I recently stumbled upon a gem of an article presenting the kind of teachable moment that usually passes unnoticed. Yahoo! Games reports on a glitch in the popular computer action/role-playing game “Diablo III,” developed and published by Blizzard Entertainment. Being a gamer myself, I took a look and discovered a probably unintentional lesson in inflation.
People understand inflation as something vaguely bad that impacts the economy in various ways. It’s easy to see why: Even a widely respected textbook on economics, Foundations of Economics by Robin Bade and Michael Parkin, defines inflation as “an upward movement in the average level of prices.” This is a standard definition. It’s easy to memorize. But the concept is more difficult to grasp. What causes prices to rise? Who causes prices to rise?
In the game “Diablo III,” there is an auction house for in-game items, including currency called “gold.” This is standard for games of this sort. The price for this gold had been 25 cents (in U.S. dollars) for one million gold pieces. Then last week Blizzard changed the price to 25 cents for 10 million gold pieces.
Along with this change came a bug: When players canceled a gold auction, a glitch in the software doubled the amount of gold they held. Apparently, only players who had already amassed a fortune of several billion gold could exploit the bug. So it’s not difficult to imagine the frenzy that ensued when players got wise to it, especially given how great the return was with respect to a player’s personal gold supply. If only the real-world money supply could expand this way. (Wait. It does.)
Just as surely as if someone hit “print” on bonds at the U.S. Treasury Department and the Fed made more money of out thin air, the new gold in the game’s economy moved from the hands of its first owners—whose purchasing power was enhanced without contributing anything productive to the economy—to the hands of those who received it for the goods they offered in the “Diablo III” auction house. In so doing, the first holders of the new gold (the cheats) could buy more than they would otherwise have been able to, stimulating demand far outside of their legitimate capacity to do so. By bidding up items simply because they wanted them and could pay more for them, they caused the market to clear artificially high prices.
Reports from the “Diablo III” forums on Battle.net, one of Blizzard’s official sites, include complaints of people selling gems worth 30 million gold for 100–400 million gold; another participant on the forum griped that players “sold garbage for hugely inflated prices.” All told, only 415 out of the estimated three million subscribers who play every month actually exploited the glitch. But all it takes is a few rotten apples to spoil the barrel. In the real economy, the men and women of the Fed and the beneficiaries of their fraudulent money creation comprise a very small percentage of the total number of participants in the real market.
As the second holders of the new gold spent it on goods they desired in the virtual economy, they, too, stimulated demand far out of proportion to their productivity on the market. This raised the prices of what they purchased, just like the cheats who exploited the glitch to begin with. As this gold spread like a ripple on the surface of a body of water, each player’s purchasing power eroded further and further as prices rose higher and higher.
Naturally, players did not like the inflated prices. When enough people complained, Blizzard looked into it. Developers took the game offline and audited all gold transactions, looking for the cheaters; they were charged for the exploited sales they participated in and subsequently suspended or banned. Those who merely received the gold and used it in transactions at the auction house were allowed to keep the items they purchased with it, as well as the real money they may have made in the process. Blizzard Entertainment pooled the money made by the cheats together with that which the company received in transaction fees on those sales, then donated the extra money to Children’s Miracle Network Hospitals, in a bit of quick thinking by Blizzard’s PR department.
The company announced this weekend that the glitch has been fixed, and that by Saturday, 85 percent of the cheat-gold had been recovered. Yet many players fear the price inflation caused by the remaining gold will still be quite burdensome. Not without good reason: The inflation may have been cut down to 15 percent, but that remaining gold is still inflationary. Members of the virtual economy understand the harm of inflation, even if they wouldn’t think to express it in economic terms, or could even name it as such. So here we have an example of inflation in a virtual economy—which is tied to the real economy. Here people can see the cause and feel the effects, in stark contrast to the obfuscation and sleight-of-hand involved in inflation by the Fed, the effects of which people feel in myriad ways without really understanding the cause.