"Die Spieler machen das Spiel."
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I can be contacted as hobold at this domain name.
#32. Advanced: On the Design of (virtual) Money,
I have started and scrapped a few lists of mechanics that a designer could
employ to create and tune a currency. But eventually I realized that these are
irrelevant details. The inherent feedback loop will self stabilize
anything that is remotely reasonable. And design decisions such as having a few
different currencies in the game for a few different kinds of wares are really
independent of the inner workings of money.
The one truly important insight with respect to designing money is this: When you design a currency, you really design a society. This can be seen more clearly with the help of four extreme examples, where the feedback loop has been stretched beyond breaking.
1. Too much money for too few wares
When there are too few wares for the market, then a potential buyer cannot reliably obtain those wares, despite having enough money for the nominal price. The lack of transactions will cause prices to be very volatile (due to lack of communication). This in turn creates incentive for potential sellers to cling to their goods, hoping for better prices later. Thus the scarcity of wares and instability of pricing tend to mutually magnify each other.
2. Too little money for too many wares
When there are enough wares, but there is not enough money in circulation, then sales cannot reliably be made because the potential buyers don't have enough money. This means that the producers/sellers of wares cannot rely on a money income. This, in turn, means that people will tend to cling to their money, further reducing the amount that is in actual circulation. Despite the society being in fact rich, prices will become unstable like in case 1 above.
In both of the cases described so far, money and wares are not freely convertible. This strictly limits the degree to which individual members of the society can specialize their expertise. There is a strong incentive to be a self sustaining generalist: the only things you can reliably obtain are those that you can make yourself. Consequently, both resulting societies will have trouble organizing themselves for large scale cooperation.
3. Too much money for too few people
When there is more money in circulation than what people can usefully spend, then money is no longer valuable as a reward. Players will tend to obtain money purely on demand whenever they have to make a specific purchase from an NPC. Players might not even use that specific currency for trading wares among each other (that depends on exactly how much hassle it is to produce money from game content).
4. Too little money for too many people
When there is too little money in circulation to sustain everybody's daily consumption of wares, then "rich" players (i.e. those who have enough money) will tend to trade only with other rich players. That's because any rich player who were to pay fair prices to a poor player would still have something of value, but might never get that money back. Eventually that rich player would be out of money, and without a reliable chance to get a fair deal himself. Consequently, the poor players face a steep barrier of entry into the money market, and will have to fall back to a barter economy.
In case 3, money fails to function as a tool for large scale organization of society, because each individual is largely independent of their fellow citizens. The individual freedoms are reaching so far that people don't necessarily have to care for each other, and might not develop a feeling of responsibility for society as a whole. In stark contrast to that is case 4, where freedom is very limited. The poor must accept whatever artificially low prices they can get for the resources they are producing. And the rich cannot individually decide to pay fair prices to the poor (more complicated business models are required to share the wealth in a sustainable manner).
A lot more could be said to case 4, but rather than going into real world politics, let me sum up what I learned from those 4 extreme examples. In order for society to work on all levels, i.e. to both provide adequately for the needs of all its individuals, as well as to organize very large scale cooperation for society wide achievements, the amount of money in circulation must be proportional to the amount of wares, and it must be proportional to the number of people. Those two requirements together imply that a society can only be maximally successful (in terms of doing grand deeds with the abilities of its people) when it can provide an amount of wares that is proportional to the population count.
This final requirement can be very hard to meet in the real world. But in a virtual world it is quite possible.
#31. Basics: On the Nature of (virtual) Money,
Thinking more about the example of a failed currency, I realized that I have
been jumping to conclusions. The explanations behind those jumps are
interesting, because they can be derived directly from the abstract functionalities of money, without
resorting to specific examples (or some other form of empiricism).
Between the four functionalities of money are causal relationships, i.e. each functionality has direct consequences on another functionality.
1. Payment implies Communication
The buyer communicates to the seller that there is actual demand for the wares, and that the perceived value is at least as high as the price asked by the seller. (In contrast, if no purchase takes place, it is not clear if there is a fundamental lack of demand, or if the asked price is way out of line. That information is simply not communicated to the prospective seller.)
2. Communication effects Standard prices
Once there is a vivid market, i.e. enough buying and selling is going on according to point 1, then the forces of supply and demand can work to stabilize prices. (Too high prices are an incentive for more sellers to enter the market and undercut each other. Too low prices will cause some sellers to go bankrupt and then the lack of competition will cause prices to rise again.)
3. Standard prices enable Storage of value
When money reliably represents a predictable value, as per point 2 above, then it can meaningfully be stored. (If the value of money fluctuated widely, or was unknown until an actual purchase took place, then you could speculate or gamble with money, but not really store value.)
4. Storage of money causes lack of Communication
However, when money is being piled up, it can no longer flow and transport information. This is the point where the feedback loop is broken. (This is the reason why money does not work all by itself automatically, but requires some careful design, or even active intervention from time to time.)
These are only the most fundamental mechanisms which result from the four basic functionalities. I don't think I understand all the subtler points, but I am quite sure of this main feedback loop and its gap.
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I can be contacted as hobold at this domain name.