World of Warcraft has a bustling in-game economy. Millions of gold exchanges hands daily. Players have to make valuation decisions, and the economy of World of Warcraft has a lot of similarities with real world laissez-faire economies. There are some important differences, but it is a close model of a no-government free market.
One of the biggest differences between a typical WoW economy and a modern real world economy is that there is hardly any major product differentiation and little to no innovation. The Saronite Swordbreakers you get crafted by your guildmate are identical to the ones you buy from strangers on the auction house, which are identical to all others. In addition, it is impossible to create or discover new, more useful items. Nobody can say “gee, I wish this belt had more spirit on it” and research ways to craft belts with more spirit. There are some exceptions, particularly when recipes are difficult to obtain. Jewelcrafting gem cuts are a great example; there are hundreds of cuts and few people have a vast library of recipes. Players have to buy them by spending time on dailies or money on Titanium Powder, an equivalent of research and development in the real world. There are some other exceptions, like Northrend Inscription Research, but by and large there is no innovation or product differentiation.
More on crafting, regulation and the auction house follows the cut.
Another big difference is that there are no significant “barriers to entry“. Just about anyone can easily become a grand master in any profession with a minor amount of effort. In the real world, it takes decades of work and billions of dollars to get enough capital and knowledge to be competitive with Ford, Apple, or Exxon-Mobil. In the World of Warcraft, for less than the price of epic flying mount training and a couple of hours, a player can become a maximum level crafter of any profession and know the majority of the recipes.
A third major difference is that there is hardly any government regulation. Even in a capitalist system like the United States, there is significant government regulation. True free market economies don’t work very well in the real world, as market failures that cause shortages can affect real people’s lives. If food became prohibitively expensive, people may die of starvation. If the market crashes and people lose their jobs and homes, a democratic society would elect politicians to impose regulation and programs to attempt to “fix” it. These sort of quality of life requirements don’t exist in WoW, and Blizzard isn’t going to (often) (directly) do anything about people buying all the Runecloth and reselling it at 5x the price, nor are they going to do anything about the price of Eternal Fire.
This description might make people think that WoW has a perfectly competitive market, which is considered the holy grail of economic modeling, but there are some differences. First off, each “economy” in World of Warcraft is segmented to a single server. The population of each server is small enough that in most markets, a few sellers control markets. In this sense, there is limited monopoly power through oligopoly. A perfect economy has no monopoly power, a situation where aggregate supply and demand set the prices. As such, you can expect that with the relatively small amount of players on each server, many items are sold by a small number of people and they have significant control on the pricing.
Next time on Goblinism 101, we will look at the basic principles of supply and demand in market economies and how they relate to WoW.