What is Gold?


People pursuing personal wealth in WoW are mainly focusing on accumulating gold, as it is the currency of the game. In real life, one would accumulate dollars, or pounds, or other currencies. Today we are going to look at how these currencies came to be, what they really are and what their place is in an economy. It will be less of a tip on how to get filthy rich and more of a guide to understand what gold is about.


History
Thousands of years ago, before the invention of currency people bartered. They exchanged goods and services for other goods and services directly. This was a very primitive way of doing business, but it served mankind well for many years. However it was very unpractical. Exchange rates weren't fix, and they were hard to determine. Also it was kind of tiring for stonemasons to carry their not so light product to the market, every time they wanted to grab a bite or buy shoes. There was desperate need for another way of trading, possibly a common product or commodity, that traders would agree to set their prices in. That is how currencies came to be.
The first currency evolved from receipts, representing grain, a common product, stored in granaries. People started trading with the receipts, and after a while, their original purpose faded, and they became a manifestation of value. Traders knew that getting receipts meant getting products, as it can be exchanged anytime, which meant that it was a safe medium of exhange, a currency.
After a while coins appeared, in lieu of the receipts. They were also light, small, and easy to monopolise the production of, by the state. Countries issued coins, and thereby had somewhat of a control over the flow of value.
As technology moved forward, and the demand for currency with value higher then coins appeared, banknotes came to be. They are even lighter then coins, small, easy to print by the state, hard to print by an individual, and easy to control.
For many years coins and banknotes were the only means of trading, untill the computer was invented. Nowdays most of the money we have is just a bunch of zeros and ones on a hard drive far-far away.

Money and the economy
In an economy there are a certain number of products and a certain number of currency flowing. For example let's say that on a realm there is 500 million gold combined, and X products. Products cannot be exactly measured, as their value differ, so a toothpick and a motorcycle does not equal two toothpicks (or two motorcycles for that matter), but they have relative value, so they can be calculated with. Let's say there are 100 million volatile fire's worth of product on this realm. The price of products is determined by the ratio between the amount of currency and products present in the economy. In this case 1 volatile fire is worth 5 gold, so their price is five gold. Easy as pie. What makes it a bit more sophisticated is that the relative value of two products can change, depending on the supply and demand of them, which changes the combined amount of products present. It is the same as with money(or gold). The more there is of it, the less it's worth. Two things make money special, different from other products and commodities, only one of which apply in WoW.

  • Money doesn't have any use. You can't eat it, can't drink it, can't wear it, can't do anything with it. If you are stranded on an uninhabited island having a million dollars with you will do you nothing. On the other hand having a couple of sweaters might. In WoW if you have a million gold, and it's 04:00, nobody is online, and you can't find the gem you want on the AH, that million gold is not going to help you.
  • You cannot actually make money. Money is not a product, or at least not in the way others are. Money is issued by governments, they are the only entities capable of actually producing money. Everybody else is just trading for it. It cannot be mined, grown, baked or anything. This is what actually doesn't apply in WoW. There are numerous ways you can actually make money. By doing quests for example.

Inflation & Deflation
We've seen that a money's worth is determined by the ratio of the amount money and products present in an economy. But we also know that neither of those numbers are constant. The money circulating in an economy is always a representation of the products behind it. When the value of a currency goes down either because the number of products decreases or the amount of money increases, we say the currency inflates. If it goes the other way it deflates.
Many people ask that if a country is so poor, it is in a crysis, why don't they just print more money? The answer is that no matter how much money they would print, that wouldn't change the amount of products they actually have. That is a very simple answer, which many people say, but it is only partially true. While it is true that printing money only causes it to inflate, and doesn't magically create goods, it also has other effects. There is a reason why countries actually do it (yes, they just print money), it has a similar effect on the economy as fractional reserve banking, but that is a whole other post on a whole other day.


Conclusion
In many ways money can be viewed as a product. In WoW even more so then in real life.
Realms in WoW are much smaller then countries in real life, so the effects of trade are much more visible. With each expansion, more and more money gets into the game's economy. Quest rewards are higher, grey junk is worth more when you're selling to a vendor, etc. Products on the other hand can't keep up with this increase, which leads to a steady and stable inflation of WoW gold. What is now two million golds is only as big of an achievement as if you were to hit 500k in vanilla (it may differ on each realm), and I expect a further inflation as future expansions come.

4 comments: on "What is Gold?"

  1. Hey it's Oligopoly from Warcraft Econ, just wanted to say that it was an interesting read on the big picture of gold making. I wonder how many people hit the old 214k gold cap back in Vanilla?

  2. Yeah thats interesting, money is not a product. but money IS an industry, and a market. Also, money can be bought (bonds, for example)

  3. This is a great topic, but some of the details in the article could be covered better.
    Fortunately, they are.
    The Austrian School's monetary theory, as originally outlined by Menger and von Mises, and explained in modern times by Bob Murphy (http://mises.org/daily/1333) is a powerful tool to understanding what money is in the real world.

  4. A better overview of the history of money and debt:
    http://www.eurozine.com/articles/2009-08-20-graeber-en.html
    Skip the Austrians; they're mostly metal-obsessed zealots.
    BTW, there's no anthorpological evidence of pre-money barter-based economies/markets.

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