The Economy of EVE – Part 2

 
In the first part of this series I mentioned the lack of a financial sector in EVE Online because previous scams made EVE players wary to such a degree that they completely avoid it. The last decade in our own world also outed several financial institutions as inconsiderate and even disingenuous in their dealings. They may not be guilty of outright scamming, but the attitude of the general public towards banks is everything but positive. Still, we had to realize that our economy depends on financiers to a certain degree. So how could the players of EVE Online dismiss banking after a few failures while the real-world economies could not? To answer that question we must take a look at the role of banking and financial services.

Financial Institutions? Why?

The origins of financial services in our world go back as far as the Crusades. In those times, soldiers were paid in minted coins, and to transport the coffers necessary to pay an army throughout a long campaign in foreign lands was both risky and bothersome. The Knights Templar provided a solution for that. To defend the Holy Land against Muslim incursions they had built fortresses and castles around Jerusalem but at the same time retained their widespread holdings in Western Europe. That allowed them to offer a European nobleman to deposit money with them in their homeland and be paid an equal sum – minus some cut for the Templars themselves – upon arrival in the Holy Land. This lead to the creation of the first bank notes, the precursor to modern paper money. Commercial banking did not develop until much later, in the Renaissance city-states of Northern Italy and among the Hanseatic League of Northern Europe. There the purpose was not to finance warfare but to overcome the barriers to free trade which were imposed by individual fiefdoms through taxes, tariffs and currency exchange rates. It became an instrumental function of bankers to provide stores of value which could be accessed at different trade centres under equal conditions. Furthermore, commercial bankers would also make sure that money deposited with them was not just sitting idly, but got invested in local businesses while the ships and trade caravans of their customers were travelling abroad. Through their direct connection to local markets wherever they had their offices, they were much better informed and could react faster to local changes in economic conditions and prices, thus making a profit while providing a loan service. Transnational traders already were tied to the bankers, but over time, local entrepreneurs also became increasingly dependent on loans from merchant bankers, and so did the nobility who needed financial backing for their wars. Consequently, banking clans like the Medici or the Fugger became increasingly wealthy and powerful. That political and economic power of financial institutions endures to this day. While I am drawing a very simple picture here in just two paragraphs, it serves to demonstrate what lead to rise of financial institutions in our world:
  • The logistical difficulties of money transfer.
  • The trade barriers imposed by local – and often opposing – political powers.
  • Imperfect information about prices, supply and demand, notably because of time lags.
  • Dependence on capital transfer from transnational investors into regional economies and vice versa.

Capital in the 25th Millenium

When we look at that list, it is obvious that none of these problems exist within EVE. Money transfer is instantaneous and free; there are no trade barriers; taxation and currency are uniform all over the cluster. Notably no empire would put tariffs on the import of goods from abroad. Finally, every trader can have almost perfect and timely information. Sites such as eve-central or eve-markets consistently show which goods are bought and sold at which price and volume with only a slight delay. There is still the potential lag of having to transport goods to the market or needing to be close enough to place an order, but those are almost negligible when compared to the real world.

fRoubIlBattleship price following mineral price index closely indicating a market that quickly and efficiently reacts to price changes.

The one thing EVE players could need banking systems for is to borrow money for investments that go beyond their current means, but even that is covered by a much more powerful instrument: PLEX. If a player needs a quick injection of liquid ISK, they can buy it with real-life money and compensate for that by buying a PLEX for ISK after they had made their profit, extend their subscription that way and earn the spent money back. Ideally with some extra profit on top. Most importantly, while PLEX prices are subject to market fluctuations, they are free of interest. That means there is no additional cost for borrowing money that way. Under such conditions, in-game banks could offer some level of convenience, but they are in no way as essential as they would be in the real world. If banks turn out to be less than trustworthy, it is easy for players to ignore them and be financially independent. That is especially true for those who are part of a larger organisation. Among major alliances it is custom to provide ISK to industry players who would then take care of purchasing, producing and transporting assets for everyone else. They would not need a bank at all because the liquid ISK is provided for them by their peers.

Implications For The Value Of ISK

The absence of a financial sector means that there is no debt in the EVE economy. Because nobody borrows money and pays interest, one daunting threat to economic prosperity does not exist in EVE: Deflation. In the real world, deflation – i.e. falling prices – can be very dangerous for an economy. Intuitively everyone would think that it would be great if things got cheaper, but that is a mistake. First of all, under falling prices people would postpone their purchasing decisions in the hope that prices fall even further. In extreme cases the result would be a decrease in consumption. That would force suppliers to lower their prices even further, creating a downward spiral. 7RMxWit Even more important are the implications of deflation for the indebted. Let us assume I buy a house for 500.000 today and take a mortgage of 450.000 on that house to finance the purchase. Under deflation the market value of that house would drop while my mortgage debt remains just as high while accumulating interest. Everything I could sell as part of a business I run or even the value of my labour would also drop in price making it ever harder to pay back the debt. Every individual or business that has to satisfy the demands of creditors gets under increasing pressure until they potentially default on their loans and become bankrupt. The cascading effect on the economy can be devastating. EVE Online has seen periods of deflation, but they are hardly as significant as they would be in a real-life economy because there is no debt burden and – as I have pointed out in my previous piece – demand is highly inelastic to price. In fact, if deflation would hit during a war, the parties involved would buy just as much – if not more – than they would have before. The only real danger lies in the potential of goods becoming cheaper than their production cost but that is highly unlikely.

Taxation – In Space!

Taxation in EVE is very rudimentary. There is a limited income tax and and a blanket sales tax. Unlike real world economies, income tax does not apply to all forms of earnings but ratting bounties and PI transfers only. Technically it is not even an actual tax because it is collected by corporations rather than governments. In sovereign space it could be argued that corporations are the government, but in a more general sense the income taxes of EVE are more like corporate fees. The individual player pays the corporation in exchange for services or the benefits of membership. Since corporations in EVE are not employers but cooperatives of entrepreneurs, each member pays part of their income to sustain the operation of collectively used facilities or to create a pool of finances for mutually beneficial investments. In fact, early corporations in our world worked exactly like that. The sales tax – which actually is a tax in the sense that it is collected by a government third party – does not work like a tax at all. Most notably, it has absolutely no effect on the finances of the government which collects it. The fact that massive amounts of tax deductions occur at Jita does not influence the game world at all. In a full-fledged economy, the Caldari State would reap immense amounts of tax revenue and could re-invest that into state infrastructure. The way things are, the Caldari Navy are no more powerful or well-funded than any other faction military, neither does Jita offer public services that are in any way more advanced than a pirate NPC station in the furthest nullsec backwater. In the game’s economy, the sales tax is nothing but an ISK sink and it has a very singular effect which is completely absent from real-world economies: it makes money vanish. In the real world, government expenditures, financed through taxation, are part of the aggregate income of an economy, in EVE it is not. rS2Gxq9 It could be argued, that such taxes flow back into the economy in the form of ISK faucets like ratting bounties or NPC purchases of sleeper loot, but other than in the real world those government rewards and purchases have no relation to tax revenue. No government is ever forced to balance its budget by cutting back on such expenditures. In fact in EVE the faucets constantly produce higher amounts of ISK than the sinks consume. In an actual economy that would be absolutely impossible without runaway inflation.

In Conclusion

EVE Online certainly has the most interactive and player driven economy of all existing MMOs and therefore offers avenues of gameplay which are impossible elsewhere. Market manipulation, insider trading, speculative buyouts and other economic stratagems are open to the financially savvy player. Calling it an economy is stretching the definition of the term a bit however. Because government expenditure and income through taxation only play such a rudimentary role, EVE is actually more of a collection of free markets rather than a complete economy. There are also other lacks of complexity which prevent EVE from having an actual full-fledged economic system. There are no differences between the different sovereign entities in EVE. They all use the same currency, collect the same taxes and most notably do not have any tariffs. That the Minmatar Republic would allow the import or production of Amarr starships without any hindrance would be inconceivable in a world with actual national interests at play. What stands out even more is the fact that all economic parameters remain exactly the same in sovereign nullsec. Instead of sales taxes flowing into the treasuries of alliances or corporations, they vanish into nothingness just as they do everywhere else in the game. The absence of labour as a factor of production is also significant. Currently there is a rudimentary NPC labour force in the form of industrial production teams, but we still do not have to deal with any labour market for ship crews despite some of the larger ships reportedly needing hundreds of crewmembers. Players have created their own very limited form of labour, but it remains a minority program. Despite all those omissions, the EVE markets are still an interesting facet of the game and the fact that CCP hired experts in the field to monitor and guide their development is an indicator of the complexity that players can delve into. I could have written even more about it. For example, by explaining what a consumer price index is I could have gone in depth on the subject of inflation and deflation, but that piece is long enough already. Let me just end by saying that, as with other aspects of the game, CCP took a daring approach when they opened up so much of the game’s economy to player interaction. I would hope they further expand the possibilities for players to engage in meaningful ways on that particular playing field.
Tags: economy, isk, plex, tarek

About the author

Tarek Raimo

Former nullsec spy (no not under that name of course) and current failure at lowsec solo PVP, Tarek spends his time not logging in to the game as much as he keeps thinking about its social and metagame nature and sharing some of those thoughts with the CZ readers.

  • Dirk MacGirk

    Nice job. Almost had me when you said “no deflation” but then you came back to it. While EVE’s economy may not match up to a RW economy in all aspects, it is pretty close at its core.
    Given the ISK faucets, I would expect more inflation. But these are offset by both the virtually unlimited resource faucets (little to no scarcity of basic resources) and the fact that the developer can tweak the input requirements.
    I almost wish they would take this to the next level and integrate some of the taxation and expenditure issues you referred to, but I’m not sure it would make for a more interesting game as much as an interesting project for an economist with programming skills.

    • Kamar Raimo

      “Almost had me when you said “no deflation””

      Yeah, that sentence is a bit misleading I realized as you pointed it out.It sounds like there is no inflation in EVE while it is meant to express that inflation isn’t a problem in EVE.

    • Richard H

      I used to think that there was inflation in EVE, too, but I was missing something sort of important. Inflation will show up if the money entering the game (a) exceeds the rate of new characters entering the game (relative to average bank account) or (b) is more available while chasing the same amount of goods. I think (a) is not true anyway. For (b), it seems that, historically, what happens is that the money ends up in someone’s bank account doing nothing or gets parked in assets like PLEX. We’ve seen this a few times like, for example, when factional warfare was shitting out tons of LP and all the factional warriors were feeling rich: they spent some on as much consumption as they wanted, and the rest ended up going to buying PLEX, resulting in a spike it its price but not much effect on anything else. (Incidentally, that inflation was actually due to increased money velocity, rather than monetary base expansion, because FW doesn’t give out much ISK.) It’s possible we might see inflation from a massive new ISK faucet sometime, but I really think price rises due to supply shocks are more likely.

      • Dirk MacGirk

        Outside of PLEX, which is an entirely different beast, inflation does exist, but it is not broad based. Any real shifts in price (up or down), are primarily related to changes made by CCP rather than anything player-related. I think those are the shocks you are referring to. CCP can make changes to bottlenecks, resource gathering, reprocessing yields, build requirements, etc, etc.

  • Havoc025

    Better explination of deflation that I ever got in university economic classes

    Both part 1 & 2 were very interesting reads.