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Saturday, 29 October 2011

Why there is no Banking System in World of Warcraft

By Banking System – i mean an institution that takes deposits from savers and lends to borrowers.  The savers get a deposit interest rate and the borrowers pay a (higher) loan interest rate.

Occasionally interrupting my posts on making gold will come observations on the World of Warcraft economy.  These posts will have no gold making value, just observations from myself.

The economy of World of Warcraft that players can make serious gold from is almost entirely based on production of items, the farming of raw materials or the trading of items on the Auction House.  Hence, compared to the real world, the Industrial and Mining sectors are alive and kicking in World of Warcraft, with a dose of Auction House trading.

Services (repairs, transport etc) are supplied by vendors.  Sure, players can charge for portals and dungeon runs, but those are relatively rare.  Healing is done for free by healers and Blizzard provide the Law & Order, and keep the lights on.  Thus Health Care, Pharmaceuticals, Technology, Utilities, Retail and Financials etc don’t exist in this economy.

(Gold from mob drops and dailies etc is a gold earning venture but perhaps not a serious gold earner for this example.)

The gold required to set up production is the spend in levelling the profession (a similar concept to building a factory) and then add the spend in buying the initial raw materials to set up the first production run.  The next set of raw materials is purchased from the proceeds of selling the first production batch.  And the profits from selling production batches eventually repays the gold spent in levelling.  Likewise, the gold required to start trading on the Auction House is the initial spend to acquire underpriced items to repost them.

Furthermore, the constraint on players making gold is normally time, not their own lack of resources.  Whilst the process of levelling a profession requires gold, at some stage it also requires time in the form of dailies or cooldowns.  And the process of maintaining production requires gold but that is entirely financed from the returns made from selling your last batch of production.

Hence, the demand for gold to put into projects that generate a return is very low.  Of course, someone may want to borrow a few thousand gold to level a crafting profession, but that is very rare.  And plenty of people may want to borrow gold to buy their prized mount, but no-one will lend that gold given the low probability of seeing any of it back let alone making any sort of a return on the loan.

Indeed, i greatly suspect there is a surplus of gold that sits in banks doing nothing.  Not often, in a healthy economy, that the supply of money exceeds the demand for money.

Therefore there is no requirement for a Banking system in World of Warcraft – i.e. there is no need to invent an institution to bring together the suppliers of excess gold looking to make a return with those demanding loans to invest in projects.

To take this one step further, to invest in a project to generate a return it is always useful to have an idea of what return can be generated without taking any risk.  I.e. the Risk Free rate of Return.  In the real world US investors buying Treasuries, or UK investors buying Government Gilts, or German Investors buying Bunds would know what their risk free return is.  This risk free rate of return can then be used as a benchmark to determine the rate acceptable to receive in more risky projects.

With the exception of the old Obsidian Shuffle there is no project out there that can generate a consistent risk free return that i am aware of.  Can anyone else think of a process that generates a consistent return (i.e. sells an item for a profit to a vendor)?

If there is, then that would be where surplus gold could go to generate a return.

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