Virtual serendipity

Serendipitously, the day after writing about Virtual Economies by Vili Lehdonvirta and Edward Castronova, another new book by Edward Castronova arrived in the post, Wildcat Currency: How the Virtual Money Revolution is Transforming the Economy. It’s about the convergence of the ‘real’ and the virtual in the domain of money, although of course as money is already largely virtual, this is more about the crowding out of the previously public domain of money by private currencies: “Today anybody can be a central bank.” On a quick glance through, Wildcat Currency looks like an accessible overview of the territory.

This is a hot subject of course. In which context , it would be remiss of me not to highlight another excellent recent book about the future of money, Dave Birch’s Identity is the New Money.

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The real and the virtual converge

What are virtual economies for? In their new book, Virtual Economies: Design and Analysis, Vili Lehdonvirta and Edward Castronova focus on the answer: providing a viable business model for the operators of digital games. “Digital publishers are usually for-profit companies that aim to make money. Their specific approach to making money is providing digital content to consumers. On a very abstract level, their business consists of three processes: creating content, attracting users, and monetizing. Virtual economy design, like every other function in the company, must somehow contribute to these processes.” So the economy-design principles they set out in the rest of the book are intended to serve this profit-making aim.

But of course, as that quotation makes it clear, the same processes applies to digital companies other than those providing online games – they are also the main processes for music, books, newspapers, films, education providers. So the ‘games design’ principles described in the book have some interesting applications to other kinds of business, and it makes this an interesting complement to one of my all-time favourite digital business books, Information Rules by Carl Shapiro and Hal Varian. There is more exchange and macroeconomics here than in Information Rules because of the gaming context, but there is a lot of food for thought in this book for anybody in any ‘content’ business.

Virtual Economies serves a third function too: it is a terrific introduction to economics. In a clear and straightforward way it covers everything from consumer choice theory to macroeconomic demand management and money; and it combines both the conventional approach as it would be taught today and informed critique of the standard assumptions and approaches. For example, the chapter on consumer choice includes both rational choice and alternatives – bounded rationality, behavioural biases, social psychology. There is a whole chapter on institutions and non-market allocation. The final chapter touches on the role of economic institutions as ends in themselves as well as instruments. It concludes with some thoughts on ‘the end of materialism’: not only are large parts of the economy already virtual, but perhaps future growth will be increasingly virtual? This certainly appeals to me as the author of The Weightless World (pdf)!

Anyway, I could see using this as a textbook for an introductory economics course with the term’s collective task for the students being to set up an online economy. It would be unconventional but I can see it equipping students with a terrific basic understanding of trends in economics and business.

Edward Castronova has almost cornered the market in the economics of games – his previous book was Synthetic Worlds: The Business and Culture of Online Games. Vili Lehdonvirta is at the Oxford Internet Institute and has written some fascinating papers. Yannis Varoufakis is the economist for Valve but writes far more about the EU – here is one interesting paper he wrote on digital economies though. Hal Varian is of course at Google now. But this is a subject on which most conventional economists are strangely silent – I guess they think it’s a frivolous subject and haven’t noticed that the real world and the virtual worlds are converging. So hooray for this very interesting new book on the subject, highly recommended.

Making democracy fun

Making Democracy Fun: How Game Design Can Empower Citizens and Transform Politics is the title of a new book by Josh Lerner. It looks fascinating. The book describes how to make political participation game-like – from game theory to game practice. The book is practical, giving examples of techniques to use in contexts such as local planning decisions and policy design. The final chapter provides a policy-makers’ toolkit, and ends by recommending the application of the tools to democratic political participation.

Interestingly, the book advocates games in actual, physical meetings – hence the very local applications such as urban planning. Lerner argues that online games have far less impact – although presumably in any electoral context, participatory games would have to be digital. He writes: “Most enthusiasts of political games … start with digital tools. I instead focus on the basic mechanics of games, through the lens of face-to-face examples. This design know-how can then be applied to digital and non-digital games, and everything in between.”

So, an intriguing, practical book for activists, organisers, planners and local politicians. Without having read it yet, I’m sceptical about the book’s bigger claim that games can rebuild trust in democratic processes (‘transform politics’). And about how citizens’ greater participation through fun would help speedy planning decisions in the public interest when Nimbyism is so rife. I’ll have to read it to find out if games can incorporate the interests of those who can’t afford a home and so are not even participants in the decision-making process. Do they get a seat at the games table?

The debt overhang

Larry Summers today reviews in the FT House of Debt by Atif Mian and Amir Sufi, praising it highly – except in one respect. Amusingly, he starts out by emphasising that it is the most important economics book of 2014, based on unchallengeable data and clearly written. Still, (not so) subtle side-swipes at Capital in the 21st Century aside, Summers’ acceptance of the argument in House of Debt is significant, given his key role in responding to the financial crisis. The book argues that the roots of the crisis lie not in the banking or shadow banking system but in household over-leverage, drawing on a line of argument dating back to Irving Fisher and running more recently through Richard Koo’s work on Japan.

Where Summers disagrees with the book concerns the authors’ interpretation of the policy response, criticising the authorities’ failure to tackle the mortgage overhang more directly with sweeping relief for over-indebted households. Summers writes: “Obviously, as the director of President Barack Obama’s National Economic Council in 2009 and 2010, I am an interested party here. It seems to me that Mian and Sufi are naive on policy.”

There is support for Summers’ point that implementation of more extensive mortgage debt relief simply could not get through Congress in one of the essays I’ve just read in The Best Business Writing 2013, The Great American Foreclosure Story by ProPublica’s Paul Kiel. In general, I think economists – even those with a tremendous interest in policy issues – fail to take into account the sheer difficulty of implementing anything in a modern democratic polity, where politics meets complexity. Just glance at The Blunders of Our Governments by Anthony King and Ivor Crewe….

House of Debt sounds like an essential read on the crisis. I wonder if any economists are doing similar empirical work on household indebtedness in the European economies?

Market forces

The Best Business Writing 2013 has some fantastic long reads on business stories – very US-focused but that doesn’t matter. There are reports on the mortgage scandals and finance, but also on healthcare, marketing, the United-Continental airline merger and much more.

Not all are tales of scandal. But many are. Some of the reports left me astonished at how people justified their behaviour and choices to themselves.

The healthcare scandals are particularly American. One anaemia medication was given at unsafe levels to an estimated 80% of dialysis patients on Medicare, because doctors made thousands of dollars from administering the heavily marketed drug. It was used on cancer patients too, despite increasing their mortality rate – oncologists could make $100,000 to $300,000 a year from prescribing it. Nor did I know that prescription painkiller overdoses are the most common form of accidental death in the US now, killing more than 15,000 people a year, more than all illegal drugs combined. The US spends $15 billion a year fighting illegal drugs but subsidizes opioid painkillers. They’re naturally very profitable for the pharma companies. As in the case of the finance industry, lobbying of Congress plays a key role in these tales too.

I’ve not read the new Levitt and Dubner book, Think Like A Freak, but apparently it starts with this proposal for the NHS, which Steven Levitt pitched to the Prime Minister. Many people think the NHS could do with a bit more pressure from market forces, although of course opinions differ. But Levitt – who got short shrift from David Cameron – appears to have absolutely no idea what proportion of GDP the UK (or any other OECD country) spends on healthcare compared to the US. And, as the reports in Best Business Writing 2013 demonstrate, market forces, brilliant as they can be at allocating resources to their best uses and satisfying the varied needs and preferences of many people, are never the whole story.

All spending on health as % of GDP, OECD countries, 2011 (source: OECD)