David Friedman’s Outline of a World of Warcraft Course

World of Warcraft LogoDavid Friedman (yes, that David Friedman) posted a course outline for a World of Warcraft-center course in economics with some interesting insights,

There is no antitrust law in WoW, which makes it a good place to observe collusive behavior by sellers. My wife, who spends more time in the auction house buying ad selling than I do, has observed both an attempt to corner a market and an attempt, at least partly successful, to form a cartel—a cartel she was invited to join. Her refusal was met by a threat to drive her out of the market by underselling her. The organizer of the cartel had apparently not read Aaron Director’s analysis, reflected in McGee’s classic article on the myth of predatory pricing; it had not occurred to him that if he was selling, at an artificially low price, ten times as many gems as the interloper, he was also losing money ten times as fast. It took only a few days for him to discover the flaw in the strategy and abandon it.

The comments have some good discussion of the oddities of pricing in the Auction House (such as the completely bass-ackward fact that in WoW — unlike the real world — raw materials tend to trade for more than the cost of many finished goods, which can actually help infer the monetary players attach to skill point increases).

Maybe someday Blizzard will release a huge anonymized dataset of Auction House transactions for folks to play with.

A Keen Theory of Value

For someone who rants and raves about the evils of giving things away for free on the Internet, it is amazing how much of his stuff Andrew Keen allows to be made available for free on the Internet. In his latest rant, Keen argues that the economic downturn is going to kill YouTube, Open Source, blogs, and probably a kitten or two,

Of course not. One of the very few positive consequences of the current financial miasma will be a sharp cultural shift in our attitude toward the economic value of our labor. Mass unemployment and a deep economic recession comprise the most effective antidote to the utopian ideals of open-source radicals. The altruistic ideal of giving away one’s labor for free appeared credible in the fat summer of the Web 2.0 boom when social-media startups hung from trees, Facebook was valued at $15 billion, and VCs queued up to fund revenue-less “businesses” like Twitter. But as we contemplate the world post-bailout, when economic reality once again bites, only Silicon Valley’s wealthiest technologists can even consider the luxury of donating their labor to the latest fashionable, online, open-source project.

. . .

When, in 50 years time, the definitive histories of the Web 2.0 epoch are written, historians will look back at the open-source mania between 2000 and 2008 with a mixture of incredulity and amusement. How could tens of thousands of people have donated their knowledge to Wikipedia or the blogosphere for free? What was it about the Internet that made so many of us irrational about our economic value? It was a “mania,” these mid-21st-century historians will explain, like the Dutch Tulip mania of the 1630s or South Sea Bubble of 1720 — a mania that ended with the great crash of October 2008.

Hmmm . . . when I look at my server logs to see where folk are coming from to read stuff I’ve written, I’m surprised how often someone has referenced an article I wrote on Wikipedia. In some cases I spent a lot of time tracking down odd facts and verifying information for specific articles. And, to a large extent I write because I enjoy it.

But it is also true that I receive far more in value from the free things on the Internet than I give back. For example, I know how to do some elementary scripting, but how software that I run on my server (such as WordPress or Social Web CMS) is actually written or maintained is largely unfathomable to me. The value to me of these free software packages is literally thousands of dollars.

The free availability of those tools effectively subsidizes my own free production. If I had to spend $500 every time I wanted to install another instance of WordPress, I’d probably have fewer domains and less time to write (since I’d probably have to put in more work to afford those additional costs).

The same thing goes for the YouTubes and Wikipedia’s. As long as there are millions of people all contributing either on these sites or on their own blogs, or turning out open source code, or recording hilarious/poignant videos, it is not altruism so much as mutual benefit that motivates people to contribute.

Keen admits he doesn’t have a firm grasp on economics and that shows from his apparent belief that unless actual money is changing hands when knowledge is shared that someone is getting ripped off. Thank goodness the Internet is largely populated by creative types who do not share Keen’s clueleness and realize that they are frequently receiving in kind far more value from free content on the Internet that any one person could possibly contribute.

Economic Studies of Pirates and Privateers

A couple of PDFs of economic studies of pirates and privateers:

Peter Leeson’s An-arrgh-chy: The Law and Economics of Pirate Organization (PDF) “investigates the internal governance institutions of violent criminal enterprise by examining the law, economics, and organization of pirates.”

Alexander Tabarrok’s The Rise, Fall, and Rise Again of Privateers (PDF) looks at the system of privateers — where commercial ships would be given license by states to attack enemy ships — and analyzes why it rose and then declined only to rise again in the last few decades with the widespread use of private military firms such as Blackwater and Global Risk International.

Worst. Inflation. Evar.

San Jose State’s Thayer Watkins has a fascinating account of hyperinflation during the early years of the breakup of Yugoslavia (no, really!)

At the end of December the exchange rate was 1 DM = 3 trillion dinars and on January 4, 1994 it was 1 DM = 6 trillion dinars. On January 6th the government declared that the German Deutsche was an official currency of Yugoslavia. About this time the government announced a NEW “new” Dinar which was equal to 1 billion of the old “new” dinars. This meant that the exchange rate was 1 DM = 6,000 new new Dinars. By January 11 the exchange rate had reached a level of 1 DM = 80,000 new new Dinars. On January 13th the rate was 1 DM = 700,000 new new Dinars and six days later it was 1 DM = 10 million new new Dinars.

That was bad enough, but of course like other regimes before it, Yugoslavia tried to counter this hyperinflation with a series of price controls. But the result, not surprisingly, was simply to make the situation much worse since the hyperinflation was occurring far faster than the government could update prices even on government-owned goods, so it was essentially giving many goods and services away free,

James Lyon, a journalist, made twenty hours of international telephone calls from Belgrade in December of 1993. The bill for these calls was 1000 new new dinars and it arrived on January 11th. At the exchange rate for January 11th of 1 DM = 150,000 dinars it would have cost less than one German pfennig to pay the bill. But the bill was not due until January 17th and by that time the exchange rate reached 1 DM = 30 million dinars. Yet the free market value of those twenty hours of international telephone calls was about $5,000. So despite being strapped for hard currency, the government gave James Lyon $5,000 worth of phone calls essentially for nothing.

And so on. But, of course as Watkins notes, the Yugoslavian government’s position was that all of its economic problems were due solely to Western sanctions.