Sunday, 4 December 2011

Currency Cycle - Balancing the Economy Pt 3

In economics, there is the concept of Monetary Velocity. This concept is basically a measure of how many times a particular unit of currency is used in an economy, and can be illustrated by this story:

Imagine a small country town. There is a pub, a hotel, a butcher, a baker, a whitegoods store, the businesses currently owe each other various amounts for various goods and services. A visitor comes to town and rents a room from the hotel for a couple of nights, for $100. The hotelier uses that money to pay her debt to the baker, who pays his debt to the butcher, who pays her debt to the whitegoods store, and so on down the line. That $100 has effectively paid off $500 worth of debts: this cycle of payments can keep going as long as the person the money is being transferred to still has outstanding debts to pay greater than $100.

In this case, the "velocity" of that money is 5: the money has changed hands five times.

The velocity of money is a flawed measure, but it is a useful tool for determining whether the economy is functioning or stalled. At Fanfest 2011, Dr. EyjoG indicated that the velocity of ISK in EVE Online is between 2 and 3. To understand what this means, here is another story:

Tom is a mission-runner. He has a Golem which he is trying to pimp out a little. Today he made a few hundred million ISK just running missions, and has decided to buy that new ballistic control he's been after. So he heads off to the LP store and buys a Caldari Navy Ballistic Control System. The velocity of ISK in this story is 1: the ISK has been spent by the person who created it, and the ISK has left the economy.

Julie is a mission-runner. She flies a Vargur which she's trying to pimp out a little. Today she made a billion ISK running missions, and has decided to buy that new tracking enhancer she's been after. So she heads off to Jita and buys a Tobias' Modified Tracking Enhancer.  The contract that Julie bought was posted by Alex, a null sec player who farmed that item from officer spawns. Alex uses the money from his officer loot sales to fund his PvP ships, which he usually buys from the local manufacturer Jo. Jo buys the minerals for ship production from a bunch of miners in the alliance who happen to enjoy the challenge of mining in null sec. Those miners are the people who pay the sovereignty fees for the space that the alliance owns. The velocity of ISK in this story is 4: created by Julie, spent on a module, spent on PvP ships, spent on minerals, spent on sovereignty bills. That ISK has left the economy.

One thing that a measure of monetary velocity doesn't tell you is how much money is sitting idle and unused. While a hoarder might view a large pool of money as a lovely thing, capitalists and economists agree that idle money is bad. The capitalist will be looking for ways to invest that money to make more, economists realise that the money needs to be spent, since it is the spending of money that in their view determines the health of an economy. Let's illustrate this with a story.

Joan is a successful capitalist. She spends her time buried in spreadsheets, she runs her own corporation with POSes spread between hisec and low sec, and every breathing moment is spent figuring out how to squeeze more return on her ISK and time investments. She's farming data cores, engaged in planetary interaction, has several alts dedicated to station trading, researching blueprints, copying blueprints, inventing T2 BPCs, and even some hauling. Joan is no longer concerned about how much ISK she has. The game Joan is playing is turning X ISK into (X + δX) ISK, with her goal being to see how big she can make δ. Joan's current net worth is in the order of tens of billions of ISK, and her activities have been tuned to the point that she can make a billion ISK a month without breaking a sweat.

Joan doesn't engage in the flying-in-space part of EVE Online. She's not an alt for a pirate or suicide ganker. She is playing EVE purely for the thrill of participating in a free economy where she can run her own company, own her own production capital, and put into practice some of the theory that she learned during her economics degree.

Joan is, effectively, one of the “1%” of the EVE universe. She has so much ISK in her wallet that she could PLEX her accounts for the next three years. Most of that ISK is unavailable to the rest of the EVE economy: Joan isn't going to be spending it on anything. The ISK is in a limbo state of still existing, but being effectively removed from the economy.

Is this idle ISK something that we should be concerned about?

1 comment:

  1. In a way, could we consider an ISK sink? Which are needed to keep the amount of ISK in the economy down?