Economic Theories

Classical School Economic Theory believed that people who acted in their own self-interest produced goods and wealth that benefited all of society. It's believed that governments should not restrict or interfere in markets because they could regulate themselves and, thereby, produce wealth at maximum efficiency. Classical theory forms the basis of capitalism

A second theory known as Marxism states that capitalism will eventually fail because factory owners and CEOs exploit labor to generate wealth for themselves.
Marx believed that such exploitation leads to social unrest and class conflict. To ensure social and economic stability, he theorized, laborers should own and control the means of production. While Marxism has been widely rejected in capitalistic societies, its description of capitalism’s flaws remains relevant.

Keynesian Economics, describes how governments can act within capitalistic economies to promote economic stability. It calls for reduced taxes and increased government spending when the economy becomes stagnant, and increased taxes and reduced spending when the economy becomes overly active. This theory strongly influences U.S. economic policy today.

As you can see, there are three very different approaches to regulating and stimulating an economy, so it is very difficult to get it right, especially in a virtual world with a closed economy

On the UO Evolution shard we use a mix of all three.  We allow capitalism to thrive between players, they make goods, create vendors and set pricing. It's survival of the fittest and is based on supply and demand

We also allow for players to practice Marxism. Laborers can own and control the means of production as well as become totally self-sufficient and self-reliant.

The shard administrators practice a bit of Keynesian Economics to promote economic stability, by controlling the gold sinks, holding public auctions, regulating evolution dollar flow, vendor stone pricing, scarcity of top rare items, and frequency of events to prevent inflation and stablize pricing.

The Three Types of Economies:

1) NPC-to-player economy involves the flow of goods and services between NPCs, players, and resources.

2) The second economy is the exchange between players.

3) The third economy is the exchange between players and Admin/donations

The addition of vendors has significantly improved the player-to-player economy.
The vendors can not auction or haggle to find ideal prices, they will sell only at the prices assigned by their owner. Vendors can not buy goods and thus players can not accumulate goods while offline.

Player-controlled vendors are scattered throughout the world attached to player’s houses. Player vendors have variable pricing based on supply and demand.  The search time and cost to find vendors is high and creates a true market experience where a player can 'bargain hunt'

Vendor stones, created by the Administrators help set a 'price ceiling' to prevent price gouging when goods become too scarce or rare or a player has a monopoly on the market

Auctions help set the pricing of goods, based on the highest price a community will pay for an item

The Law of Supply and Demand

Ultima Online is an example of a closed virtual market economy.  For a market economy to function, Crafter/Vendors must supply the goods that players want. This is known as the law of supply and demand. “Supply” refers to the amount of goods a market can produce, while “demand” refers to the amount of goods players are willing to buy. Together, these two powerful market forces form the main principle that underlies all economic theory.

The law of supply and demand explains how prices are set for the sale of goods. The process starts with players demanding goods. When demand is high, Crafter/Vendors can charge high prices for goods. The promise of earning large profits from high prices inspires Crafter/Vendors to manufacture goods to meet the demand. However, the law of demand states that if prices are too high, only a few players will purchase the goods and demand will go unmet. To fully meet demand, Crafter/Vendors must charge a price that will result in the required amount of sales while still generating profits for themselves.

For example, assume that a Master Blacksmith perceives demand for an exceptionally crafted sword. The Blacksmith invests in market research to produce the exact type of sword the players want. The blacksmith then produces 500 swords and puts them up for sale at 1000 gold each. Consumers who find the phone to be valuable pay the full 1000 gold, and half of the swords are soon sold.

Because of the high price, however, sales gradually begin to drop off. Many players still want the sword, but are unwilling or unable to pay 1000 gold for one. Because the Blacksmith loses money on unsold products, he reduces the sword’s price to 500 gold in hopes of increasing sales. Players begin buying again. The process continues until a price is reached that will both meet demand and maximize the blacksmith’s profits. That price is known as the “market-clearing price.”

When supply becomes balanced with demand, the market is said to have reached equilibrium. At equilibrium, resources are used at their maximum efficiency. The study of economics is largely a study in how market economies can best achieve equilibrium, which is why economists spend a great deal of time analyzing the relationship between supply and demand.

The law of supply and demand explains why people behave in certain ways within a market economy, and can even be used to predict behavior and, thereby, economic outcomes.

UO Evolution takes this theory and applies it before making any changes to our economy.