This creates complexities in real economies that I believe are not yet understood by contemporary economists.
I believe there is one virtual economy that is actually closed under the slightly looser definition of closed you gave here ( that is, where money can be created or destroyed, but generally isn't through is normal use). It is a free to pay title called Wakfu. If I remember correctly, money is created in game from mined resources by players directly. I also think it was two different classes that mined the resources and minted coins. I remember thinking it was a pretty novel solution to inflation in an MMO ( having just left FF11 at the time) as when inflation was high, the relative value of minting coins would go down and fewer coins would get into the game. However, if the game experienced deflation ( for instance, by more players joining the game or an in game event that encourages people to stock up on coins), the value of coins would go up and encourage more players to make coins.
I suppose one such complexity in a virtual economy that was actually closed, including resources, is that the only utility of currency would be to transport value cheaply (it is much easier to transport and measure a paper dollar than a dollar's worth of gold). You might run into a similar problem with the factories here if non-currency goods are too easy to transport. Otherwise, people might start trading in some other item with an in game utility (such as a common crafting material or ammo for a weapon) instead of the designated currency, effectively replacing it leaving the only people using the currency to be speculators.
Reading this has got me interested in the subject. I hope you reach your goal and are able to create a closed virtual economy one day. It'll be interesting to see the issues (and solutions) that arise.
There are valid comparisons between the two, but I, too, have become sensitive to seeing economics compared to natural science because the person doing the comparing usually like to imply that the rules of the game of economics evolved naturally and should not be questioned as what bias they introduce into the system. I'm not saying that you're implying it, just that the comparison has been used often as very effective propaganda.
Obviously there are also laws passed that open up new exploits (presumably intentionally), such as the aforementioned Prop 13. Here again I assume that these work as intended, even if that intent is hidden while it is being promoted. I even see clever beta testers in the games I study suggest changes to game mechanics that open up new exploits that they intend to use for their own purposes once the game goes retail. Sometimes developers fall for such ploys, even against my advice.
This happened with Flying Labs' Pirates of the Burning Sea (2008) when they changed some key rules against my advice. A week or so later I was able to generate 14 times the combined wealth of the entire server (5000+ players playing for over a month) in just one hour. In my case I contacted them after that first hour and asked them if they wanted me to stop. They said "yes please" and I did. I probably could have used RMT to make a quick $30,000 but by that time in my career I had a reputation to protect. If this had been Wall Street and I had found a similar "Holy Grail" exploit, I could have added several zeros to the end of that number.
I would briefly note that you're already politicizing your work. It's hard to read a statement like "When the uneducated hear 'let's lower taxes,' this of course sounds very attractive to them" as anything but an attack (and an unfair one at that) on anyone who doesn't share your belief system. It's not brutal as such things go, but I mention it since you say you'd prefer to avoid overt politicization of your article and I take you at your word.
That said, I've tried to keep the following comments objective -- I'm also not interested in arguing politics; I see this discussion as being mostly about ideas concerning property ownership rules and how those ideas might play out in virtual worlds, especially massively multiplayer game worlds.
1. Factories are not real estate. Your EVE example talked about factories, but your later comments shifted to talking about real estate. A producing investment has a different kind of value than an appreciating investment, though. People spend money to obtain those different forms of property for different reasons, which affects some of the economic principles that apply and their effects on an economy. So I'm not convinced that applying conclusions related to one applies well to the other, in the real world or a game world. It might -- I'm saying that I'd like to hear about evidence if that's the case.
2. Rent is not a tax. Rent goes to a (usually private) owner, who will often reinvest that money, either through spending or savings, enabling additional economic activity. Taxes go to a government that -- when it's functioning correctly -- spends the money only on legally required/approved activities of proven social benefit... but governments don't always do that. They can and do spend less efficiently than private owners who can't create fiat money or coerce prices by armed force. Marketplace-oriented rules give different results (both good and bad) than results dictated by a command economy, and I believe both perspectives need to be considered when thinking about economic rule-setting in a game with a ruler (the devs) and free people (the players).
3. Property taxes are not the only kind of tax. National, state/province, county, and municipal taxes of many kinds all affect the economic behavior of private actors. The effect of raising property taxes may be obvious in a highly constrained environment (and thus one whose results are less applicable to the real world). But it's less certain where a complex mix of rules allows complex responses to changing stimuli. For example, did your Prop 13 analysis consider the effects of other state and federal tax rates in California at the time? What about property ownership activity levels and usage patterns in other states with different property tax rates? Wouldn't it be interesting to allow multiple different location-based property tax rates in a gameworld to avoid confirmation bias?
4. This analysis doesn't seem to consider any likely consequences besides the one presumably positive effect of forcing the owners of productive property to use that property by artificially pricing most potential owners out of the market. In the real world, changes in economic policy have multiple consequences -- usually a mix of desirable and undesirable effects -- as those affected change their behaviors in response to the altered economic environment. A trustable analysis would give fair consideration to all the most likely effects of sharply increasing some economic taking, not just one effect considered positive.
5. Raising the cost of property certainly must restrict the ownership of property to the few who can already afford it, and exclude the majority of the public (in real life or a game). What consideration have you given to this exclusionary consequence of making property taxes very high?
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In general, an economic analysis that assumes tax-taking governments (made of people with power) are compassionate and wise actors while private investors are only [edit: I should have said "frequently" or "primarily" here, not "only," as you did mention families] opportunistic "speculators" is not one that I would trust to inform the making of public policy. Certainly not in the real world, and it probably wouldn't be much fun as a game, either.
All this said, as I mentioned I strongly support the idea of using virtual worlds to test economic theories. In particular, for at least ten years now I've seen people suggest making MMOs with closed economies. That pesky "games need to be fun" requirement means that open faucet/drain systems almost always win over closed implementations of someone's pet economic theories. But even though I've come to think that trying to build a game with a closed economy is chasing a will-o-the-wisp, I admit to a sneaking admiration when someone tries it. I genuinely hope your effort sees wide usage, and I hope you'll share your results here.
Given the ease with which such things are politicized, though, I would gently suggest that teams of economists -- who are included specifically because they have different perspectives on how people act economically and on the proper means and ends of public policy -- would be more likely to find widely-applicable results than one person who begins with a particular belief system.
If you can get multiple economists to agree on a theory of economic behavior, then you'll have accomplished something of real utility. ;)
As for your other comments:
1. For the purposes of EVE Online, Factories were real estate. They do produce, but if there is an increase in demand for them, they appreciate just as land would if there was increased demand for it (especially in an environment with increasing population). There is no rule that land will appreciate in value, though obviously in a world that has gone from 1.25B to 7B population in 100 years, we generally make this assumption.
2. In a virtual environment where there is an open economy and no public goods or services, rent and taxes are indistinguishable. In a closed environment the only difference is whether the beneficiary is a public or private entity, which is unlikely to affect the payer or their behavior. It does affect what is done with those funds afterwards.
3. I see no point in entering this argument. Clearly if I wanted this article to be more rigorous it would have been 100+ pages and then very few people would have read it. Likewise, the whole point of using virtual environments instead of the "real" world is that any argument about economic effects can always be countered by the argument that you cannot isolate an effect to one stimulus alone. This is not true in a virtual environment where you can control for this.
4. I believe I did this. I did not mention that the speculators lost their real world income because they no longer could sell factories at $300 each. I think such conclusions are fairly obvious. I also pointed out that competition was increased and prices were lowered. I'm sorry if I was not able to find any negative effects of the correction to report. If you can think of some that would be great.
5. Raising the TAX on property actually LOWERS the cost of of property, making it MORE accessible. Perhaps you might want to read that section again.
While resisting the urge to respond to your other appeals, I will remind you that I have posted here in these comments that I think the future of this technology lies in collaborative work by individuals of multiple disciplines.
Also, in what I perceived as an attempt to be objective, some of your arguments have seemed to have boiled down to: "What you are saying may or may not be true depending on the circumstances". Which is true, but it's also true for effectively every statement.
I do wholeheartedly agree with your suggestion that economists with different perspectives would be more likely to find applicable results.
[EDIT: This was originally posted before Ramin's post above this one. Because it had to be approved first - I'm a first time poster - this obviously isn't the case anymore]
you stated:
"Because of this interaction, high property taxes reduce the value of property, again due to the “hot potato” effect. Low property taxes raise the value of property and trigger speculation"
in the real world this simply isnt true. Property taxes are BASED on the current market price of the house. If the property tax is low its because the market price for the house is low. Property tax is a reflection of property value.
Property tax is based on land value + structural value (livable square feet, neighborhood, and other variables within the house itself). So in reality if the house goes up in value, so does its property taxes.. Housing speculation went and still goes across all price spectrums. Free and easy money was to blame. The housing market collapsed because at upon the slowdown there was too many people with too many expensive houses with no real way to afford them. The classic asset bubble.
I think what Ramin is talking about changing is the *rate* of taxation on property.
I'd also like to better understand how he thinks that affects the "value" of property, though.
Its why if you ever want to appeal your property taxes, the first thing you do is find comparable houses in your neighborhood, if you are paying more than joe down the street who basically has the same house as you, yo'll probably win your appeal and your taxes will go down to be comparable with Joe.
here is the problem I see Ramin is using Prop 13 as a point of comparison, Prop 13 is the most absurd property taxation system in the country. It's a completely unfair system that no other state in the US would dare emulate.
Prop 13- The proposition decreased property taxes by assessing property values at their 1975 value and restricted annual increases of assessed value of real property to an inflation factor, not to exceed 2% per year. It also prohibited reassessment of a new base year value except for (a) change in ownership or (b) completion of new construction
therefore in CA two identical houses in the same neighborhood could have one family paying 1000 dollars a year in property tax and the other paying 10,000. Its insane, and it not what occurs in any other part of the country.
It sounds very similar to the 2% cap on property tax increases that Governor Christie helped pass for New Jersey. With home values coming out of a 9 year low we're essentially all being taxed (or could appeal to be taxed) at 2003 home values.
The constructive criticism I would give is that yes you can increase fluidity (as Kenneth mentioned) by increasing upkeep costs. However this also increases corruption and cheating. I'd venture to say that this is for two reasons 1) the stakes are so high and 2) because the upkeep has become a factor of greed and not of need.
I could go into even more detail, but hopefully you guys get it from reading this.
For the average homeowner after a reval your taxes remain the same, even if your ratio went from 60% to 100%
Chris,unless your house lost value and for some reason all the houses around you didnt. You have nothing to appeal.
Property taxes are among the most misunderstood areas of taxation in this country.
Its why a 3 bedroom 2 bath even if highly taxed nice neighborhood is more desirable for buyers than a 3 bedroom 2 bath in a low taxed slum. Same exact house but price and demand can and does vary incredible do to the municipality. so in reality you cant simply say "high property taxes reduces the property value. After all, at the end game of all house speculation must be a long term homeowner.
Also speculators never bought and held on purpose, therefore property tax meant little to them with regards to your YOY price/taxation ratio differential, speculation was to flip as quickly as possible. Buy using a liar loan, paint and do some easy fixes, sell it for a higher price then you bought, all while trying to pay as few mortgage payment a possible.
Again, I find this a very interesting article, thank you for sharing it, always an interesting conversation. If you wish to link to me feel free. I dont use LInked in much, but Im under Todd Weidner, I'll be the Todd with the patent in this field of property taxation.
One interesting variable that is coming into play, if your still into all this analysis that is really going to effect home rices, sales, flipping etc is home/hurricane/flood insurance. NJ shore house prices are likely to fall and demand may weaken in the near future when flood insurance doubles, triples, and more. Gulf coast has and is seeing it with Hurricane insurance,and unlike property taxes, insurance really is more like a money sink, this may be a better variable to mess with.
anyway, thanks again for the conversation.
Of course again we are stretching the conversation past what has (up to now) been simulated in virtual space, and I agree that insurance might be a bit closer to the EVE Online economy since that tax goes into private hands with no desire or obligation to put that money back into the communities they extracted it from.
I would add that there are a number of "normal" people that speculate on property every time they buy a house to live in. These people are not looking to "flip" their house right away, but they are gambling that the equity in their investment will rise and pay for itself, vs. the cost of renting. I use a very broad definition of the term "Speculator".
correct, but it is one of the very large weighted variables that allows it to be desirable. Just because people have been conned into thinking they can have a free lunch doesnt change reality. Nice towns cost money to upkeep but you never do see mass exodus from them, even at high tax rates, people just like to moan and groan. Only people who leave nice towns due to taxes usually are old people, living on fixed income who no longer care all that much about school systems etc. I see this firsthand in NJ, which has by far the highest property taxes in the country. But Im getting off on a tangent again :P
Lets also remember this whole house as an investment first and foremost is still a new phenomenon, for most of our history and I think we are moving back to this, a house if first and foremost a home to raise your family or to live in and become part of the community. The bubble changed that for a decade, but the bubble is gone and I dont forsee it coming back. If you buy a house thinking its some great investment, that bubble has burst :)
Might take some time for this younger generation to get that.
We have to remember nationwide property taxes are still low, 1200 bucks on average. So they do not move much YOY. (FYI-Fees are the new game they play now, its not a tax its a new fee. )
"To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes"
When banks/business becomes "to big to fail" and "to big to prosecute" because they will cause damage to the economy, It is the role of government to step in to protect the public interest. It's a shame that we had laws in place to prevent this and remove them from the books rather than enforcing them. We were all told that government was the problem...
Do you have anything to share about inflation and virtual economies? I'd be interested in hearing about any studies done and the creative ways game developers (who care) have tried to deal with it.
In virtual economies, usually ALL elements in the economy are expanding rapidly due to a lack of dynamic sinks. Thus ALL items in a weak (most of them) virtual economy will lose equity over time. If you are seeing inflation at all in the classic sense it is almost always due to the effects of RMT3 (gold farming) activity as these agents can move currency much more easily than other goods. Thus they tend to farm specifically for virtual currency, flooding the economy with that faster than any other good.
In my experience supplies of virtual consumable resources are usually limited by time:
- only a limited number of people can harvest a resource at a time
- items have a fixed or bounded drop rate
- objects have fixed or bounded respawn timers
Conversely, the money supply is not under the same constraints. This setup allows for money to be earned much faster than it can be spent. When this happens I presume that players with the highest earning potential can [and do] disrupt the economy by creating spikes in demand that can't be satisfied by the player base.
An example I could give would be max level players who buy consumables from an auction house. Very little of what they want or need (rare drops/titles/achievements) can be quantified by the in-game currency that they have so much of, especially time. So when they do spend money they usually purchase almost exclusively on convenience, with little to no regard for the monetary cost(similar to letting the seller keep the change on a $4 purchase because you don't have anything smaller than a $5 bill [or any bill higher than 5]). Sellers adjust to this 'new' demand by increasing the supply, but the fixed ranges for harvesting/manfucaturing perpetuates the inflated prices. The higher competition between sellers actually results in higher costs instead of lower costs since they have no way to increase the supply past the ceiling.
That's my take anyway.
The other obvious thing that will expand the coin supply and lead to inflation is if players can quickly run out of things to buy. This is an issue of insufficient content, or poorly balanced content.
I'm going to hold off on defining what makes an economy "weak" here. Once I post the review I did of the Guild Wars 2 economy you will see some of the qualitative and quantitative methods I use to determine the strength of a virtual economy.
Though I doubt you'll publish anything in the near future again. At least now I know why EVE economy is working so well.
If you feel strongly about this you might want to talk to Reynir Hardarson or Chris Reid. I parted ways with EVE after the Miner 2 situation, despite making a lot of real money playing the game, because I had another game to F&F test at the time. Something called World of Warcraft.
I wanted to link to a brief of George's "Land Cycle" argument (http://www.henrygeorge.org/bust.htm) as well as a more research melding of the Georgist land cycle with the Austrian business cycle by economist Fred Foldvary (http://www.foldvary.net/works/geoaus.html).
In an environment with high wealth stratification, most of the wealth fails to circulate. This has the effect of contracting the economy and thus over time leads to perpetual recession. This is, of course, the state we have now achieved in the USA. Only massive currency inputs by the Fed give the illusion of growth. During WW2 and the decade following, the opposite trend was in play, and we are still living off of the (decaying) infrastructure that was built for us during that period.
Note that this was not a period of socialism or communism in the USA. It was a period of *cooperation*.