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Edward Castronova's Guide To Synthetic Economies

Perhaps synthetic worlds have begun to offer a new mythology.

As the MMO grey market profits pass into the billions and the populations of the games themselves now exceed several small nations, the question of whether or not we should take synthetic worlds seriously has ceased to be relevant. More important questions about how these places work, what kinds of culture arise there, and what they imply for the future are all being explored. One of the most important books on the topic of synthetic world economies is Edward Castronova's Synthetic Worlds. Based principally on his experiences with Everquest, the book outlines the basic set up that a synthetic world needs to induce trade and create an artificial economy.

The thing that you’ve got to grasp about a synthetic economy is that the money in the game “is just a convenience for recording choices and their effects. The economy is the choices, not the money by which I register choices and their effects” (174). So saying something like, "one gold piece equals 100 silver pieces and that’s the economic system" is missing the point. The economy is instead grounded on a series of structured institutions like market-making, monetary policy, transportation, and banking to just name a few. To have an economy, the game must have trade. To facilitate trade, you need specialization. One person can get resource X but not Y, another person is in the opposite position. To make sure that these two folks get to talking, you make sure that the design imposes a lot of needs on the player. These needs must be resolvable by consumables more than durables. A consumable would be a good that is used up after one use like a health potion. A durable is something like armor that you can use repeatedly but degrades over time. Any MMO should avoid permables or items that never degrade because there’s not much point in them existing. You always want people to need something to keep the economy going. (184) Eventually once a large enough group of people all think the same things are valuable, then they become valuable. There doesn’t have to be anything more to it. Money is valuable because we think it is, not because it does anything by itself. (102)

Driving the consumption of these resources is the method by which people evaluate them. Castronova refers to this as the diamond versus water paradox. Why are diamonds expensive if they don’t do anything except look shiny, but water, which we need to live, is instead cheap? “Diamonds are expensive because it takes quite a lot of time to get them discovered, mined, cut, and set. . . . Water is cheap because it doesn’t take very many person-hours to provide an amount that satisfies the needs of a typical household.” (46) The point is that costs and benefits of goods are always expressed in terms of time. The cost is the amount of timethat it takes to get something and the benefit need only be the item facilitating something that you want to do. Time is the resource of an MMO.

Leveling up systems are just a way to invest time into the game’s goods because they “turn the synthetic world into a place where value can be assigned to anything, and behavior directed accordingly” (111). Your avatar is gaining capital as you level it up and dump time into it while your goods accrue value from the time that you spend getting them. Compensation in a synthetic world can be broken downs as “Total Compensation = Wage + Fun”. While economics doesn’t really have a way to incorporate fun into a quantifiable value, you can see this equation extend into both real world and virtual professions. The more fun the job, the less you get paid. The more you get paid, the less fun the actual work is. Castronova uses the example of a college professor as someone who has a relatively easy job and thus does not get paid as much as a CEO under intense daily pressure. In MMOs, being the Paladin or Tank is a relatively fun job while being the Healer is fairly dull and means taking a lot of orders. The value of the two classes is reflected by their demand. If you roll a Healer in an MMO, you won’t have trouble finding people who will work with you (154).

To get a better grip on what drives people to participate in synthetic worlds, Castronova solicited responses to a voluntary survey along with conducting impromptu interviews throughout his play sessions. He generally found that “[m]ost people wish they could spend more time there, and a smaller but still significant number devotes all thought to the world” (59). He argues that the population of MMOs (based on 2005 growth rates) should hit 40 million by 2020 and almost 100 million by 2030 (67). He says that “[s]ynthetic worlds, being much like our world in their essence, will grow in popularity if they seem to be better places to spend time.” (71)

Understanding the appeal of a synthetic world has a lot to do with understanding the shortcomings of reality in Western Civilization. He writes, “From the perspective of play theory, the treadmill of income acquisition in ordinary life does not provide a good game; there are not enough moments of success, and new rewards appear only infrequently and for too few people. As a result, very many of us come to feel like we are getting nowhere at all” (76). In this sense an MMO is remarkably apt at making you feel important. Every game automatically has a lower-class: the AI. They are always inferior to any player, always praising the player as a hero, and always treating them as unique. They provide a sense of well being at its most base level. (120) Rewards are frequent in these games and there is always a new goal on the horizon to be accomplished. There is always something worth doing. Castronova later concludes, “When we say that 'modern life is dull,' we mean that almost everybody who lives in this place finds that nothing matters and there is nothing to do. Boring. When we say 'synthetic worlds create meaning,' we mean that almost everybody who goes there will get the feeling of being a little bit of a hero after all. So: Perhaps synthetic worlds have begun to offer a new mythology” (276).

At the time of the book’s writing the average MMO was broken up into shards of 2000 to 4000 players. A game has to broadcast thousands of updates per second, and even today there are limits to how big a game’s population can be. Shards fix this problem by just creating multiple versions of the same world. Revenue models vary for these games and vary depending on their age because generally speaking an MMO is a localized monopoly. All the resources that you accumulate in a synthetic world do not transfer over. In other words, you cannot leave with your goods (139). As a consequence, MMOs are inherently prone to inflation and overflow.

This process of degradation is called MUDflation, and it’s basically when a game has a flooded market of skilled players. The weak players can only get access to mediocre gear that isn’t worth anything while the strong ones are all sitting on mountains of cash because they’ve been in the system so long. They never leave because why would someone want to go back to being a loser in a different virtual world? The value of rare items skyrockets way past what they should be because the people who want them or can use them are all very rich. Everyone else is cut off. The situation ends up being a variation of Richard Bartle’s concept of a multiplayer game becoming unbalanced because there are only hyper-skilled players engaged with it. ("Hearts, Clubs, Diamonds, Spades: Players Who Suit MUDs", Richard A. Bartle: Entry Point, 8 August 1995). The issue for Castronova is that in a degraded MUD there is nowhere for a beginner to go. (197)

Fixing this problem is not simple. Synthetic worlds “provide an amenity whose value first rises with the number of users and then falls as the worlds become congested . . . [which is] really an economic phenomenon that happens when there is a good that many people can access but where each person’s access degrades the quality of goods for others” (138). Any attempt to tax and regulate an MMO is going to break the freedom and fantasy elements that the game offers. The escape is believing that you can go to this synthetic world and become someone successful and important. Taxes, revenue sinks, or allowing players to buy goods with alternative currencies breaks that element down because then only the previously rich can get an advantage. Even though keeping the rags to riches fantasy intact means that the entire system busts over time, an MMO is still first and foremost selling that fantasy. Castronova writes, “If synthetic worlds become commercialized completely, the golden goose will be dead. For as entertaining as Wal-Mart Online may become, it will never have the drawing power of the world of my dreams” (169).

The last chapters of the book are Castronova’s various predictions for the industry, which five years later prove to be hit and miss. Castronova is dead on when assessing the profit potential for MMOs, which is to say they are highly unpredictable. Most MMOs have a very steep learning curve that will simply take time to become culturally inherent. Initial experiences in this medium are not like those that people had with radio or television because those things are all conceptually very simple. You just turn them on and watch. MMOs are going to face a long boom and bust cycle of innovation because making a game that thousands of people like to play with one another is easier said than done. Development will be erratic and marked by long downturns followed by random design revolutions. He goes off a bit on a lot of concepts like "Toxic Immersion" and how much governments should intrude on synthetic worlds, but it’s difficult to take these sections seriously in the current legal limbo that MMOs exist in. Between the ugly history of EULAs that forfeit all player rights and that most developers gladly hand over player information to the authorities without even a subpoena, I'm going to guess that a player engaging in dangerous subversive conduct will probably have a short career. (L.B. Jeffries, "Privacy Rights in MMORPG’s", Banana Pepper Martinis, 23 April 2009) To be fair, I’m an opinionated little shit when it comes to people discussing video game laws so take my criticisms how you like.

At the start of the book, Castronova tells a story about when he first started studying Everquest’s economy and how every academic journal that he contacted refused to publish the paper. Frustrated, he posted it on the internet. It was an overnight sensation. He comments, “No one had to be persuaded that synthetic worlds were important, they made the case themselves” (22).

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