I'm An Economist And...

There are many of us who play every day, because we enjoy it here, despite what the 'economic experts' like yourselves are trying to change and destroy that.

May I ask WHY you don't play? Is it because you were lured here under the fake advertising of make easy money, found out you couldn't, and gave up? Because that's what so many people are doing.

Lewis

How can he be an expert if he hardly plays?

I repeat once more - this is a game, not real life. You cannot automatically expect real life principles to apply because real life expenses do not apply. We don't pay expenses that real life incur such as fuel, electricity and food, because our avatars don't use them. Therefore it's wrong to assume that an economic model that 'works' in real life will just work in SL, which is what many people here are trying to apply.

To know how SL works, you have to play it, you have to experience it. Otherwise you are merely an observer.

Lewis

Actually, as long as humans are involved, economic theories can be applied.

Whilst there are large elements of your original analysis that I don't have a problem with, there is one part in a later comment I do disagree with.

If there isn't some consistent drive to devalue the L$ there are far, far more stupid people in SL than I give credit for - and as a teacher I have a fairly low opinion of human intelligence and its distribution.

For the last several months I've cashed out enough L$ every month to pay my $195 tier. I put the money up in my morning of the tier day (so the very early hours of the morning) and I've always sold it within a few hours (about 4 is the longest). That's selling at the highest rate (it is a time sensitive sale after all) or if there's a big block there the highest rate +$1. If there's a screwball block (lots at 295 and a chunk at 350 on one occasion) I'll hold on 'til the 350 has gone and sell at 295-ish.

So why on days when the rate is $300 do we get people selling at $350, $500 etc? On days when the rate is 325 we get people selling at 400? I'm prepared to accept the real screwball results $79000 etc. are simple mistakes, but any half-wit can see that the money at or right next to the current block sells fast and planning 6 hours or so ahead for your tier isn't THAT complicated surely?! The others - they're either stupid or there's a deliberate attempt to spread FUG and devaluation around.

Excellent post Teufel! You very accurately described patterns of behavior that I have seen and carry out myself simply in response to the situation as it is today (meaning that I am not an economist - just finding ways to cope).

I agree that the economy is not in self-destruct mode - as you mentioned, the price of everything should become relatively stable in terms of US$ even though the price in L$ is going up.

I am wondering though, would it be practical at some point to artificially increase the relative value of the L$ by dividing the value by 10 or 100? For example, suppose something that costs L$1,000 today increases to L$10,000 at some point while still having the same value in US$ today and when the price increases to L$10,000. Given that the relative value of the L$ at that point is so small and such a valuation is not practical in terms of L$ to US$, would it be practical to increase the value of the L$ at that point by dividing it by 10 - so that that price of the L$10,000 item becomes L$10 while retaining the same relative value in US$?

I was thinking about the massive price changes that this type of change would cause; however, the key benefit is in visibility since the fact is that many people pay US$ for Linden$ and want to know what value they are getting. Paying US$0.002 per Linden$ makes it hard to know what L$1000 is worth to a typical SL citizen. I am speaking from experience where I have people often asking me what my rates are in US$.

As for the stipends, you're right in that their relative value is changing - I personally feel that they'll become *almost* worthless at some point(if the amount in L$ does not change) as prices increase. As for the effect of stipends on the economy, they are a great way to get someone started and supplement most people's incomes so that they can pay for sinks like upload fees.

-2fast

Theories - especially those just learnt out of textbooks - actually mean very little unless you apply them, work them, monitor them, adjust them.

In theory, I can sell something for L$50, sell 2000 times, and make L$10,000 which I can then cash on Lindex.

In reality, I'd be lucky to sell maybe half a dozen because there is so much competition.

The big problem is that everyone wants to make money, and there are few consumers left. Removing stipends removes even more consumers - then all we get left with is campers, tringo players and nightclub escorts.

The only reason most people in SL who make good money are successful is because they got in before the game grew too big, now they're so big nobody can touch them.

I would almost guarantee you that if any of the "famous names" spent one month trying to do something completely different, from scratch, they probably wouldn't even cover their costs, even with stipends.

One track advertising brings in people with that same one track. If there was real advertising that bought in a variety of people - as well as those just wanting to make money - then wouldn't SL be such an exciting place?

Lewis

Excellent Post, Teufel.

I'm still not convinced that keeping the stipends is in the long-term best interest of the SL economy. I do understand, however, your point that if LL intends to keep SL as more of a gaming/socializing platform, then removing stipends may cause problems.

I have wondered about something for awhile with the SL economy. Perhaps you can take a stab at answering these questions. You made a brief reference to it in your post:



1. Since land in SL is theoretically infinite in supply (more can always be added), doesn't that create a devaluing pressure on the economy over time?

<<That would depend on the demand for land and supply of it. If they keep adding more and more land and not get many new players or old players which want more land, then the value of that land would fall. I believe LL watches the demand for land and adds it as needed in order to maintain a certain level of land value, which has fallen in recent times. There was a good while when LL added no new land and land became quite valuable.>>>

2. Since most residents simply teleport directly to where they wish to go, thereby bypassing everything in between, does not that do away with the real estate mantra location, location, location?

<<Yea, I guess it may. There should still be higher demand for land in high traffic areas as well as areas with nice views, etc. This is more of a question for someone involved in land trade, I'd say. Ask someone who rents out land and shop owners/casino/club and see what they say.>>>

3. Although it is desirable for your parcel to have a "good view", since land is constantly created, there is always the chance that more good views will be created.

Considering these three issues, it seems to me that the viability of the real estate industry in SL comes into question. It is only a matter of time before residents figure these issues out.

Since land is not finite in supply and since location does not matter in the long run, where do you see the real estate market heading? What affect will that have on the economy over time?

The only reason most people in SL who make good money are successful is because they got in before the game grew too big, now they're so big nobody can touch them.

Note: This was posted in another thread by mistake.

Hello there,

I'm an economist and actually the economy is not on "self destruct mode." We do have a rather large inflation rate here in SL. This is due to the adding to the money supply each week through stipends and other adds. Simply, adds outweigh the sinks. This in combination with a devaluation of Land in SL (After SL started giving out lots of new land as well as adding First Land), has added to devaluation. In economic terms, this could be considered "hyper inflation." although we are not quite at that level yet. Hyperinflation happens when a government decides to try and fund, a war, for example, by printing more money. As they print more money and add it to the money supply, the value of that money drops and thus prices go up.

One of the main drawbacks of an economy on a hyperinflationary route is that of "menu prices." This is the cost of changing prices. Actually, it comes directly from the fact that when inflation is high, restaurants must change their menu prices often, which costs money, to print the new menus, etc.

The devaluation of the currency also adds uncertainty. It is more difficult to borrow money, because that money keeps losing value. This slows the economy more and lowered tax revenue and the cycle continues. This would normally lead to a crash in the value of the currency.

Here in SL, we constantly add to our money and land supplies, thus driving down the value of the two, depending on population growth. Many people on here post things such as, "Why do people keep selling Lindens for cheaper!! You’re driving down the value!!" Well, the answer is, because the $L is overvalued. We have to remember, that this is a virtual currency, backed by nothing else than the word of Linden Labs that the currency is a medium for exchange. Our value of even 350L/$1 is higher than many real world nations.

Now, LL could cut all adds to game, but this would diminish the "fun" aspect of the world. Thus they would lose subscribers, the value of the Linden would fall even faster, and Linden Labs would lose revenue which in the worst case scenario could threaten the shut down of SL which would make the currency plummet to nothing due to no further backing or need.

I have played many MMORPG games, and the simple fact is, ALL to date continually add to their money supply in the form of "hunting" or "gathering." In Ultima Online, for example; when I first started playing, I could sell 100,000 gold on ebay for about $55. Today, due to the MASSIVE increase in the money supply, you would need to sell several million gold to get $55 USD. The UO economy has not collapsed, but things have gotten more expensive via gold, but still about the same via USD.

Some people have also asked Linden Labs to "freeze" the value of the Linden and get rid of the exchange. This also would not work. By trying to artificially keep a currency at a given level, you create "black markets." In SL, the black markets would be in the form of people selling Linden Dollars on EBay, for example or simply via papal if they find someone in game. You can't artificially hold down (or up) the value of a currency (or anything for that matter.) without unbalancing the economy in question and throwing things, in the words of Plato "off balance."

Also, as long as Linden Labs does not make stipends, etc. LARGER to offset the devaluation, the high rate of inflation will slow over the next year, as the % adds each week will be less and less each time as the money supply grows. And let’s not forget they cut dwell as well. Let’s also not forget that inflation is measured by taking a "basket of goods" and analyzing the increase in prices from one period of time to the next. Many people, whom talk about inflation in SL, are actually referring to currency valuation, not inflation. Inflation grows a bit slower than currency devaluation, due to the Keynesian Theory of "sticky prices." Meaning that prices to not go up everyday, although we may have some inflation day to day. In real life, for example, the cost of a newspaper does not go up everyday although we do have a small amount of inflation each and everyday.

To sum things up:
1. In a MMORPG they have to keep the game fun, or they lose customers and the loss of players, makes the value of the game's currency fall even faster than it does with hyper inflation. By cutting stipends, in SL for example, the above would happen, maybe not to an all out crash or shutdown of the game, but they would def lose players, thus decrease population, thus decrease the demand for L thus decrease value because we would still have the same amount of L in circulation.

2. The economy will not collapse. Land owners will have to charge a bit more for rent, which will be offset (partially) by the added land supplies. Shop owners will have to charge a bit more, which will get passed on to customers. Customers will pay more in Linden. When it comes down to the bottom line of how we measure our Linden Dollars (in USD) we will still be paying the same amount of money.

3. A negative side of a hyperinflationary economy is the fact that people want to "spend" the money as soon as they get it in order to maintain the value. In post World War 2 Germany, for example, workers would get paid at lunch and allowed one hour to spend their money, because by the time they got off at night, the value of their pay would have dropped almost 50%. Here in SL, this would be reflected in the form of content creators and shop vendors selling their Linden often to try and maximize profit and avoid inflation. This decreases the demand for L$ and increases the amount of L for sale at any given time, which further devalues the $L, and the cycle continues.

Summary: Linden Labs has to find the "equilibrium" of how much stipends and adds to give out and how much land to offer in order to keep the game fun, while at the same time not introducing too much new currency into the money supply to try and keep the level of inflation steady and not overly high to help avoid the dumping of Linden on the exchange which further drives down Linden value creating a valuation-paradox.

Now, I typed this in a hurry, because I'm about to go to the gym, so I'm sure this is not very clear. I can answer any comments or questions on this subject. I hope this helps a bit.

Regards,
Teufel

PS. One thing they could do to slow inflation and currency devaluation would be to eliminate the stipends given out to free accounts. This would not hurt Linden Lab's bottom line much, thus securing our world's future a bit more, thus increasing confidence. You could give free accounts a stipend for 30 days to try things out, then they can stay in world, but not get a stipend unless upgrading to a full account. This would depend on how much of the add is from free account stipends. If the add is mega low, the loss of population may not be worth the decrease in currency value by such a small percent. Cheers!

I would almost guarantee you that if any of the "famous names" spent one month trying to do something completely different, from scratch, they probably wouldn't even cover their costs, even with stipends.

Two months ago I went into business, thinking it would be a bit of fun and I might cover my account and my modest tier fees. Since then I've made several hundred dollars. If I can do that from nothing then the big names, who already have brand recognition from their other products, can do it even easier. Like real life there are lots of big, established players but that doesn't mean there is no room for new people; my wife is making good money selling hair now, and that is a market with a lot of big players in it.

Opportunities exist if you look and are willing to take some risk... and in this world, the risks of a failed business are a few dollars spent and the time you put in.

Two months ago I went into business, thinking it would be a bit of fun and I might cover my account and my modest tier fees. Since then I've made several hundred dollars.

Seriosuly i hope to f'ing god that your kidding here. This is f'cked up as hell right here. Do you have any idea what in the heck you even stated here. Ban players for sending L to someone. This idea is wrong on so many levels that i wont even say it. Just get these idea's out of your head NOW!!!!!! If you did this you would screw up things horribly for those that help people. I dont want to insult you personally but seriously WTF are you thinking!!!!

Opportunities exist if you look and are willing to take some risk... and in this world, the risks of a failed business are a few dollars spent and the time you put in.

Hi Teufel, the above has been repeated so many times on these forums its not even funny anymore. Get used to reading the following logic ...



... because I guarantee you it won't be the last time you see it.

I, for one, welcome your expert knowledge on economic matters into these forums, and simply ask that you continue to do so and not become discouraged by some of the responses you may receive to your posts.

I think you mentioned that you taught undergrad economics. If so, then I am certain that you are accustomed to being challenged by your students, and I trust that you will persevere through similar challenges in the face of adversity here as well.

Again, welcome and I look forward to your increased participation in the Land and Economy forum.

I agree There.com sells Tbux and is 'allows' other 3rd party websites to sell it ( with their consent ) but NO-ONE EVER sells tbux on ebay or clothing etc....NO ONE trust me Ive looked. Everyone knows There.com would ban you instantly.
I believe There.com had the right attitude about selling Tbucks. As they are contoling its value over all. The 3rd party sellers gaged their sell rate based on what ever There.com was currently selling at, they just slightly undercut them. So as a result teh Tbuck as far as I am aware has remained almost constant in value from day one.

Thats why even though a number of people left There to come to SL they keep their There accts active and produce content as the sell rate of the Tbuck is strong and consistant.

( thinking of going back myself and starting to make things...at the time I was there I hadnt enough photoshop exp to produce anything worth selling to be honest but think I could handle it now)

Fair enough, E A Games also dont encourage ppl selling simoleans for TSO but ppl did it anyway ( before that economy crashed and died big time ( people left the game ) and never got banned because EA Games have too many games to be concentrating on one.

EVE online...MASSIVE amount of people play that game.. the game currency ( ISK ) has a high value too because it takes a lot of skill and time to make it generally...they ban instantly anyone found selling it and as such no one does....This is a recent thing after they found some sweat shop office in Asia were 15 employees were running 'mining bots' and the owner sold the currency made a MASSIVE amount of money I believe hundereds of thousands were made b4 they swooped in and closed them down. ( te employees were paid peanuts btw )

Now they have screwed the lid TIGHT because it was destroying the game...people were AFK running mining bots....the 'game' was turning into nothing more than a place for ppl to make ISK and sell it w/o adding to the games content not to mention the effect it had in the in game currency value..things became so expensive to buy with game currency because it had a RL value for a short time

I mentiion EVE online as nothing more than an example of how diferent things effect the value of a game currency.

my wife is making good money selling hair now, and that is a market with a lot of big players in it.

Seriously? Well it would stabilize the economy.

I'd love to see what your wife, and others, can come up with, hair-wise, now that we have flexible wavy prims