Home » Economy » ISK Review – Where are the banks?

# ISK Review – Where are the banks?

The last post briefly touched the subject of currency creation and its flow. The reason for choosing this topic as the start of my “ISK Review” project is this: in both real world and in-game worlds, currency is that thing that everybody needs (Note that I didn’t use – “wants”. I like to pick carefully my words). In the last post, I tried to present briefly the facts and not much of anything else. This post is different.

### 1. Introduction

Before having dreams of self-grandeur (i.e. wants), everybody has to satisfy some basic survival needs. We all need food, shelter, clothes. It blows my mind (even if I know the reasons) that on one hand, currency is at the center of all modern civilizations, and on the other hand, currency is the thing about most people know so little. For example, I believe that quite a few people, if asked what some pop star had for breakfast yesterday, will know the answer even if that fact doesn’t affect their life in any meaningful way. At the same time, if asked how currency works, will have problems to formulate a simple sentence on the subject, subject that has the most impact on their day-by-day life. In other words, all the “free” choices we make are directly and/or indirectly the result of the way currency works. This is not an opinion. It is a fact. As such, it makes sense to put some effort in order to understand the topic. At best, your life could get better. At worst, when you’ll get in trouble you’ll have some idea on how and why it happened.

I finished my last post with a question. In part, the question was rhetorical. It’s obvious to anyone that the entire mmo’s industry is not dumb (Maybe “the world is, but that is another story). The reason of using another system to handle currency in the game worlds, different from the one used in the real world, is that the real world currency system will “never(i.e. never say never) work in a game. To understand why, one has to consider the effects of the real world currency system.

### 2. Kinder-garden economics

I will leave out of this discussion the fact that the decision on pretty much everything related to real world currency is in the hands of a few people who have to respond to no one for their actions. What I mean with this is that we shouldn’t be naïve and think that it could be any different. The “real” problem is the fact that no one creates the interest that has to be paid back at each iteration of a loan. This has two major effects: guaranteed losers, an intrinsic requirement for constant growth.

Despite having a Nobel Prize category, modern economics has at its foundation an inconvenient, and as such, overlooked problem.  If you create $X_1$ amount of currency and you ask to be returned $X_1+Y_1$, when you start dividing $X_1$ to $N_1$ persons, some of the persons among those $N_1$ persons will lose the game no matter what they do (i.e. they are the guaranteed losers) because no one has created the $Y_1$ amount of currency. Well, at least no one has done it yet. The only way they, all of them, can pay back the loans is if some $N_2$ persons make some other loans and use part of this new created currency in place of the never created $Y_1$ amount.  This comes at a cost. The initial problem is now bigger. Some of the persons among the $N_2$ persons have no way to pay back their loans because now the amount of never created currency to cover is $Y_1+Y_2$. Below you have a table showing you the simplified version of the iteration process.

Iteration New currency Currency supply Interest to cover Returned currency
$1$ $X_1$ $X_1$ $Y_1$ $0$
$2$ $X_2$ $X_2-Y_1$ $Y_1+Y_2$ $X_{1}+Y_{1}$
$3$ $X_3$ $X_3-Y_1-Y_2$ $Y_1+Y_2+Y_3$ $X_{2}+Y_{2}$
$n$ $X_n$ $X_n - \sum_{i=1}^{n-1}Y_i$ $\sum_{i=1}^n Y_i$ $X_{n-1}+Y_{n-1}$

The simplification consists in neglecting the overlapping areas of the iterations. However, this doesn’t change the structure of the final product. The currency supply at any point in time is the algebraic sum of all the non-returned loans and the interest associated with all the returned loans. It means that as we move forward in time a larger amount of the new currency, instead of being used to its “true” purpose – facilitate exchanges, has to be used to cover the interest of the loans made in the past. At the same time the interest to cover, that is the amount of currency representing the interest of all the loans created over time, is just getting bigger and bigger.

At this point, one could think that is nothing wrong with this system since: 1. who cares about all that interest, which doesn’t exist in the first place; 2. who cares that the currency supply is under the pressure of the interest due to the loans made in the past. You’ll just iterate the all thing to infinity, everybody will be happy – the end.

Not so fast young man, like all the ponzi schemes this system is destined to fail eventually. The fact is that we live in a world with laws of its own: physical laws. Sooner or later someone will witness the “real” crash. For this currency system to work you need new loans being issued all the time, otherwise everything will start to collapse. We have now an intrinsic requirement for constant growth, real growth. The problem is that it clashes with the reality of our world: a finite supply of energy deposits with high enough energy density. You don’t have to be a genius to understand how this story will end.

### 3. The in-game currency: no banks (in Eve)

Let’s go back to games now. Consider the effects that a “real world – like” currency system will have on a game. No matter how you design the game, implementing a currency system where you create the in-game currency as debt without creating the interest amount of currency would require an increasing effort over time from the players. It could come in two ways: 1. the same number of players play more on average, 2. the total number of players is increasing.  This positive difference in effort is a percent wise increase condition over time. It translates in a forever-increasing quantity: its absolute value.

And this is one of the reasons why we don’t have banks in Eve. No game designer is so “uninspired” as to assume that his/her game will not reach a saturation point, where the game reaches both limits: average game-play time per player and total number of players. The reason I’m insisting on the banks thing is that contrary to what most people believe the main role of the banking system is not to keep safe “ours” precious money. At the same time, (I)you like it or not, the banks are a core feature of capitalism. The way ISK is created in Eve avoids completely the problems generated by the real world currency system described above.

Moreover, it does something else. I often hear people complaining about the lack of work in the real world. They misuse the meaning of the word. They mean that there is a shortage of jobs, not of work. In my book (and in this case), work is any activity which one could do that potentially brings a benefit to the society. Fact is that there is no shortage of such things. However, don’t expect someone to pay you for all these activities. A job is one of such activities which we can do and get paid for it. If you see work as a set, then in the real world job is just a subset of work. In Eve they are brought to the same level and we have an equality between the two concepts. This is not “some” thing that one should overlook, just think about the consequences.

### 4. Closing comment

The real question upon which I would like you to reflect comes now.

What’s wrong with the world? Why we accept a ponzi scheme as a respectable currency system?

Since I don’t intend to make another post on this matter, here are my thoughts on it. There are many differences between the in-game worlds and the real world. From all of them, I want to point out the most obvious. If you’re not happy with one game, you can go and play some other game. Most importantly, you don’t have to play any game at all. By contrast, you have only one real world, we know of, to live in. In addition, as far as we know, if you don’t “play” it’s game over. That is, you have to play it. For most people, accepting this system is not a matter of choice. No military power in the world exists to protect you or me. Much like the Concord police in Eve, it exists to punish. I think you got the idea.

The few people, for whom this is a matter of choice, have no incentive on the short-term to change anything since they would be the ones with the most to lose from a real change. Moreover, many of them got high on the idea that this system is responsible for the spectacular progress (mostly in science and technology) we all witness.  In my opinion, nothing could be further from the truth. The progress began when we started to stop explaining everything in terms of “God’s will” and it accelerated once the miracle happened: the discovery of high-density energy deposits. If anything, this system has slowed down the progress. Unfortunately, as a side effect, it also puts all of us on a collision course with nature itself.

I don’t think there is an easy way out of this mess because, ultimately, it all boils down to trust. Most of us don’t trust anyone. Ironically, it seems to be a direct consequence of fact that we don’t trust ourselves either which in turn it is because we don’t understand ourselves as much as we would like. To paraphrase one my favorite physicists, “if people understood themselves better, the world would be a nicer place to live” – Warren Siegel.

Quick Note To The Morons: I’m not advocating the other social system whose name shall not be pronounced here.

Signed out, Ritual Union.

Post Video: MS MR -BTSK