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How I Used EVE Online to Predict the Great Recession
by Ramin Shokrizade on 04/05/13 10:22:00 pm   Expert Blogs   Featured Blogs

The following blog post, unless otherwise noted, was written by a member of Gamasutra’s community.
The thoughts and opinions expressed are those of the writer and not Gamasutra or its parent company.

 

The EVE Online Real Estate Crisis

Back in 2003 when I was helping CCP with their new economy in EVE Online, the biggest problem with their design was that the factories that were central to the player based economy were too cheap to buy and maintain. Since the game was released in the UK a day earlier than in the USA, by the time I was allowed to log into the retail version of the game all of the prime factories had been grabbed. This forced me to race to Minmatar space, where the ships were generally held in lower esteem by beta testers.

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. 

Real Estate Bubbles are Pyramid Schemes

When you speculate on real estate, you are gambling that the value of that real estate will continue to rise, at a rate greater than the overhead on that property. This does not occur unless the number of speculators increases over time, otherwise demand would stay flat and property values would not rise. A rapid influx of new residents in California would have also increased property values by increasing demand, but the population growth during this time was relatively flat in California.

A rapid increase in the pool of speculators allows each generation of speculators to unload their investments on the next generation and to generate a profit. Like all pyramid schemes, the system is unsustainable as it would need to approach infinity to continue. The faster the pyramid grows, the greater the profits for the early entrants, and the greater the losses for the last generation of participants (before the crash).

This pattern of real estate speculation in California is a basic part of life there. When a new “bubble” (this is what we like to call the pyramid in California) is forming you get a pattern like this: http://firsttuesdayjournal.com/the-rises-and-declines-of-real-estate-licensees/

Note the huge rise in real estate agents as the bubble heats up and approaches detonation. But this bubble was different. In 2006 I noted the proliferation of the Adjustable Rate Mortgage (ARM). Its use was increasing at a rate that was positively non-linear. The ARM is designed to let new players enter the pyramid that normally would not have the means to do so. This allows the pyramid to go on longer than it normally would, increasing the profits of early entrants. It also ensures that the last generation will be historically large.

Not only was the last generation of this pyramid unprecedented in size, but also in quality. These participants had little or no assets to give up when they got left holding overvalued property at the time the bubble burst. This means that the banks, who were seeking to profit off of the use of ARM's to foreclose on valuable California real estate, ended up with a massive amount of real estate that was not as valuable as they had hoped. It was “under water”. This further drove down property values, creating a negative feedback loop.

The result, which I predicted in 2006 in a conversation (and bet) with a friend who was a retired but powerful financial expert, was a system collapse that threatened to force our banking system to fail. This forces the government to step in to shore up the collapse. What is happening here is that the banks, the instigators of the ARM, did not realize that if the pyramid got too large they would end up being the last generation of the pyramid. Because the government feared what would happen if the banks collapsed, the government stepped in and volunteered to be the last generation of the pyramid.

You might find it interesting to note that I won that bet in 2008 by mutual agreement, and my friend fronted me the money I needed to return to school to study “real” economics. Now I consult to three international gaming companies with net revenues in excess of $1B each, as an applied virtual economist. Thank you CCP and EVE Online for teaching me so much.


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Comments


Nick Harris
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Absolutely fascinating. Any recommendations on how to get the world out of recession now?

Ramin Shokrizade
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When you make economic decisions on a global scale there will always be winners and losers. I always keep this in the back of my mind. Due to my role in education in virtual economics, stepping into the question you pose in a public space would run the risk of my work becoming politicized, reducing my effectiveness. So while I am very far along the path of answering your question, I'm not going to publish it. Just publishing this piece was a difficult decision for me as I know some will attempt to politicize my work to serve their own agendas.

Ramin Shokrizade
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Let me add that this is the ultimate promise of serious research into virtual economics. The ability to play "God" in a simulated economy means that you can see who will be harmed by your actions in a "safe" environment. Playing God in the real world without running such simulations can have catastrophic effects.

Michael Mullins
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Thank you for exercising discretion. It speaks very well of your professionalism.

Lars Doucet
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Am I right in understanding that you basically implemented Henry George's Land tax to end the problem of speculative rent?

Ramin Shokrizade
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I am mostly self taught, so honestly I had to look that up. Yes clearly he made some very similar observations about economies. The difference here is that what Henry George was proposing was a society more like a meritocracy, free of the inequities that exist in real space. In virtual space, where I mostly do my work, the consumer *expects* it to be a meritocracy. I have the advantage of being able to provide that because I am starting from scratch when I build or improve a virtual economy.

In the real world many of our economic systems are archaic, and changes are made incrementally in order to prevent disruption. Equality has never been the objective. Nonetheless, there are inefficiencies associated with unequal distribution of resources, and these inefficiencies magnify as the resources become ever more poorly distributed. I believe a big part of the purpose of economics is moving resources in a timely fashion to where they are needed to optimize production and wealth creation.

Ramin Shokrizade
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I would like to add that Mr. George's thoughts on immigration would not cause improved systemic efficiency. His view seems born more of nationalism, and is a bit obsolete in the global economy. In a virtual economy, if a worker does not like my economy they are free to leave at will. I then lose a customer.

In the real world, if a member of the economy sees a better economy elsewhere, they will likewise seek to travel there. We have numerous systems in place (immigration, customs, etc.) to prevent this fluidity, even if it would lead to greater efficiency and productivity. There are two reasons we spend so much of our wealth on trying to reduce our efficiency.

The first is that while all workers as a whole would benefit by being able to move where the jobs are, those who already have jobs might fear greater competition. This is isolationism, and while it is understandable, it is inefficient. It also ultimately leads to unemployment as high labor costs force companies to move to locations with more attractive labor costs. Companies would rather move the people than the factory, but if they are not permitted to do this, they will move the factory.

The second reason is that in economies that tax labor, the movement and behavior of labor needs to be regulated. Failure to do so might mean that public goods and services will go underfunded and over used. If you were to instead tax land, which tends to be incapable of immigration, then all of these problems and inefficiencies disappear. If a lot of people want to live in one place, land values go up, rents go up, taxes go up, and all services are fully funded.

The primary objective in making any real world change in an economy is to minimize disruption. The secondary objective should be to increase efficiency. Thus incremental changes in the direction of improved efficiency are ideal. Taking no action in a competitive environment, or worse still taking action that reduces efficiency (as the original article describes), increases the risk of an uncontrolled disruption.

Lars Doucet
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Yeah, I don't buy into every single detail of Georgism as 100% gospel, but I definitely think George (and you) are on the right track with the land tax idea, which in any case is kind of the cornerstone of his philosophy, and which carries over to related but distinct movements like Distributism.

I also find it kind of awesome that you've used a game simulation to hilight the land tax theory, much like "The LandLord's Game" did 100 years ago. (That board game is known to us today as the commercialized rip-off "Monopoly")

Ramin Shokrizade
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Thank you Lars. I'm paid to make virtual worlds, not the real world. To be successful commercially, my worlds have to be more fun than the "real" world. Some day, hopefully soon, I will produce a game economy that is superior to the "real" economy. In playing these economic games, players will learn to become sophisticated in the ways of economics themselves. I learned a lot myself from Sid Meier.

When the uneducated hear "let's lower taxes", this of course sounds very attractive to them. In a world with no public goods and services you don't need taxes. This is anarchy. I don't think these people realize they are anarchists. I'm not here to tell them anarchy is good or bad, but they should understand what they are voting for.

Michael Mullins
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I hope this isn't a silly question, but what kind of resources do you use as a professional to compile and test economic data? Would it mostly be the Labor/Statistics Bureau in the US? If a layperson like me was idly wondering about some random question (I guess more in an XKCD way rather than doing hard, intensive primary research), what sources could I go to in slaking that curiosity?

Ramin Shokrizade
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If you are asking about virtual economies, my best advice would be to log into EVE Online and start exploring :) If you are asking about how to learn about "real" world economics, you would do better to ask a "real" economist. Data is valuable. If you could get a game company to let you test things in their virtual environment and then share the numbers with you, that is the ideal way but this is not so easy for a casual observer to do. Because virtual worlds tend to be privately controlled, they don't have to share their data with you and probably will not.

David Serrano
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@Ramin Shokrizade

I haven't visited in quite a while but, in theory someone could test and collect data on complex economic theories in Second Life. However, this would require a substantial real world financial investment and would become the equivalent of a full time job. Because you would need to own and manage several large, high traffic sims in order to gain the ability to collect data, manipulate prices, rules, regulations, etc...

Ramin Shokrizade
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Second Life is pretty far from having a closed economy. This means that while you might be able to gather some useful information, it's usefulness for simulating real world economic interactions is more limited than you might expect. Still, it could have some uses as long as the involved researchers understand the limitations of the system.

Steven Christian
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It sounds very interesting, but I must admit that I didn't fully understand it on the first read-through.
But it did get me thinking how a classic resource-gathering RPG would work if the money spent by the player didn't disappear.

I guess there would be massive inflation, and the system would break down, as generally the player is the only one in the game that is designed to make money.

I would be keen to try some of these games that you have worked on with differing economic models (or even ordinary ones for comparison).

Gerard Gouault
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If you haven't done so yet I would suggest you read about Garrett Hardin 1968 - The Tragedy of the Commons.

Michael Joseph
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the so called tragedy of the commons effect is not any sort of law (natural or otherwise) nor does it represent an inevitable outcome. It requires (in my view) fools. So unless you believe humans are ultimately foolish creatures then the tragedy of the commons is avoidable if the users are educated and (for lack of a better word) indoctrinated to value long term sustainability. Long term sustainability is the rational choice for societies even if it's not the rational choice for the self interested individual.

Ramin Shokrizade
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While I find this interesting, I am not sure how it ties to my article. On a side note, I will volunteer that I am building a virtual economy right now that will simulate The Tragedy of the Commons. I can do this because the world I am building has a finite duration (it is session based). If it was without a maximum duration the result would be resource and species extinction, just as you would expect. The great thing about using a virtual environment to simulate this is that we can run the entire simulation in months and see the result, instead of waiting decades.

In response to Michael, you would expect non-renewable resources to expire in all scenarios I could model, but renewable resources would not. This leads to some sort of stability that looks very different than our current society. The real problem is that if you allow warfare in the simulation (which I am) then those that try to conserve get wiped out by those that try to consume. So we would have to remove the threat of warfare first to achieve the sort of equilibrium you would envision.

Ramin Shokrizade
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Part of the problem is that we only allow one nation to win in our simulation. If we removed this victory condition, then it is possible multiple nations could agree to disarm. I think this would be possible if we set the victory conditions to "any nation that survives to Date WYXZ" instead of some last man standing condition. I will have to think on this. I'm guessing such a game would not monetize as well so it is unlikely to be produced as a commercial project. It could be publicly funded but so far I've seen no public desire for such investments.

Kenneth Blaney
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Michael, you are absolutely correct that for tragedy of the commons to occur, it requires a society of fools (or at least a majority of them). That said, understanding that a tragedy of the commons can occur is how people learn to not be those fools. Long term sustainability is in the interest of societies, but it is not what a society will do if the individuals within the society don't realize it.

Michael Joseph
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Great article Ramin.

We hear about gamification being used to educate people but simulations of virtual _______ (such as economies) I think is, as you've shown, where the real power of using interactive simulations lies to help people to understand the fundamentals of complex real life systems such as economies and examine them in a way that takes advantage of the strengths of computing. In other words, gamification usually tries to make learning fun, but is not otherwise using the strengths of computing to create controlled simulations and experiments.

You mentioned how getting private companies to open up their virtual economies for research as being something hard to do. Even if it was opened up, there would likely still be restricted access. I wonder if universities are developing virtual economies for undergraduate educational as well as post grad research tools.

Ramin Shokrizade
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Michael, thank you so much for your words. I spent 2009, 2010, and 2011 attempting to convince universities to allow me to pursue my work as part of a PhD program. Given my GPA, in each case I was the top ranked applicant. Each year I was rejected, "for non-academic reasons" as one friendly professor described it. The issue seemed to be that I did not come with my own funding. Other factors could have been anti-gaming stigma, my race, or that I have disagreed with some of the work of other virtual economists. Thus I went to industry, where (after some initial skepticism) my work has been enthusiastically embraced. I think that it is a bit weird that in this case industry will be teaching academia, it makes me wonder as to the relevance of our higher academic systems. I am sure this is not a unique situation.

Weather prediction used to be the stuff of comedy because it was notoriously inaccurate. Weather forecasts were wrong more than right. Once we learned to model the weather, our weather predictions became fairly solid. Now it seems to be economists that are wrong more than they are right. If they could similarly learn to model economies and run simulations, I think the field (and our species) would enter a Golden Age.

David Serrano
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"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."

So you used insider information to position yourself in an underdeveloped and undervalued segment of the market... then you lobbied the lawmakers to change an existing law in a way which allowed you to exploit your position and become exceedingly rich in the process. Sounds exactly like real life economics and politics to me lol! Just incase it's not clear, I'm only joking. This is actually a fascinating topic and article!

But if I can ask... what is your opinion of the economic system in World of Warcraft? After six months of nearly non-stop play and reading about the different methods players use to game (or poison) the auction system, I've decided WoW's economic system could be used as a model to prove why "the American Dream" is only a pretense. I'd love to hear your opinion, if you have one.

Ramin Shokrizade
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David.... cute :) Actually no one got to see the economy for EVE until Day 1 of retail. I had been very actively beta testing the game, and did not get a sneak peek at it. My only insider knowledge was that I knew how to play the game from said beta testing. I flew from system to system on Day 1 (the UK players started on Day 0 and bought everything up) and found nothing available until I got to Minmatar space.

After I told CCP how to fix their factory problem, it was something like 4 months before they actually implemented it. I wasn't advantaged by knowing how they would fix the problem some day, I just kept making due with the broken economy that was in place at that time. I actually quit EVE about the time the fix went in so that I could test....

World of Warcraft. In my opinion one of the primary reasons WoW was so successful was that it launched with a weak economy. This was a lot better than NO economy, which was what the competition (except EVE) had. But it was ravaged horribly by gold farmers, what I would later (in 2011) describe as RMT3 activity. Watching this grotesque abuse of WoW, with Blizzard apparently helpless to stop it, was what caused me to start researching passive RMT defenses in 2005. I studied the WoW economy, and the activities of IGE and their ilk intensively through 2005 and used the information I gathered in building up to my 2009 "Sustainable Virtual Economies and Business Models" tome. Dr. Mike Zyda, the founder of the USC Gamepipe lab, introduced me to Blizzard's senior recruiter in late 2009 so I could discuss presenting my findings to them. The recruiter said "I have no idea what you are talking about" and that was as far as it ever went. I have not played WoW recently so I would be unqualified to discuss their economy now, as it has hopefully evolved somewhat.

Kenneth Blaney
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There is a spectrum of housing speculators which you did not mention here (possibly due to no corollary to something in EVE or just for brevity). That is, someone who purchases a house for the purpose of improving it and then selling it for a profit instead of simply buying it for the purpose of selling it, as is, later on. For them, raising the tax on a property hurts their ability to make a profit on some types of houses that may require a longer term restoration and thus actively prevents work with real value being done. To that end, we must be mindful in both real and virtual economies that efforts to end speculation come at costs to real services.

Although your solution quite obviously worked, might I suggest a slightly different mechanism? The usual service that speculators provide to a market is liquidity. That is, when someone who was actively using the property wants to sell it, he will more easily be able to find a buyer who, in turn, will be better at finding a buyer that the original seller (because he specializes in doing so). However, in the situation you described in EVE, it appears that the speculators were actually accomplishing the opposite and actively decreasing the liquidity of the market. To that end, they effectively acted more like stock manipulators than speculators. The solution (increase the cost of holding) thus made the act of manipulation unprofitable and ended the practice. A way to verify or debunk this could be to monitor the churn of factories and determine if there are any people who tend to hold properties for short periods of time (thus avoiding the tax), but do so rather often (thus "making it up on volume").

Ramin Shokrizade
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Kenneth, I think I understand your point. When you build a system that is simple enough that there is no need for a middleman, then said middlemen disappear. If I were to make the process of purchasing or leasing a property complex enough, then I would create a market for skilled labor that understood that process. In virtual environments, I generally like to make these processes simple enough that they can be understood by all interested parties. In the real world this is not always possible, so your point is taken.

I just want to say that I am not here to solve the world's problems. I am just suggesting a way by which we can come up with and test, in a relatively safe manner, future solutions to the world's problems. Ideally this would be a multidisciplinary collaborative process.

When you create a closed virtual economy (my ultimate goal), then all sorts of complexities that are difficult to predict can be observed with real people making decisions. I believe the results would teach us a lot. Currently all virtual economies are open systems. Given how countries such as the USA "print" money, it might even be argued that real world economies are open. Further, since all modern economic models seem to assume that environmental inputs are infinite and can be borrowed from forever without repayment or interest, again "real" economists act as if they are in an open system. This creates complexities in real economies that I believe are not yet understood by contemporary economists.

Kenneth Blaney
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There is loads economists don't understand ( and plenty they seem to not want to understand if I feel like dredging up the math vs econ war). You make a good point about designing systems simple enough to be understood by everyone. In a virtual economy you have the ability to do that because it is designed all at once instead of piecemeal over the course of decades or centuries by hundreds of thousands of people. I suppose that's why MMOs tend to not need players who act as specialized real estate agents or lawyers. Maybe there is a philosophical point in there somewhere?

I believe there is one virtual economy that is actually closed under the slightly looser definition of closed you gave here ( that is, where money can be created or destroyed, but generally isn't through is normal use). It is a free to pay title called Wakfu. If I remember correctly, money is created in game from mined resources by players directly. I also think it was two different classes that mined the resources and minted coins. I remember thinking it was a pretty novel solution to inflation in an MMO ( having just left FF11 at the time) as when inflation was high, the relative value of minting coins would go down and fewer coins would get into the game. However, if the game experienced deflation ( for instance, by more players joining the game or an in game event that encourages people to stock up on coins), the value of coins would go up and encourage more players to make coins.

Ramin Shokrizade
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I was asked a while ago if I wanted to help finish the Wakfu economy, and I was very intrigued by how they were approaching it. I probably asked for more authority than they were comfortable with at the time and thus I ended up on other projects. I am glad you brought that title up because in that title they were attempting to model resource extinction with only limited renewability. I thought this was grand. I have not gone to look to see how they did in the end, and I probably should. Note that when I talk about closed economies, I don't just refer to currencies, but all resources.

Kenneth Blaney
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I guess I shouldn't be surprised that you have not only heard about Wakfu, but actually influenced the development (if only modestly).

I suppose one such complexity in a virtual economy that was actually closed, including resources, is that the only utility of currency would be to transport value cheaply (it is much easier to transport and measure a paper dollar than a dollar's worth of gold). You might run into a similar problem with the factories here if non-currency goods are too easy to transport. Otherwise, people might start trading in some other item with an in game utility (such as a common crafting material or ammo for a weapon) instead of the designated currency, effectively replacing it leaving the only people using the currency to be speculators.

Reading this has got me interested in the subject. I hope you reach your goal and are able to create a closed virtual economy one day. It'll be interesting to see the issues (and solutions) that arise.

Karl E
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Your comparison of economics with weather prediction is... I don't know. Weather systems may be chaotic but they are natural phenomena, they do not consist of intelligent beings who have an interest in manipulating the system for their own benefit.

Ramin Shokrizade
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Are you suggesting this makes people less predictable than weather? If you are, don't you think this is just a technological hurdle? When I say technological, I realize that sociology is at least as important as quantitative analysis in understanding the trends and patterns.

Chris Grey
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I think the point Karl is making is more along the lines that economics is not a natural science. Comparing it to a natural science obscures the fact that all rules for the economy were made at some point by people, generally for some reason.

There are valid comparisons between the two, but I, too, have become sensitive to seeing economics compared to natural science because the person doing the comparing usually like to imply that the rules of the game of economics evolved naturally and should not be questioned as what bias they introduce into the system. I'm not saying that you're implying it, just that the comparison has been used often as very effective propaganda.

Karl E
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Well, if there is anything the bubble/crisis shows is that there are people on the inside of the system, such as in major banks, who are capable of understanding the thinking of the economists that are supposed to be charge, and act upon this knowledge for their own benefit. Basically, while they are part of your model, you are also a part of theirs. So it’s definitely not a technological hurdle, it’s more of an arms race of modelling capabilities that is not going to end soon.

Ramin Shokrizade
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I operate in the belief that my fellow Quants in the financial sector know what they are doing, and should not be underestimated. When I see huge spikes in wealth stratification I attribute this to them quietly using powerful computers to take advantage of the myriad weaknesses in the real economy, just like players do to the games I study. I cannot overemphasize that when an exploit is used to fatten one purse, it must come from another purse in a nearly closed economy like our "real" one. Or millions of other purses.

Obviously there are also laws passed that open up new exploits (presumably intentionally), such as the aforementioned Prop 13. Here again I assume that these work as intended, even if that intent is hidden while it is being promoted. I even see clever beta testers in the games I study suggest changes to game mechanics that open up new exploits that they intend to use for their own purposes once the game goes retail. Sometimes developers fall for such ploys, even against my advice.

This happened with Flying Labs' Pirates of the Burning Sea (2008) when they changed some key rules against my advice. A week or so later I was able to generate 14 times the combined wealth of the entire server (5000+ players playing for over a month) in just one hour. In my case I contacted them after that first hour and asked them if they wanted me to stop. They said "yes please" and I did. I probably could have used RMT to make a quick $30,000 but by that time in my career I had a reputation to protect. If this had been Wall Street and I had found a similar "Holy Grail" exploit, I could have added several zeros to the end of that number.

Bart Stewart
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Ramin, thanks for this write-up. I'll say up front that this description doesn't persuade me to your conclusions, but I also want to be clear that I endorse generally what you're doing. Good testing of theories is something everyone can support.

I would briefly note that you're already politicizing your work. It's hard to read a statement like "When the uneducated hear 'let's lower taxes,' this of course sounds very attractive to them" as anything but an attack (and an unfair one at that) on anyone who doesn't share your belief system. It's not brutal as such things go, but I mention it since you say you'd prefer to avoid overt politicization of your article and I take you at your word.

That said, I've tried to keep the following comments objective -- I'm also not interested in arguing politics; I see this discussion as being mostly about ideas concerning property ownership rules and how those ideas might play out in virtual worlds, especially massively multiplayer game worlds.

1. Factories are not real estate. Your EVE example talked about factories, but your later comments shifted to talking about real estate. A producing investment has a different kind of value than an appreciating investment, though. People spend money to obtain those different forms of property for different reasons, which affects some of the economic principles that apply and their effects on an economy. So I'm not convinced that applying conclusions related to one applies well to the other, in the real world or a game world. It might -- I'm saying that I'd like to hear about evidence if that's the case.

2. Rent is not a tax. Rent goes to a (usually private) owner, who will often reinvest that money, either through spending or savings, enabling additional economic activity. Taxes go to a government that -- when it's functioning correctly -- spends the money only on legally required/approved activities of proven social benefit... but governments don't always do that. They can and do spend less efficiently than private owners who can't create fiat money or coerce prices by armed force. Marketplace-oriented rules give different results (both good and bad) than results dictated by a command economy, and I believe both perspectives need to be considered when thinking about economic rule-setting in a game with a ruler (the devs) and free people (the players).

3. Property taxes are not the only kind of tax. National, state/province, county, and municipal taxes of many kinds all affect the economic behavior of private actors. The effect of raising property taxes may be obvious in a highly constrained environment (and thus one whose results are less applicable to the real world). But it's less certain where a complex mix of rules allows complex responses to changing stimuli. For example, did your Prop 13 analysis consider the effects of other state and federal tax rates in California at the time? What about property ownership activity levels and usage patterns in other states with different property tax rates? Wouldn't it be interesting to allow multiple different location-based property tax rates in a gameworld to avoid confirmation bias?

4. This analysis doesn't seem to consider any likely consequences besides the one presumably positive effect of forcing the owners of productive property to use that property by artificially pricing most potential owners out of the market. In the real world, changes in economic policy have multiple consequences -- usually a mix of desirable and undesirable effects -- as those affected change their behaviors in response to the altered economic environment. A trustable analysis would give fair consideration to all the most likely effects of sharply increasing some economic taking, not just one effect considered positive.

5. Raising the cost of property certainly must restrict the ownership of property to the few who can already afford it, and exclude the majority of the public (in real life or a game). What consideration have you given to this exclusionary consequence of making property taxes very high?

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In general, an economic analysis that assumes tax-taking governments (made of people with power) are compassionate and wise actors while private investors are only [edit: I should have said "frequently" or "primarily" here, not "only," as you did mention families] opportunistic "speculators" is not one that I would trust to inform the making of public policy. Certainly not in the real world, and it probably wouldn't be much fun as a game, either.

All this said, as I mentioned I strongly support the idea of using virtual worlds to test economic theories. In particular, for at least ten years now I've seen people suggest making MMOs with closed economies. That pesky "games need to be fun" requirement means that open faucet/drain systems almost always win over closed implementations of someone's pet economic theories. But even though I've come to think that trying to build a game with a closed economy is chasing a will-o-the-wisp, I admit to a sneaking admiration when someone tries it. I genuinely hope your effort sees wide usage, and I hope you'll share your results here.

Given the ease with which such things are politicized, though, I would gently suggest that teams of economists -- who are included specifically because they have different perspectives on how people act economically and on the proper means and ends of public policy -- would be more likely to find widely-applicable results than one person who begins with a particular belief system.

If you can get multiple economists to agree on a theory of economic behavior, then you'll have accomplished something of real utility. ;)

Ramin Shokrizade
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Bart, thank you for your thoughtful comments. When I say that lowering taxes always seems attractive to the uneducated (as would saying something "tastes better" if you don't tell them the consequences of something tasting better), I am not implying that only the uneducated like lower taxes. There are clearly a group of educated people that are advantaged by this. I don't see this as a political statement, as cruel as it may come across.

As for your other comments:

1. For the purposes of EVE Online, Factories were real estate. They do produce, but if there is an increase in demand for them, they appreciate just as land would if there was increased demand for it (especially in an environment with increasing population). There is no rule that land will appreciate in value, though obviously in a world that has gone from 1.25B to 7B population in 100 years, we generally make this assumption.

2. In a virtual environment where there is an open economy and no public goods or services, rent and taxes are indistinguishable. In a closed environment the only difference is whether the beneficiary is a public or private entity, which is unlikely to affect the payer or their behavior. It does affect what is done with those funds afterwards.

3. I see no point in entering this argument. Clearly if I wanted this article to be more rigorous it would have been 100+ pages and then very few people would have read it. Likewise, the whole point of using virtual environments instead of the "real" world is that any argument about economic effects can always be countered by the argument that you cannot isolate an effect to one stimulus alone. This is not true in a virtual environment where you can control for this.

4. I believe I did this. I did not mention that the speculators lost their real world income because they no longer could sell factories at $300 each. I think such conclusions are fairly obvious. I also pointed out that competition was increased and prices were lowered. I'm sorry if I was not able to find any negative effects of the correction to report. If you can think of some that would be great.

5. Raising the TAX on property actually LOWERS the cost of of property, making it MORE accessible. Perhaps you might want to read that section again.

While resisting the urge to respond to your other appeals, I will remind you that I have posted here in these comments that I think the future of this technology lies in collaborative work by individuals of multiple disciplines.

Tim Loots
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I think you are approaching this piece the wrong way. I think this is a very interesting topic, but aren't you approaching things a bit /too/ serious in this case? It doesn't seem to me like Ramin wrote this piece in the hope of arguing that owning a plot of land is the same as owning a factory, nor does it seem likely to me that he was trying to argue that tax and rent are essentially the same thing. I tend to agree with most of what you are saying about the lack of evidence or consideration, and I'd be more than willing to hold that against something like a scientific paper. Not against a blogpost though.

Also, in what I perceived as an attempt to be objective, some of your arguments have seemed to have boiled down to: "What you are saying may or may not be true depending on the circumstances". Which is true, but it's also true for effectively every statement.

I do wholeheartedly agree with your suggestion that economists with different perspectives would be more likely to find applicable results.

[EDIT: This was originally posted before Ramin's post above this one. Because it had to be approved first - I'm a first time poster - this obviously isn't the case anymore]

TC Weidner
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I find this a very interesting discussion and I dont want to get to deep into it, but one assumption did jump out at me and just wanted to address.
you stated:
"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 the real world this simply isnt true. Property taxes are BASED on the current market price of the house. If the property tax is low its because the market price for the house is low. Property tax is a reflection of property value.

Property tax is based on land value + structural value (livable square feet, neighborhood, and other variables within the house itself). So in reality if the house goes up in value, so does its property taxes.. Housing speculation went and still goes across all price spectrums. Free and easy money was to blame. The housing market collapsed because at upon the slowdown there was too many people with too many expensive houses with no real way to afford them. The classic asset bubble.

Bart Stewart
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TC, it sounds like what you're describing is the *amount* of taxation on a particular piece of property.

I think what Ramin is talking about changing is the *rate* of taxation on property.

I'd also like to better understand how he thinks that affects the "value" of property, though.

TC Weidner
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Bart, rates dont change very often, they are set via the whole community ( usually county wide as a % per 100,000 worth of value) hence everyone in your neighborhood pays the same rate.
Its why if you ever want to appeal your property taxes, the first thing you do is find comparable houses in your neighborhood, if you are paying more than joe down the street who basically has the same house as you, yo'll probably win your appeal and your taxes will go down to be comparable with Joe.


TC Weidner
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heres the thing:
here is the problem I see Ramin is using Prop 13 as a point of comparison, Prop 13 is the most absurd property taxation system in the country. It's a completely unfair system that no other state in the US would dare emulate.

Prop 13- The proposition decreased property taxes by assessing property values at their 1975 value and restricted annual increases of assessed value of real property to an inflation factor, not to exceed 2% per year. It also prohibited reassessment of a new base year value except for (a) change in ownership or (b) completion of new construction

therefore in CA two identical houses in the same neighborhood could have one family paying 1000 dollars a year in property tax and the other paying 10,000. Its insane, and it not what occurs in any other part of the country.

Christopher Plummer
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I don't know about about the no other state bit.

It sounds very similar to the 2% cap on property tax increases that Governor Christie helped pass for New Jersey. With home values coming out of a 9 year low we're essentially all being taxed (or could appeal to be taxed) at 2003 home values.

The constructive criticism I would give is that yes you can increase fluidity (as Kenneth mentioned) by increasing upkeep costs. However this also increases corruption and cheating. I'd venture to say that this is for two reasons 1) the stakes are so high and 2) because the upkeep has become a factor of greed and not of need.

Ramin Shokrizade
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Let me give an example with arbitrary numbers. Let's say I put a 100% annual tax on a property, based on its value. Unlike the (intentionally) bizarre way Prop 13 prevents reassessment, let's assume I reassess the property at least once a year. It is realistic to assume that with a 100% annual tax rate, almost all owners will attempt to sell their property if they can. They may not be able to because the number of sellers will far outnumber the buyers. Buyers might match the sellers when property values drop by 90%. At that point the annual property tax is 0.1 x 100% or 10% of the original value of the property every year. The good news is it was really cheap to buy. The bad news is you are essentially buying it every year. So if the house was $300,000 before I raised the tax, now it is only $30,000, but the tax on it is also $30,000 per year. This is only $2500 per month which is in line with the cost to rent a modest house.

I could go into even more detail, but hopefully you guys get it from reading this.

TC Weidner
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Sorry Ramin, thats not how property taxes work. If the assessors ratio is old and say 60%, it doesnt mean when he revals or does a reassessment to get back to 100% ratio that property tax rise. They may adjust some but on average across the town they stay the same, (revals are revenue neutral)
For the average homeowner after a reval your taxes remain the same, even if your ratio went from 60% to 100%

Chris,unless your house lost value and for some reason all the houses around you didnt. You have nothing to appeal.

Property taxes are among the most misunderstood areas of taxation in this country.

Ramin Shokrizade
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TC, I think we are misunderstanding each other. Perhaps you can contact me on LinkedIn and we can have full discussion :)

TC Weidner
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Ramin, I have reread your post, I think you are correct, we may have spoken past one another. While I do agree with much of your analysis, especially the final part , the real estate bubble and pyramid scheme, your idea of property taxes is a little off base IMHO. First off property taxes do not go into a vacuum. They go into the schools, park, police, fire dept, infrastructure of the town as you did mention. Good schools, nice parks, safe neighborhoods then go right back into pumping up your homes value. Therefore this alone make any comparable analysis with a MMO economy money sinks deeply flawed.

Its why a 3 bedroom 2 bath even if highly taxed nice neighborhood is more desirable for buyers than a 3 bedroom 2 bath in a low taxed slum. Same exact house but price and demand can and does vary incredible do to the municipality. so in reality you cant simply say "high property taxes reduces the property value. After all, at the end game of all house speculation must be a long term homeowner.
Also speculators never bought and held on purpose, therefore property tax meant little to them with regards to your YOY price/taxation ratio differential, speculation was to flip as quickly as possible. Buy using a liar loan, paint and do some easy fixes, sell it for a higher price then you bought, all while trying to pay as few mortgage payment a possible.

Again, I find this a very interesting article, thank you for sharing it, always an interesting conversation. If you wish to link to me feel free. I dont use LInked in much, but Im under Todd Weidner, I'll be the Todd with the patent in this field of property taxation.

One interesting variable that is coming into play, if your still into all this analysis that is really going to effect home rices, sales, flipping etc is home/hurricane/flood insurance. NJ shore house prices are likely to fall and demand may weaken in the near future when flood insurance doubles, triples, and more. Gulf coast has and is seeing it with Hurricane insurance,and unlike property taxes, insurance really is more like a money sink, this may be a better variable to mess with.

anyway, thanks again for the conversation.

Ramin Shokrizade
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Todd, I don't think you are arguing that high property taxes are what make a neighborhood desirable. I think you are just suggesting that there are multiple things that make property valuable. Further, it might be possible to suggest that very high end properties might be owned by (or at least advised by) more sophisticated consumers that realize that their taxes improve the local infrastructure.

Of course again we are stretching the conversation past what has (up to now) been simulated in virtual space, and I agree that insurance might be a bit closer to the EVE Online economy since that tax goes into private hands with no desire or obligation to put that money back into the communities they extracted it from.

I would add that there are a number of "normal" people that speculate on property every time they buy a house to live in. These people are not looking to "flip" their house right away, but they are gambling that the equity in their investment will rise and pay for itself, vs. the cost of renting. I use a very broad definition of the term "Speculator".

TC Weidner
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I don't think you are arguing that high property taxes are what make a neighborhood desirable--------------------

correct, but it is one of the very large weighted variables that allows it to be desirable. Just because people have been conned into thinking they can have a free lunch doesnt change reality. Nice towns cost money to upkeep but you never do see mass exodus from them, even at high tax rates, people just like to moan and groan. Only people who leave nice towns due to taxes usually are old people, living on fixed income who no longer care all that much about school systems etc. I see this firsthand in NJ, which has by far the highest property taxes in the country. But Im getting off on a tangent again :P

Lets also remember this whole house as an investment first and foremost is still a new phenomenon, for most of our history and I think we are moving back to this, a house if first and foremost a home to raise your family or to live in and become part of the community. The bubble changed that for a decade, but the bubble is gone and I dont forsee it coming back. If you buy a house thinking its some great investment, that bubble has burst :)

Might take some time for this younger generation to get that.

We have to remember nationwide property taxes are still low, 1200 bucks on average. So they do not move much YOY. (FYI-Fees are the new game they play now, its not a tax its a new fee. )


Erin OConnor
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Much like CCP steps in to adjust and regulate the Eve Economy we also have a body that can step in and regulate the economy as well, Its called government.

"To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes"

When banks/business becomes "to big to fail" and "to big to prosecute" because they will cause damage to the economy, It is the role of government to step in to protect the public interest. It's a shame that we had laws in place to prevent this and remove them from the books rather than enforcing them. We were all told that government was the problem...

Christopher Plummer
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Great article Ramin. Thanks for posting.

Do you have anything to share about inflation and virtual economies? I'd be interested in hearing about any studies done and the creative ways game developers (who care) have tried to deal with it.

Ramin Shokrizade
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The concept of inflation in virtual environments is often misunderstood, even by PhD level virtual economists. In the real world inflation occurs when the money supply (variable) expands vs. resources and consumer goods (relatively stable). This makes real goods worth more dollars because the equity of each dollar has been compromised.

In virtual economies, usually ALL elements in the economy are expanding rapidly due to a lack of dynamic sinks. Thus ALL items in a weak (most of them) virtual economy will lose equity over time. If you are seeing inflation at all in the classic sense it is almost always due to the effects of RMT3 (gold farming) activity as these agents can move currency much more easily than other goods. Thus they tend to farm specifically for virtual currency, flooding the economy with that faster than any other good.

Christopher Plummer
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What classifies something as a weak economy?

In my experience supplies of virtual consumable resources are usually limited by time:
- only a limited number of people can harvest a resource at a time
- items have a fixed or bounded drop rate
- objects have fixed or bounded respawn timers

Conversely, the money supply is not under the same constraints. This setup allows for money to be earned much faster than it can be spent. When this happens I presume that players with the highest earning potential can [and do] disrupt the economy by creating spikes in demand that can't be satisfied by the player base.

An example I could give would be max level players who buy consumables from an auction house. Very little of what they want or need (rare drops/titles/achievements) can be quantified by the in-game currency that they have so much of, especially time. So when they do spend money they usually purchase almost exclusively on convenience, with little to no regard for the monetary cost(similar to letting the seller keep the change on a $4 purchase because you don't have anything smaller than a $5 bill [or any bill higher than 5]). Sellers adjust to this 'new' demand by increasing the supply, but the fixed ranges for harvesting/manfucaturing perpetuates the inflated prices. The higher competition between sellers actually results in higher costs instead of lower costs since they have no way to increase the supply past the ceiling.

That's my take anyway.

Ramin Shokrizade
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Without getting too technical with this, I would like to point out that everything we are talking about here is a "good". Even currencies are a good, and they are definitely so in virtual environments. Any good in a virtual economy can become flooded if the supply exceeds its exit rate. When RMT3 agents (gold farmers) attack an economy, they are usually after coin, since it is the easiest good to pawn. Thus they are specifically trying to make a lot of coin as opposed to horses or weapons/armor etc. This expands the supply of this good.

The other obvious thing that will expand the coin supply and lead to inflation is if players can quickly run out of things to buy. This is an issue of insufficient content, or poorly balanced content.

I'm going to hold off on defining what makes an economy "weak" here. Once I post the review I did of the Guild Wars 2 economy you will see some of the qualitative and quantitative methods I use to determine the strength of a virtual economy.

Gil Salvado
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Thank you so much for sharing this after 10 years! Although this is only one short example of economics, it is well explained. Much, much appreciated.

Though I doubt you'll publish anything in the near future again. At least now I know why EVE economy is working so well.

Ramin Shokrizade
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I've been posting almost every month here on Gamasutra. I have a Guild Wars 2 economy analysis that I've been working on, I've just been really busy and they keep patching faster than I have time to reassess :)

Caleb Ayrania
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Sorry to say this but you are such a fake. Being a veteran of EVE I know everything you claimed is conjecture and based on loose bits and pieces you picked up somehow online. Please gamasutra research this guy and remove his material.

Jeremy Shapiro
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So you're not saying the EVE events described didn't happen, only that Ramin wasn't an active player in them? This is an interesting claim. It seems like you'd have to have knowledge of all early EVE factory owners and/or knowledge of all of Ramin's early EVE accounts. A simple Google search of his name produces a pile of mentions of this article only. As "researching this guy" might require considerable effort, can you provide any evidence or links to get us started?

Ramin Shokrizade
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I stopped playing EVE Online a few months after the retail launch, after I discovered the true nature of the Miner 2 incident. This likely was before your time. CCP used my account for demoing the game during much of the E3 convention in 2003 because I had one of the first cruisers (which I held the blueprint of). They also knew me personally not only from my work in the beta and my advisory status on the economy, but because my news site, www.unknownplayer.com (hacked in 2005), hosted the first US irc chats for CCP long before the game released. By the time I had quit I had personally created one third of all the cruisers in play, and one quarter of all the battleships. I played under my game name of Sarcerok.

If you feel strongly about this you might want to talk to Reynir Hardarson or Chris Reid. I parted ways with EVE after the Miner 2 situation, despite making a lot of real money playing the game, because I had another game to F&F test at the time. Something called World of Warcraft.

John Johnson
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I see that someone mentioned Henry George above, but it is really cool to see you independently recognizing the link between land speculation and the business cycle and then actually watching the solution pay off.

I wanted to link to a brief of George's "Land Cycle" argument (http://www.henrygeorge.org/bust.htm) as well as a more research melding of the Georgist land cycle with the Austrian business cycle by economist Fred Foldvary (http://www.foldvary.net/works/geoaus.html).

Caleb Ayrania
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A very interesting and well argued read, but your EVE history and credentials are holed like a sieve.

Jeremy Shapiro
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I've really, really enjoyed this article and the comments, and look forward to hearing more from you Mr. Shokrizade.

David Goldman
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I've enjoyed reading the article and the comments. One thought that occurred to me is that if in real economy we start managing property taxes the way we manage monetary policy, dynamically increasing and lowering them to either spur growth or to cool it down, we might be be able to achieve stable growth of the housing market and prices (affecting general business cycle as well), avoiding bubbles... or at least reducing their size.

Ramin Shokrizade
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How a nation raises taxes, and thus funds its public services, ultimately shapes the nation and determines how equitable a society its citizens will live in. In real life people are much more tolerant of inequity as they are born into it "Matrix style" and just accept it. In a virtual environment there is an assumption of equality and fairness (at least in the West) so this forces the development of more equitable economic models. I would dare to say superior economic models.

In an environment with high wealth stratification, most of the wealth fails to circulate. This has the effect of contracting the economy and thus over time leads to perpetual recession. This is, of course, the state we have now achieved in the USA. Only massive currency inputs by the Fed give the illusion of growth. During WW2 and the decade following, the opposite trend was in play, and we are still living off of the (decaying) infrastructure that was built for us during that period.

Note that this was not a period of socialism or communism in the USA. It was a period of *cooperation*.


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