A Novel and Detailed Economic Proposal

* Preface:
I’m an established SL business owner. I own a sim and some mainland plots. I make a substantial profit from SL but not as much as some land barons. I am not an economist. I’m a computer programmer with a background in various other sciences hoping to contribute my two cents worth on the SL economy. I don’t post very often, preferring to post when I have thoughts I feel are worth sharing and debating.

* Request:
I would be interested in getting feedback on some of these ideas. Please do not degrade the discussion to the level of personal attacks, insults, or other such banter. I am sure there are many issues and consequences related to some of my proposals that I have overlooked and or lack the economic wisdom to foresee. I ask that this thread be kept civil as a group trying to productively brainstorm on ways to improve and stabilize the economy from the perspective of both SL residents and Linden Labs.

* Current Problems:
I suppose logical people could debate whether or not there truly is a problem worth proposing solutions to. I fully understand (after reading many threads) that some people feel it is best to let free market forces pave our economic SL futures. I respectfully disagree with this proposal. I suggest that the historical real world human model has yet to produce a truly free market that remains stable without substantial restrictions, regulations, and interventions. For example, even the world’s freest markets have laws relating to monopolies, insider trading, fraud, etc. Real world agencies actively stabilize economies by adjusting interest rates and the like.

It would probably be an overstatement to suggest that the SL economy is broken. Most residents I have had discussions with feel there is at least room for very substantial improvement. The current L$ exchange system is troublingly unstable. The current SL economic model of substantially more L$ being supplied (stipends etc.) than L$ being removed via sinks (fees etc.) seems unsustainable, even assuming a healthy influx of new residents. The idea that as the L$ devaluates, merchants will simply raise prices and all will be fine fails to account for many psychosocial economic issues and other potential problems which I will probably discuss in another post for the sake of brevity. For now I will simply suggest that a more stable L$ benefits the community. Certainly, at least some residents agree with this statement. For what it is worth, Linden Labs has also voiced a vested interest in a fairly stable L$.

I find other problems in the current system. The lure to undercut is unnecessarily exasperated. The market is totally free of any restriction, thus making it exceedingly prone to psychosocial fluctuations. The exchange system does not provide an L$ sink. All of the money that flows into the exchange returns to the economy. Lindens have the ability to infuse money into the economy, but they desperately need more options for the removal of money. I would argue that the later is just as important as the former, perhaps more so during this period of rapid devaluation. Any economic adjustments should be as transparent and predictable as possible.

* Primary Objectives:
It is important to clearly delineate the objectives of any economic proposal. They are roughly ordered, as I perceive them, in decreasing priority.

1) Stabilize the L$ value.

2) Modify the exchange to act as a transparent, flexible, and predictable L$ sink.

3) Provide sufficient funds to Linden Labs to ensure profitability.

4) Allow sufficient market flexibility (freedom) while providing some reasonable psychosocial safeguards.

5) Slightly reduce the temptation to undercut exchange rates.

* Specific Proposals:
Points two through five also lend themselves to point one. As such, I will only provide specific proposals designed to implement points two through five.

Important note: Although I provide specific values such as 10 percent and one dollar in the following proposals, I do not make any claim that these values are best suited for the objectives. Determining the ideal values would require data that we are not provided and more economic experience than I have. (Keeping in mind that I have none.) I make use of specific values only for the purpose of model clarity. Because the SL economy is almost entirely closed, a group of economically minded individuals provided with sufficient data should be able to determine near ideal values.

The current exchange system does not remove L$ from the economy. It is hard to imagine the L$ ever stabilizing if Linden Labs fails to develop a way to remove substantial sums of money from the economy during times of rapid devaluation. I propose that the exchange system be altered to act as an automatic L$ siphon that works on a predetermined sliding scale. The Lindens would be removed from the seller’s side of the equation (removing or reducing the current seller US $ fees). The percentage removed from the economy would be based on a sliding scale buffered around a target value. As a specific example, a target value of 300 Lindens per US dollar could be set. A seller desiring a trade at this rate would lose 10% of Lindens sold. (Keep in mind they will pay little or no percentage US $ fees and that this percentage proposal is just an educated guess at a reasonable number.) The Lindens lost would be permanently removed from the economy. A buffer zone of plus or minus 10 Lindens per dollar would retain the same 10% “fee”. The percentage removed would be adjusted at increments of 10 Lindens per dollar. For example, a sale at 310 would be subject to an 11% fee, 320 would be subject to a 12% fee, while a sale at 290 would be subject to only 9%. Such a system would thus automatically remove more L$ from the economy during times of devaluation and fewer L$ during times of greater demand. Such a system would be fully transparent and serve to automatically regulate the average per resident wealth within the economy. It certainly still provides substantial market flexibility while retaining an anchored transparent target exchange rate. If a specific scale value proves to be too inflexible, the % variations can be reduced, likewise if it proves to be too unstable, the variations can be increased.

Linden Labs needs to be made profitable. It obviously does not benefit SL residents if Linden Labs fails to be a viable business model. From the limited information provided, it seems Linden Labs wants to make money from the exchange. I am unclear as to whether or not (or how much) money they currently make through the SL exchange. Current fees may be there only to cover credit card transactions, and other costs such as server maintenance. In any event, the proposal above of siphoning money out of the economy on the seller’s side does not provide Linden Labs with income. That would be moved to the buyer’s side. A buyer would pay a set percentage of US $ fees (such as 10%) when they place their L$ purchase. Also, it would probably be reasonable to have a one or two dollar usage fee on both the buyer’s and seller’s transactions. Adjusting these fees and percentages to maintain profitability would be much preferred over their hotly debated proposal to market L$ directly themselves (which they would get though various in game fees and services). The goal again is stability and transparency.

Points two and three have been discussed above. The remaining proposals four and five are probably less important but would still go a long way in the context of psychosocial economic stability. Extremely rapid fluctuations in the market are almost always emotionally driven, with no real impetus. I would propose some sort of reasonable per day L$ value variation limit. The limit would be such that the market retains the ability to adjust rapidly to supply and demand forces while protecting itself from panic induced sales or subversive market manipulation by high volume sellers. Perhaps a variation cap of 10 Lindens per dollar per day would be reasonable. In other words, if the market closed at 305 L$ per dollar on Monday, Sellers would be prohibited from selling at a rate higher than 315 L$ per dollar on Tuesday.

My final proposal serves as a modest disincentive towards undercutting. The current system draws only from the very highest exchange rate available. I propose that the sales draw upon the top 6 exchange rates on a sliding scale. For example, 1/2 of sales made come from the first column, 1/4 from the second, 1/8 from the third and so on down to the sixth highest rate. (This actually results in a small amount unaccounted for which would probably go towards the first column.) Such a system would help reduce the need to undercut the current highest market value. A seller would know that a sale remaining near the top rate would eventually sell, just at a reduced pace. In the current system, a barrier of 3 or 4 million at a higher rate results in a seller feeling that their sale will never be made and thus they are compelled to leapfrog over the competition. Selling at a better rate would still retain the benefits of faster sales, this benefit would simply be reduced, and with it the desire to undercut. The impact felt by the buyers would be very slight, as three quarters of the purchase will be coming from the top two exchange rates.

I think the obstacle to any solution isn't so much is its feasibility as it is the resistance on the part of Lindens to participate in meaningful dialogue, as well as to risk experimenting with foundation of their economy.

The latter I guess I understand, the former is rather suprising considering this is a community created world..

all that was a little over my head, course its 2am and i cant sleep but still - i should be in bed!

Anyways, it was a nice touch from the usual "zomg idiot!" posts. For that I applaud you and promise to read it when my eyes are open.

Can you add some more math to illustrate your proposal?

For example let's say we have a sale of 90000L$ at 300L$/$

Current situation:
Buyer pays 300.3 US$ and get 90000L$
Seller loses 90000L$ and get gets 289.5 US$
Linden gets 10.8 US$

Now how do you make a sink of 10% without somebody losing out? Will the seller lose because he gets 10% less money? Will the buyer lose because he gets 10% less L$? Or will LL lose by reducing their fees?

Unfortunately all proposals along the lines of "The economy is broken and this is how I propose we fix it" have the same fundamental problem... trying to fix something that doesn't need fixing.

This is a free market economy, and the market is going exactly where the market needs to go. Just because it is falling away from the L$2501 imaginary ideal figure - which has no more basis in reality than L$5001 simply because its a figure LL plucked out of fresh air - doesn't mean it's broken.

Right now, it's a buyer's market. In time, it'll be a seller's market , then it'll be a buyer's market again. Economies go up and down all the time, it's part of how they work.

Instead of people whining that their investment is going down... why not try making a better product that people will want to spend thier money on>

Too many people take this game too seriously for their own good. "I put on my hat and wizard cloak" springs to mind.

Lewis

Lewis... please read paragraph three. This addresses most of your comments already. If you did, then ignore this comment. hehe.

Blakar... I'll try to post a specific numerical example later today when I get back from work.

Dont forget player-run exchanges...

I read it fairly fast and only once so correct me if i'm wrong.

The references you make in the text about boosting sinks, trying to control sinks, removing money etc, this is flawed thinking, IE don't think like this. The only way to control supply is by input throttle.

As for the part in taking money on Lindex from the 6 higest tiers, err that totally destroys a market, I wouldn't do this. As for market changes, I would leave the LindeX as it is, however I would cut the margines and put in a buy section like GOM had. This would probably end up boosting trading volume which is excellent for a market!

That's a really well-written and interesting suggestion actually

I'm still not so sure that removing L$ from the economy is the way to stabilise it. It works for real-life economies, but they don't have infinite basic resources. It's exactly the stipend that keeps L$ such a desirable environment for creators: it means that all the time new things are being created, new money is also being added for people to buy it with, so it's much easier to get a place in the market.

With no stipends, SL would be far less attractive for consumers (and they already get the short end of the stick in many regards), and new content creators would be pushed into competition with all the established brands for the now scarce supply of L$. The most likely way they would compete would be on price, which would be welcomed by the L$-poor consumers. This in turn would drag down the price of content over time, possibly to the point where the content-to-US$ exchange rate, "through" the L$, would be worse than it would be under deflated L$ conditions.



This would result in an effective exchange rate for sellers of L$330/US$1, far worse than the ones that people have complained about under the "broken economy".

In other words, L$ sellers get a worse exchange rate, while L$ buyers get less L$ for their money.



This is starting to get scary..

I want to make US$1 by selling L$.
To do this I actually have to make US$2 because there is a US$1 fee on the sale.
To make US$2 at a rate of L$300, I have to sell L$600, but I actually have to sell L$660 because 10% of my sale amount is destroyed.
The person who buys the L$600 has to pay me US$2 for it, plus a 10% fee ($2.20), plus their own usage change, bringing their total bill to $3.20.
Results:
To get my US$1 I had to sell 660 Lindens, meaning my effective rate is L$660 / US$1.
To get their L$600 the buyer had to spend $3.20 meaning their effective rate is L$187/US$1.

Of course most people would not sell just US$1 of L$ at a time, so the fees would be a lower proportion, but that shows how serious it can get. In this case people would just buy L$ from SLExchange instead..



This could easily be gamed. Since the "buy L$" requester tells me how many US$ I'm going to pay, it must know before I enter the amount which column it's going to be using. So I look at the list, work out the most desirable rate, and if when I click the buy button it's not coming from the best value column, I enter a buy of L$100 or something to make it count as a sale move to the next column.

Yumi… I realize that the specific numbers I proposed there are actually “worse” for the seller than the current market rates. I only used those round numbers to simplify the math and to help clarify the economic model. The actual numbers would have to be set after a careful analysis of all the market data. All of those percentages and fee amounts are just off the cuff, estimated proposals. In any case… I think what value the L$ adjusts to is less important than its overall stability. You expressed concern over the person trying to sell only one dollar of Lindens and having to pay a fee. I wouldn’t personally enjoy paying fees every time I made a transaction either, but I think we need to face the reality that Linden Labs is a for profit business and from what I can tell they are intent on using the SL exchange as a source of income. I’d rather see them use transparent fees for this, than to modify TOS agreements as a means of selling their own L$ on the market. I think if they sold their own L$ the market would be further destabilized. At the very least, their proposal to do so didn’t seem to sit well with a majority of residents. I was slightly unclear about your concern about point 5 being gamed. If, however, I understand your point, I know of a way to prevent this, but the explanation would be rather lengthy. I’ll wait and make sure I fully understand your point first.

Nexus… I’m unclear as to why you feel providing LL with more flexible and more transparent sinks is flawed thinking. Please provide a supporting argument, as I’d be very interested to hear it. Also, please expand your second comment.

Thank you all for the feedback thus far.

Wow, what a great read. It in nice to see someone take the time to write a clear and logical argumentative essay, rather than a few lines of a quick fix proposal. Overall a system of this type would work if the details can be sorted through. The best point you made is about the sliding scale removal of L$ based on the selling rate. That is exactly what is needed to stop the unhealthy steady and rapid flood of L$ into the economy. It would accomplish the same thing as reducing stipends but would be less likely to cause a depression. Another reason why it is better than simply reducing input is that it is a flexible system. I have to think more about your proposal to reduce undercutting. At first glance I would say this is also an idea worth consideration.