What is money?
A common answer is "anything that can be used as a medium of exchange". Money is a symbol for the value of goods, a kind of shorthand for "three pigs" or "one chicken". Such symbols have included precious metals, shells, giant stone wheels, and the current paper and electronic data. But on this definition, money isn't just the stuff issued by governments as legal tender - to the extent that they can be used to purchase goods and services, it also includes limited and private currencies such as air points, book tokens, and McDonald's cheeseburger vouchers.
I've often wondered what prevents the owners of these private currencies from simply "printing more money" - for example, what stops Air New Zealand from paying its debts with airpoints, or PayPal from paying people by tweaking its database? The obvious answer is self-interest. The owner of a private currency is frequently also its backer, so every voucher or airpoint created is effectively a contingent liability which must later be repaid. Air New Zealand must provide travel in exchange for air points, and PayPal must ultimately provide US Dollars in exchange for money stored on their system. But interestingly, in the latter case PayPal may not actually need to provide those US dollars - its widespread acceptance means that fewer people need to take their money out of the system and into the real world, effectively reducing PayPal's liability. And so, to some extent they can simply "print money" (tweak their database) to pay their bills.
A more interesting example is online games. Most MMORPGs (Massively Multi-plyaer Online Role Playing Games) include an in-game currency, used for various purposes in the game world (buying cool stuff and as a kind of score), and they all have in-game goods (magic weapons, artefacts, or simply the characters themselves). It didn't take long before people started trying to convert their in-game wealth into "real" money - first through one-off auctions on EBay, and now through the GamingOpenMarket (an online currency exchange enabling funds to be transferred from one in-game currency to another, and into US Dollars). This has effectively set an exchange rate for these currencies, and given them a real value. This is kindof cool (I've heard of people who are trying to make a living by building then auctioning MMORPG characters), but also dangerous - because what the MMORPGS are effectively doing is printing money. Most of it stays within the game-world, but to the extent that it can be transferred into real currencies and represents a claim on real goods and services, it is as if they were printing US or NZ Dollars. This raises some interesting issues:
- How long will it be before the MMORPG companies notice this and incorporate it into their revenue model? They'd still need to produce a game, attract players and collect fees, but if a game became popular enough to create a secondary market, the company could start creating in-game money and goods specifically to sell for real money. While this would undoubtedly cause in-game inflation and alter the balance of character power in a way that (probably) detracted from the game, many MMORPGs have a limited lifespan and the problems may take long enough to show up for the company to reap a healthy profit in the meantime.
- This is inflationary - a private organisation is effectively increasing the money supply. Banks do this all the time when they issue credit, but their power to do so is tightly regulated by the government. This is mostly a theoretical problem, because of the relatively low rate of transfer - the GamingOpenMarket has only exchanged about US$350,000 of real currency for virtual, and transfers are limited by the number of people who want to gain in-game wealth without jumping through all the hoops - but its still interesting nonetheless. And what happens if transferring virtual money into real, whether from MMORPGs or a similar online form of entertainment which seemingly creates wealth ex nihilo, really takes off?
- On the third hand, you can view an MMORPG through the lens of our existing foreign exchange system as just another country (though a virtual one). Normally what happens if a country just prints money to pay people overseas is that the exchange rate drops; however MMORPG exchange rates are really a matter of popularity rather than anything to do with their economies or trade balance. Conceivably, a game could sustain large inflows (could keep on transferring wealth from the game world to the real one) as long as there are players willing to pay for it. And in a way, this is no different from the current US practice of funding enormous defecits by selling bonds to the Chinese; the significant difference being that a really good game could be self-sustaining, wheras eventually the US's creditors will want their money back.
- And on the fourth hand (how many hands do I have anyway?), what the MMORPGs are doing is really no different from making spoons, or giving a musical performance. They're producing goods which other people value and are therefore willing to pay for. It doesn't matter that those goods are virtual and cost practically nothing to make at the margin - neither does an autograph or a trading card, and people are willing to pay outrageous amounts of money for those (though usually not from the people actually signing things).
But while MMORPGs are fascinating, I think they are mostly of intellectual interest; it's things like PayPal which are important. Traditionally, currencies have been the domain of the nation-state and its sovereign power - but now we're seeing the beginnings of totally privatised currencies without ties to any government (and while PayPal is within US legal jurisdiction, it need not be; you can run a website from anywhere). As more transactions move online and are conducted in these private currencies, it will increasingly break down the barriers between economies and undermine the ability of nation-states to operate monetary policy. Our ability to (say) control inflation will depend not just on the actions of our government, but also on the decisions of private corporations beholden to no-one but their shareholders, who will be running their monetary policy for private profit rather than any sense of the public good (and no matter how twised you may think current monetary policy is, they still appeal to the public good to justify it).
The only way to prevent this is some form of global regulation. But I can't really see that happening any time soon.