Financial speculation in games teaches us about financial speculation in real life

Interesting:

There I managed to buy the factories in a key star hub and set up shop. I produced the first Mammoths (a massive transport ship critical to trade) in the game, and also the first Minmatar battleships. I would have loved to expand my production but within days of the retail launch all factories had been bought up and idled by speculators who were charging $300 to $400 per factory, without any way of knowing if they really owned the factory or not.

One week after the launch of EVE I handed a report to Reynir Hardarson explaining, among other things, how this weakness in the economic design threatened their game and how to solve it. My solution was to greatly raise the rents on these factories so that only those that were actually actively running them would want to hold them. The idea was to create a “hot potato” effect where no rational person would want these factories unless they were doing a lot of output with them.

While it took several months to implement the fix, once it was in it worked perfectly by causing the speculators to abandon their stranglehold on the economy. In the meantime a handful of players who did have factories (myself included) got exceedingly rich. Thus the effect of this speculation was increased wealth stratification, reduced economic competition, increased consumer goods prices, and crazy real estate inflation.

Parallels in the “Real” Economy

When I began creating virtual economic systems and theories in 2005, I looked to the way our “real” economies were designed to see if I could find parallel systems. I wondered if excessively low property taxes would do the same thing in real life. The way this works is that if the tax or overhead on property is lower than the rate of increase of the value of that property, then this becomes an investment that generates profit. If the tax on property exceeds the value generated by appreciation, then this becomes a losing investment.

Because of this interaction, high property taxes reduce the value of property, again due to the “hot potato” effect. Low property taxes raise the value of property and trigger speculation. In a “high tax” environment, only those that really need the property will be motivated to hold it. Families would be a good example of a group that “needs” property, some place to live. In a low tax environment, speculation makes property values so high that people seeking homes have a hard time affording them.

I wanted to see how this translated to the real world so I looked around for examples. The most obvious such example was California’s Proposition 13, which was passed in 1978 when I was only 12 years old. This not only lowered property taxes, but also increased property values as described above. Its effects were exactly what you would have predicted from the scenario generated in EVE Online.

There was one additional difference in the real world, however. EVE Online is not a closed system. By this I mean that when a tax or rent is paid in EVE, this does not cycle back into the economy, it just magically disappears. In the real world, when a property tax is paid it cycles back into the economy through expenditures on public infrastructure such as education and road maintenance. Thus when the property taxes were lowered the result was a widespread degradation in public infrastructure, an effect not observed in EVE.