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The Central Problem of eWorld’s Economy: Savings

In this article, I would like to develop a fairly simple economic model to reflect on the central problem of eWorld’s economy. Indeed, this problem has been recognized time and again by economists originating from different countries and backgrounds, who pursue conflicting political and economical agendas. Although the problem was recognized by many, we are still struggling to achieve the solutions, and there is a lack of consensus on its priority. Therefore, it is the aim of this article to discuss the reasons and the solutions of the problem, in a way that the reasoning can be followed by the general public who do not have a rigorous training in economics. After all, if we cannot convey our ideas to the general public and the governments, they are of little practical importance.

The problem I am speaking about is the misuse of savings from a social planner’s point of view. Although the world as a whole can do a lot better, we cannot, because of the mechanics of the game. The mechanics of eRepublik do not allow efficient allocation of savings. But what am I talking about? Let’s take a step behind, and look at the situation from an ordinary citizen’s point of view.



To Save or to Consume?

At the beginning of each day, you have the money you have accumulated up until now. These are called your savings. Some people can have zero savings, but this is rarely the case. If you are not a very wealthy person, you work everyday to earn your daily wage, and hopefully to earn the hard worker medal.

Now you have your savings plus today’s wage. It is now time for you to make decisions on consumption: What kind of food/weapons should I buy? Should I buy a house? Is it worth it to spend my gold on Lana? You make your consumption decisions, and spend a portion of your wealth. While doing so, you also think on your plans for the future. This is why you do not usually consume all your wealth in a given day.

Tomorrow’s starting wealth = Today’s starting wealth + Today’s Income – Today’s Expenditures

Simple enough, right? But why is that accumulated wealth sitting idle in a corner during your life? Could it not be put to better use? It coul😛

1) Lend the money to a person who needs it more than you do, and is willing to return it in the future.
2) Open up a company to earn profits.



Time Value of Money

The main reason why you lend or invest your savings is to earn interest. Although this notion has been associated with bad connotations due to its condemnation by monotheistic religions, interest is nothing but the result of the “time value of money”. If you choose to transfer your right to consume goods today to someone else, you are giving up something and you should be justly compensated. Investment in a company is similar: You choose to make a considerable portion of your wealth non-tradable, and give up a huge amount of consumption. It is only just that you receive some compensation for the risks you take and consumption you forgo in terms of profits.

Or is it? In an ideal world where there are perfect capital and lending markets, the real interest rate offered to savings would be the same all over the world. That means, everyone who chooses not to spend 1 gold today would receive the same amount of compensation. This is not the case. Most of the citizens of the eWorld let their savings sit idle, because there are no reliable ways to lend it to other citizens or firms. Some firms make huge profits, whereas the rest even require additional money from the investor to operate. The capital and lending markets of eRepublik are far from perfect.



Why Lending is Problematic

Very simple: Lack of trust. If you lend your money, how can you be sure that it will be paid back? Before the abolition of the contract system, the lending market was still not very viable: Yes, you could sign a contract, but there were problems:

1) You had to pay 5 golds to start a trial. This meant that if the compensation you would get from the accused was lower than 5 gold, it was not profitable to litigate. In practice, this meant that the borrower could cheat you 4.99 golds in every contract if you did not include penalty statements beforehand.

2) The person could be a fake account, and transfer it to someone else. You needed to check if the person was real or not.

3) Writing contracts and finding suitable people have their own costs in time spent. For people with a small amount of earnings, it is simply not worth the effort to enter the lending markets.

With the recent change in the contracts system, it is even less secure to lend someone money. The interest you might earn by lending is simply not worth the risk to lose your capital as well. Hence, the lending market fails.



The Discrete Nature of Capital Investment and Efficiency Considerations

So you cannot really lend your savings. Then you should perhaps open a company? But this is problematic as well. Here are the reasons:

1) The game does not let you to invest any money you like into a company. There are five qualities to choose from, with huge differences in prices in-between. If you have less than 30 gold, you cannot even think of opening a Q1 company. Until you accumulate that much savings, your money sits idle even though it could have been used to produce more.

2) Even if you can wait until you save up enough, there are other people who open up Q1 companies as soon as they can. The result is that generally no Q1 company is making positive accounting profit, let alone economic profit (See the appendix for definitions). This pushes up the limit you should wait until to invest even higher: You need to establish a Q2 or Q3 company at least to have a real return.

3) You may not be the best person to operate the firm. Operating a firm optimally in eRepublik requires considerable ability to calculate, use tools such as Excel, and to closely follow not only the prices and wages, but also other economic parameters. You may not have the time or skills to achieve these as well as some other person. If someone else managed the firm in which you were an investor, you could have earned more. This means letting everyone operate their own company is not efficient.

4) If you are not an extremely wealthy player, you cannot diversify and spread the risk. What does this mean? It is fairly obvious that the economy in eRepublik is a volatile one. Yesterday weapons were all the rage. Today food, gifts and housing rose in importance. Who knows what tomorrow will bring? Furthermore, while the prices of Q1 food were experiencing an all-times low in the world, they exceeded the minimum wage in some other countries. There are many markets and many countries to invest in. If you want to reduce the risk of losing profit, you need to be able to invest in as many different sectors and countries as possible. One citizen alone cannot simply save enough to do this.

5) Letting everyone have their own firms is not even viable: One company employs 10 or 20 people. This means that the economy actually needs 1 company per 13-15 citizens. Letting everyone open their own companies would just be gold spent in vain. However, we cannot also let only the richest to own companies, because that would mean that the savings of the remaining 90% of the eWorld’s population would sit idle with the current status of the lending markets.

To summarize, if we let everyone to use their savings to open private firms:
- You need to wait until you accumulate a lot of gold in order to invest.
- You may not be the best manager.
- You cannot diversify enough.
- One company per citizen is not viable.

This is why capitalist mode of production does not work in eRepublik as efficient as in real life. The lending and capital markets have undergone a market failure, because of the lack of institutions to allocate savings efficiently. Banks, corporations, stock markets, and an efficient legal system solve these problems in the real world capitalist economies. We lack these institutions.



The Solution

Whatever you may choose to call it, we need large organizations who can achieve what an individual cannot. You can call them banks, corporations, communes or worker collectives. It matters not. What all these institutions need to do is to gather the savings of many people, invest it in a diversified way with good management, and distribute the profits. This is how the savings will not sit idle. This is how the economy will not be filled with useless companies with no workers. This is how we will stop pouring unnecessary amounts of gold into unprofitable ventures and attain an efficient economy. At our current state, we produce and consume much less than what we could attain by combining our economic strength.

If these institutions are the solution, why did they not emerge readily? It is clear that they need two key components:

1) Capable and transparent management
2) Trust

The first one can be achieved by finding enthusiastic players with considerable economic and managerial skills. If there are only a few such institutions, finding adequate managers and strategists will not be that much of a problem. The second component is the critical one: How can you trust another person in another corner of the world? This is where the importance of communities and social relations emerge. If you can find people you can trust, the doors to higher welfare is open.

eRepublik is presented as a social game. This analysis proves this to be correct once more. Not only enjoyment and politics depend on the social aspect of the game. As it can be clearly understood, the creation and maintenance of trust by social activities and groups is the key to achieve efficiency in eWorld’s economy. Since military success also depends on economic advancement, we could say social relations and trust is the key to everything in eRepublik. Even though it is hard to establish this trust, it will have to emerge sooner or later, because individual action is doomed to fail in the economic arena as I have just shown with the aforementioned arguments.



Enter Gosplan

The lack of collective action based institutions is shown to be the central reason why we experience inefficiency in the eWorld’s economy. The super commune project called Gosplan which is active in the Russian markets is one such institution through which we can attain the most out of our limited resources and labor. The fact that it aims to overcome the most central obstacle before economic development is only one of the reasons why I choose to work in the project.

There are many other market failures in the eWorld that are caused by informational asymmetries, transaction costs and principal-agent problems which can only be overcome by collective action. There are many injustices committed in the eWorld resulting from exploitation of the game mechanics eRepublik offers, which can only be fought against collectively; united as one in ideals and objectives. To achieve a better eWorld, we need to unite and work together in an egalitarian and democratic fashion. That is why I work for the Gosplan, and that is why I will call all interested to participate in the project.



Conclusion

As I have extensively discussed throughout this article, establishment of collective institutions is not an option, but a necessity to attain economic development. There are organizational, managerial and communicational problems that need to be overcome; but I believe constructive debates and rigorous studies will be sufficient for success. Therefore, I would like every interested person to contribute to the subject if possible, and inform me of their articles. Let us for a while see past the short-term problems of the efficient rate of taxes, inflation/deflation or the necessary government policies. If the savings go to waste, if we produce a lot less than what we actually could, the short-term problems are of minor importance.

I would like to thank everyone who has read my views on what I consider to be the central problem of eWorld’s economy. I would appreciate your comments on the issue, and would be delighted to read other people’s response articles. It would also be wonderful if you could direct interested friends to at least take a glance at my analysis.

And last, but not least: Visit Gosplan to see the theory in action. We have other economic and political considerations besides achieving efficiency, and the project is not in its mature state as of yet. However, I believe the collective action of hundreds of workers working in one of the largest enterprises in the eWorld would impress even the staunchest defender of neoliberalism.

Link to Gosplan forums: http://forum.flpvp.com/

Best regards,
Kemal Ergenekon

Gosplan Committee Member
Independent Economist