
A Virtual Weimar: Hyperinflation in a Video Game World - abtinf
http://mises.org/daily/6435/A-Virtual-Weimar-Hyperinflation-in-a-Video-Game-World
======
sharpneli
"Furthermore, inflation is not simply an increase in the supply of money
within an economy; it is the increase in that portion (if any) not backed by a
commensurate increase in specie: most common in history, market commodities
like gold or silver. "

Either the author of that article is misenterpreting, I am misinterpreting or
Austrian school of Economics is tad stupid. I'm hoping that the one at fault
here is me.

Basically even with increase of the amount of gold or silver you'd still get
inflation, check what happened with Spain at 1500 or so when they got a huge
influx of gold from the new world.

You can also imagine what would happen if suddenly we'd get huge influx of new
gold. As the amount of stuff in the world does not increase the amount you can
buy with that new gold must decrease.

~~~
gizmo
"Austrian economics is tad stupid" is the more correct choice. Austrian
economics does not correspond with reality and is rightfully marginalized and
ridiculed by the vast majority of economists.

In the 19th century we thought of inflation as the change in ratio of money to
goods. Inject more money in the economy without a commensurate increase in the
amount of goods and you get inflation. Take money out of an economy and
deflation occurs. Now we know this isn't really accurate. Inflation happens
not when there is more money in the economy but when more money is competing
for the same goods. If money just sits in a bank account (or virtual bank
account in the case of Diablo III) it doesn't really affect the economy and no
inflation occurs. There is the same economic activity but a few rows in a
database somewhere contain larger numbers.

This is also why in the real world the fed can triple the size of the money
supply without causing inflation. Of course the austrians predict, over and
over again, that runaway inflation is going to happen Any Time Now. But it
doesn't and it won't.

Of course in a completely healthy economy you _would_ expect an increase in
the money supply to lead to an increase in economic activity and inflation,
because in a healthy economy people spend and invest the money they have.

Austrian economics is about digging gold up from the ground, then smelting it
into ingots and then burying those ingots again in a vault somewhere. Only
through this mystical process can you get Real Money. Otherwise the money is
"fiat money". It's so silly.

~~~
anextio
As an engineer with no background in economics, do you have any sources that
discuss the pitfalls of Austrian economics from a layman’s perspective?

It seems nowadays that the internet is so rife with neo-Libertarians that it’s
very difficult to find content discussing Austrian economics that is not
biased towards it. I’d like to see a more balanced perspective, or at least a
rundown of reasons why Austrian economics has failed to correspond with
reality.

~~~
DArcMattr
I have a Master's in Applied Math, and a Master's in Economics (educated by
neo-Classicals).

Keep in mind the Austrians are not a monolithic movement, this article was
published on the Von Mises Institute site, which has more to do with the
Rothbardian strain of Austrians. Core to Austrian-Rothbardian theory is a
system of a priori axioms and a repulsion to mathematic formulations and
empirical validation, so the argumentation can end up being along the lines of
"because I said so!"

The objection to mathematization comes from the belief that preference
relations lead to a discontinuous utility curve, which the tools of
differential calculus cannot crack (this is wrong, as a graduate-level
mathematical analysis covering Lebesgue integration shows).

A more detailed neoclassical analysis of what's wrong with Austrian economics
is Bryan Caplan's [Why I Am Not an Austrian
Economist](<http://econfaculty.gmu.edu/bcaplan/whyaust.htm>).

------
jacques_chester
Bear in mind that inflation of the money supply is not the only possible cause
for price bubbles. I used to think so too (because hey, I used to read
mises.org religiously). But it's not, as they say, that simple.

Here's are some good pieces on bubbles generally, and how money supply by
itself can't explain real-world phenomena:

[http://skepticlawyer.com.au/2013/05/15/bubble-trouble-not-
an...](http://skepticlawyer.com.au/2013/05/15/bubble-trouble-not-an-easy-
money-problem/)

[http://skepticlawyer.com.au/2013/04/19/bubble-trouble-
about-...](http://skepticlawyer.com.au/2013/04/19/bubble-trouble-about-asset-
booms-and-busts/)

~~~
nhaehnle
Also, the focus on "the money supply" is a red herring. What matter for real
world prices is supply and demand of real world goods.

When you seriously study hyperinflationary periods, you realize that - unlike
the story of this Diablo auction house bug - it's basically never a case of
governments going crazy with printing money. There's always an underlying
cause that came _before_ the hyperinflation - usually a combination of a
collapse of production capacity (in Zimbabwe, caused by drastic and ill
thought-out economic reforms) and crushing _foreign-curency denominated_ debt.
See this paper, for example:
<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102>

It is true that excessive spending by _anyone_ can lead to inflation (not just
by government, since most money is actually "created" by private banks).
However, what Austrian-types like the Mises people blind themselves to is the
fact that the economy has two possible reactions to an increase in demand:
There can be price increases, and there can be increases in production.

To end up at their stated position, Austrians have to completely deny the
possibility of production increases. It's no wonder they got basically all of
their inflation-related predictions wrong for many years. They are
unfortunately closer to religious dogma than serious economic analysis.

~~~
chii
> the economy has two possible reactions to an increase in demand: There can
> be price increases, and there can be increases in production.

armchair economist here, but i woudl say that when the increase in money
supply outstrip the increase in production (becase there is a limit to the
rate of increase of production, but there is no real limit to the rate of
increase of printing more money - just put an extra zero at the end, you don't
even need more paper/plastic!).

~~~
nhaehnle
Absolutely. It is a matter of quantity, and it would be nice to understand how
much and how fast production can increase. But since Austrians usually
outright deny the possibility that production increases at all, the path to a
fruitful discussion is usually closed.

In practice, even the more ambitious types of policies that are debated do not
actually increase spending that much.

~~~
jacques_chester
Rothbard-school Austrians make the same error as classical Keynsians. They
freeze the structure of production, treat it as a homogenous gas, and then
modify some exogenous variable.

The Austrians modify money supply; the Keynsians modify the aggregate demand.

It's the same error of over-simplification. Economies are not smooth curves,
they are lumpy and have heterogeneous networks of heterogeneous agents.

------
n1ghtm4n
Good to see the Austrian School weirdos at the Ludwig von Mises Institute have
given up real-world economics and now just play video games. Hopefully in the
virtual world their incredible track record of dead-wrong predictions will
cause less harm.

~~~
svv
> incredible track record of dead-wrong predictions

The Austrian School economics methodology does not allow for making
predictions. See e.g. the note at the beginning of
<http://wiki.mises.org/wiki/Austrian_predictions> It provides certain tools
and models that one can use for explaining events and reasoning about policy
options. These reasoning can be used as a basis of predictions (along with the
other, non-economics-theoretic assumptions), but the predictions themselves
will fall outside of the economics science in the Austrian School sense.

Basically, if your analysis manages to reason away uncertainty of the future,
you're not following Austrian methodology. And no, the Austrian methodology
won't even let you quantify that future uncertainty in probabilistic terms:
that would only be possible if it used _causal_ explanations of human action;
instead, it relies on _teleological_ , goal-oriented explanations.

Now, questioning and disputing the value, coherence and real-world
applicability of the Austrian methodology is perfectly OK. (Personally, I find
the Austrian economists' disregard for formal notations very unfortunate, as
I've mentioned in another discussion:
<https://news.ycombinator.com/item?id=1647747>) Your comment, however, seems
to be simply misguided, based on a flawed understanding of the issue, and the
sarcastic tone is unlikely to facilitate a constructive discussion.

(Edited: spelling.)

~~~
vwfwerwetqwerqw
You probably know more about economics than me (I'm just a mathematician), so
I won't argue against you, but if I understand your two posts correctly, it
seems like what you're describing is completely useless. If a model doesn't
have predictive power then what is it good for?

I understand from your other post that the justification of Austrian
"models"/"explanations" comes from their simplicity. Which I guess is some
application of Occam's razor? But that makes no sense - the simplicity of a
model on it's own is no indication of correctness. You always need some notion
of the likelihood of the observed evidence under that given model. Otherwise,
you can just say "all people make all decisions completely randomly" and
that's the simplest model of all.

A completely non-predictive model has no real-world meaning, because it can't
be used to effect reality. I suspect that Austrian models do effectively have
some small predictive power - there is an implicit causal analysis that comes
from the small element of qualitative evaluation of uncertainty, no doubt used
instinctively by practitioners to decide whether an argument sounds plausible.

Anyway, it all sounds completely ridiculous. How is their method of choosing
explanations any better than a witchdoctor deciding that thunder is a sign of
the gods being angry?

~~~
danenania
For me, the major idea that the Austrians bring to the table is that the study
of economics is not a science and never can be. Attempts to create and support
models by quantitive analysis of data are flawed because human economies are
so astronomically complex that it's impossible to isolate variables, and
therefore impossible to design valid economic experiments or draw sound
conclusions from economic data.

There are many parallels to algorithms analysis. If we want to know how fast
an algorithm runs, our approach isn't to try to run it on every processor in
existence and compare the results. Instead we break down the algorithm
logically to deduce its theoretical running time.

Austrian economics--in its good parts anyway--is an attempt to build a
framework for economics that is more like the asymptotic analysis of
algorithms. But this very compelling goal is frequently derailed by politics
and polemics.

~~~
vwfwerwetqwerqw
Algorithmic analysis is absolutely scientific. Asymptotic analysis is based on
models of computer behaviour that are testable (and people do test them and do
improve on them). Moreover, the asymptotic models make predictions and those
predictions are testable (and people do test them and do improve on them).

The asymptotic analysis of algorithms would not be useful if it didn't make
accurate predictions about real world phenomenon. I've written peer reviewed
computer science papers where I have devised an algorithm, predicted its
asymptotic behaviour and then validated through empirical testing.

What you're describing sounds completely different. If the major idea is that
human economies cannot be scientifically analysed, then surely all analysis is
a waste of time? An analysis that isn't based on the scientific method isn't
more likely to be correct.

------
stormbrew
The problem is that in order to make the experience fun for new players, the
faucets have to be relatively open and the sinks not too punitive. I'm not
sure how you can successfully balance a truly working virtual economy with
making it fun for any but the most hardcore trader types, especially once real
money comes officially into the equation.

~~~
kybernetyk
> successfully balance

You could try to balance faucets with omnipresent unavoidable sinks aka.
taxes. But how fun would it be to pay taxes in a game? "You loot 100 gold.
Minus 30% gold drop tax. 10% dungeon upkeep tax and 15% financial transaction
tax." :)

So the thing is: As soon as you try to model a "real" economy (possibly with
real money exchanges) you can't have artificial faucets and sinks. Even Eve
Online - which has the most advanced game economy - struggles with inflation
as there are too many faucets. For such an economy to work you need to have a
steady amount of money circulating the economy. And the only source (and
destination) for money for players has to be other players.

But then you get a lot of other problems. Like what if a player hoards all the
gold? Or if players just deactivate their accounts with significant gold sums
on them? How do new players get their first gold? etc.

~~~
sbov
At least one problem with gold in games is that the management of large sums
of gold is unrealistic. If you really had a huge portion of gold available in
the game the storage and transportation of said gold would be both costly and
risky. These concepts work mostly for fantasy themed MMOs though, not as much
in something like Eve Online.

~~~
kybernetyk
Heh, yeah ... I remember Ultima Online where gold had weight and you had to
carry it in your back pack. If you wanted to move large sums you had to get a
pack horse. :)

But most MMOs nowadays treat gold as something ethereal that you even can't
lose when you get killed.

------
mihaifm
Nicely written article, but it doesn't seem to factor in the fact that the
item supply is also increasing over time. Since players are only equiping
stuff only once in a while, the items have nowhere to go, thus decreasing in
value.

While players (or bots) farm for gold, they're also farming for items. It
would be interesting to see how item prices evolved over time...it might be
that only prices for high end items have skyrocketed, while decent low end
items are almost free.

~~~
muraiki
The experience of a friend and myself when we returned to D3 about three
months ago was that for a relatively small amount of money (250k gold perhaps)
you could get gear good enough to play on some of the lower monster power
levels of Inferno. Inferno is the hardest difficulty level, and there's 10
settings of monster power to tailor the difficulty to your preference / gear.
I think that he played on MP3 or 4, but I usually stuck around at MP 1-2.

However, I stopped playing because I couldn't even begin to afford the gear to
go higher. I figure if I wait a few more months then the gear that I'd need
for MP5 shouldn't be so expensive anymore. As such, even though my gold is
technically becoming worth less in terms of top tier items, it's becoming
worth more in terms of decent low-mid level items. As such, I think that the
D3 situation is more complex than just hyperinflation.

------
rosser
There's a delicious irony to dollars being the hedge against virtual gold
hyperinflation while real gold is the canonical hedge against dollar (hyper-)
inflation...

------
te_platt
This makes me wonder to what extent online games could be used to
model/explore/study economic and social theories. Here we have an example of
hyperinflation happening. Could you reliably reproduce the results? Could you
reliably adjust conditions to lead to expected results? If so how accurately?
I think you could get results much better analyzing surveys because of the
seriousness people put into games.

~~~
idunno246
valve hired an economist do do something like that.
[http://blogs.valvesoftware.com/economics/it-all-began-
with-a...](http://blogs.valvesoftware.com/economics/it-all-began-with-a-
strange-email/)

~~~
zokier
And EVE online has had economist onboard since 2007

[http://www.scientificamerican.com/article.cfm?id=virtual-
wor...](http://www.scientificamerican.com/article.cfm?id=virtual-world-
economists-on-real-economies)

------
ordinary
While it's true there was a significant upset in the Diablo 3 economy after
the 1.0.8 patch came out, things are settling down again, and we're certainly
not seeing the kind of delta that would make me call out a hyperinflation. If
anything, the prices remind of me a bubble forming and consequently popping.

Worse, the article is not just inaccurate, it's dishonest: it hides the data
that contradicts it, despite being publicly available on a day-by-day basis.
[1] is a wonderful resource.

The eye-catching table near the end stops at peak prices. The prices since
that peak are more-or-less hidden in the second half of an otherwise fairly
unremarkable paragraph. We've seen a downward tendency, with prices moving
back to pre-patch prices. We can illustrate that by looking up more recent
data for the same examples as listed in the article:

Radiant star amethyst: 20m before patch (april 29), high of 60m, 22m now.

Radiant square ruby: 200k before patch, high of 528k, 266k now.

Star emerald: 760k before patch, high of 1.6m, 770k now.

Flawless square topaz: 3k before patch, high of 16k, 4.5k now.

Tome of jewelcrafting: 1.2k before patch, high of 6.5k, 1.5k now.[1]

All these items have a downward price trend, with the exception of the
(relatively inconsequential) tome of jewelcrafting, which is stable. I would
not be surprised to see these and other (harder to track) items reach month's
end at roughly pre-patch prices.

It's also worth mentioning at this point that the prices of each rank of gem
is linked directly to the price of the rank below it. For example, a star gem
costs 80k gold plus 3 radiant square gems of the same type to craft. This is
an ingame feature. All gem prices are therefore functions of the price of
flawless square gems, the highest rank that monsters can drop. The article
mixes the prices of different gem ranks, which is either ignorance of the way
the game's economy and mechanics works, or an intentionally and artificially
pretense of diversity. It's a bad sign either way.

Finally, and most important of all: _the European market has been fairly
stable throughout this whole debacle_. The only difference between the
European and the North American markets is that the latter suffered the
(disastrous) bug described by the article, while the European market did not:
Europe gets its patches 6-9 hours after North America does and the bug that it
introduced was fixed before the patch hit Europe.

This lends credit to the idea that all we're seeing here is the aftershocks of
massive destabilization due to a simple bug. To me, the fact that prices seem
to be returning to normal testifies to the relative stability of the Diablo 3
market, and long term price trends show the same. Huzzah, Blizzard!

All in all, while interesting in a general sense, the article is flawed when
it comes to the specific case it uses to promote its message, the turbulence
of Diablo 3's economy over the last few weeks. This is not hyperinflation.

[1] <http://www.diablohub.com/price-tracker/>

~~~
Nursie
>> Worse, the article is not just inaccurate, it's dishonest: it hides the
data that contradicts it, despite being publicly available on a day-by-day
basis. [1] is a wonderful resource.

What do you expect from mises.org?

It has an agenda to push, and is relentless in doing so.

------
GotAnyMegadeth
I remember when the money in Phantasy Star Online became worthless.

