Archive | September 2016

A “conversation” with Paul Elder about Minecraft and Economics

Paul Elder (Class of 2016 and now in Pennsylvania) runs a Minecraft server for his younger brother, Darren, and friends. He noticed some phenomena that modelled what might or might not be happening in real-world economies. The following is an edited email exchange that I had with Paul. (My replies are in italics and I have supplied titles for different sections in a different bold font in an attempt to organize the topics). Whether or not you play Minecraft (and I know nothing about the game at all!), I was struck by its relevance to several economic theories and problems.

 Effect on the circular flow of income within a country and on global demand if one individual/economy is much more productive than others

[Paul] A little background: Darren’s country does the most production. He has very high productivity from his capital (automatic farms), and he established a monopoly on cookies since he captured all the land where cocoa beans grow.

I found a dialogue which occurred when one of Darren’s friends wanted to trade and buy a good (a cat) from him. But Darren refused the transaction saying that he had too much money and people needed to sell things to him as well, not just buy from him.

It seemed that one firm/country could produce so much so efficiently that it could actually break the circular flow of income and make it linear, and then eventually the economy will stop functioning!

[Susan] To a certain extent, these phenomena DO occur in the real world, but because they are on a relatively small scale they have not so far had the drastic impact that you foresee.

For example: 1) In some economies, a few individuals accumulate a great deal of wealth. If they do not spend it, the whole economy grows less than it might otherwise. So a strong argument for redistribution is that it raises the propensity to consume and thus aggregate demand increases. 

2) Sometimes a whole economy is spending less globally than it is earning and thus it tends to depress other economies. For example, at the time of the Greek crisis, a few economists argued that the Greek problems were due, not to Greece, but to Germany. They considered that Germany had benefited enormously by selling exports to Greece, but in return had imported very little from there. The resulting bilateral imbalance was “balanced” by Germany LENDING to Greece (i.e. Germany’s surplus on the current account was counterbalanced by an outflow on its capital and financial account). But thereby Greece got into debt.

Wouldn’t it have been better for Greece, if Germany had bought more olive oil etc from there rather than forcing it to borrow from Germany?

International trade, exchange rates, and the gold standard

[Paul]   It’s interesting that it is not only the fault of the less productive party unable to produce anything, but it’s also the fault of the more productive party.…………..    Anyway, as a result, in the Minecraft economy over time, all the income flowed to Darren, so he has all the gold (they use gold as a currency), and everybody else has very little gold. (They’re using bars of gold as currency since there’s enough, but not (yet) an oversupply.)

[Susan] Your brother’s economy is like an economy which has a persistent surplus on the current account of its BOP. It really has a moral responsibility to allow its exchange rate to appreciate, so that, gradually, it will sell fewer exports and buy more imports (but it won’t work out as intended if the Marshall-Lerner conditions are not fulfilled!). This also explains why some deficit countries complain that the exchange rates of surplus countries (eg China and-to a lesser extent-Japan) are undervalued and SHOULD be allowed to appreciate (but Japan is resistant to letting that happen, because domestic demand is so low, since the rich individuals and firms in Japan who have accumulated a lot won’t spend enough).

But because the Minecraft economy is using gold (the “gold standard”), there is no way that exchange rates between them can be adjusted —- similar to the problem that arises when most EU countries use the Euro as a single currency. So Darren’s friends should be putting pressure on him to raise the prices of his goods and/or to lend to them and/or to buy from them; otherwise there could be an economic collapse in the whole system.

[Paul] I proposed establishing a central bank which “prints” money, but then how would it be distributed?. I’m wondering if it might be better if each country had their own currency, though that might pose as a trade barrier.

I wouldn’t think that Darren raising his prices would help, would it? His friends don’t have much currency anyway so higher prices on his part would definitely halt the flow of income. I did not consider the lending option, but in Minecraft it is a bit difficult to keep track of interest and loans, especially since the unit of currency is so big and is difficult to break down into smaller pieces. Darren buying from his friends seems to me the most straightforward and simple option, though his friends don’t produce anything. Maybe they just have to start producing.

Migration flows vs Aid to Economically Less Developed Countries (ELDCs)

[Paul] So Darren’s friend, really wanting the cat, offered to sell Darren things, only to realize he didn’t actually produce anything worth selling. I foresaw this problem a long time ago and advised Darren to buy labor from his friends, since his friends didn’t produce any goods or capital, and Darren already had a bunch of land. ……and that’s where the story ends. (I guess his friend never ended up getting the cat?)

[Susan] The parallel to advising your brother ” to buy labor from his friends” could be the situation where the EMDCs (Economically More Developed Countries] eventually need to allow immigration into their economies in order to keep them thriving, both from the supply side and the demand side.

[Paul] Darren and one of his other friends are in the same country. Since Darren is the largest producer and the wealthiest (in gold and resources), he provides subsidies (in the form of resources) to said friend. He also decided to build a subway system connecting his faraway island and a large continent with a convenient port, to facilitate transportation within his land.

[Susan] Giving out subsidies and providing transport systems to other players is rather like lending to them and its counterpart in the real world is the way in which rich countries “charitably” donate aid to the ELDCs……but the underlying motive (perhaps not even obvious to those giving the aid) is really to keep the global economic system functioning. If the ELDCs stagnate or decline, it is feasible that there will be oversupply of goods among the EMDCs (lack of demand) and, as you write, the circular flow collapses. (Incidentally, globally, there is already an oversupply of steel globally, and, to a lesser extent, oil.)

[Paul] I see, so the EMDCs “donating” to the ELDCs is more like forcing them to take some of the currency to forcefully let the income flow. Would that not constitute as a welfare loss or total loss because there is cost and zero gain? Though I suppose in the long run the income would flow again so maybe that’s a worthwhile gain.

The Role of Infrastructure

[Paul] There was another observation that I made. Middle-schoolers, are obviously not very… considerate of each other and are prone to attacking each other, and as a result, everybody in the Minecraft game lives very far away from each other to prevent or obstruct war. This means that the cost (in this case, time) of transportation for trade is very high, and nobody wants to build infrastructure because a) it costs resources and time and b) it facilitates invasion.

[Susan] While it is true that improved international transport communications could facilitate invasion, I also (perhaps too optimistically) think that improved telecommunications and travel will help to prevent war by reducing misunderstanding and allowing us to get to know better people from other countries. In the decades before WW2, xenophobia increased as trade declined (both as a cause and an effect). Is war on a global scale much less likely now? I hope so, although the rise of Islamophobia etc. seems to imply that we still too easily mistrust each other (and my argument that improved communications help to make conflict less likely seems to be proved wrong by the way in which ISIS etc. have managed to use the internet so effectively to increase both support and hatred for their cause).

[Paul] Although ISIS is spreading its terror using those means, I think that the People of The Internet are pretty good at fighting back.

And this is a positive note on which to end this exchange, in which I learned a great deal about computer games and their potential relevance to the study of Economics. Thank you, Paul.