Free Trade and the Diablo 2 Economy
By: Investors Perspective
Tags: Trade, Macroeconomics, Economics, Gaming, Games

The crowd near town frantically scattered as a pulsating frozen orb splintered across the rickety walls of the campsite. A few seconds later, corpses rose from the ground and a whirlwind roared into plain sight. No, this isn’t a scene in the latest sci-fi movie, but a typical PvP (player vs player) battle on the outskirts of the Rogue Encampment. When Diablo 2 debuted in 2000, no one expected the game to attract as much fanfare or shoot up the ranks of the best online games. Each session asked players to use economics and strategy to build a character and move forward in the game. It turns out the same approach would work in the current trade climate.

What’s Trade Got to Do With It?

Trade, in the economic sense, represents the exchange of goods and services between one or more country. A developed nation like the U.S. will trade with an emerging market for commodities, electronics, and other goods that require labor-intensive work. This allows the domestic labor force to focus on knowledge-based work; the driving force of innovation and wealth creation. When a company files a patent or receives a drug approval, for instance, they can then export the intellectual property to another country.

More often than not developed countries like the U.S. will import more goods and services than it exports, creating a trade deficit, or conversely a trade surplus where exports exceed imports. In December 2018, the deficit increased by nearly $9 billion from $50.3 billion the month before. While the growing trade deficit may seem harmful on the surface, in reality, economists do not believe this is money or productivity lost to other countries. That’s because trade imbalances stem from key macroeconomic factors — relative growth rates, foreign exchange rates, and savings and investment rates — rather than one-sided trade deals the President has derided.

Yet, President Trump insists the current trade deficit, combined with unfair trade practices, have hindered economic growth, and by shrinking it, we can Make America Great Again. Even those who agree with his hard-nosed stance probably recognize the benefits of trade. It helps create opportunities for impoverished households to reach a better standard of living and also provides consumers with an array of goods and services at a fraction of the cost. Take TVs, for example. A 36 inch TV was a modern luxury for a middle-class household in the 1990s, but today, a comparable product, with far more technological bells and whistle, runs as cheap as $100. That’s because regions in Asia like China and Japan produce chips and semiconductors that power TV’s (and other electronics) more efficiently than the United States, otherwise known as a comparative advantage.

Into the Catacombs

Much of the same can be said about community-based games. To succeed in Diablo 2, players must go through similar channels to acquire new gear and unique items in the game. But unlike a country, players do not attempt to establish trade agreements that last through the games’ existence. Instead, they will exchange goods and services when it benefits them. In building an Amazon — which can rely on lightning fury and other electric-based skill — you may try to acquire Titan’s Revenge or a Stone of Jordan from an Assassin, who can’t use a javelin. In this case, neither player leverages the same comparative advantage a country might hold when trading with another nation. Players, however, can get an upper hand by farming monsters that drop unique items at a high rate. Being able to rush through a Baal run or a series of Cows puts you in a position to acquire more rare items and make better deals.

The Darkside of Trade

Two weeks ago, President Trump tweeted that he would slap an additional 25% tariff on $250 billion of goods. The surprising turn in rhetoric comes after a protracted public back and forth between the two countries made it seem as though a resolution were near. It’s unclear what changed, but the President now believes that depriving China access to U.S. markets will help shrink the trade deficit, create jobs at home and protect our intellectual property. Tariffs aren’t the answer, though. When Trump taxes Chinese imports, Beijing isn’t footing the bill. Instead, U.S. companies cover the extra costs once a shipment clears customs and then markup products for retailers. The same is true of the tariffs China placed on U.S. goods. And so in the end, people — not countries or companies — end up worse off.

Now imagine if Blizzard put a tax on various goods in Diablo 2. An item with desirable qualities may exhibit some inelastic behavior wherein an incremental price hike would not impact demand. But more often than not, there are substitutes available that can replace the item in focus. An Amazon can always use Thunderstroke, a matriarchal javelin, for PvP battles and adventures as opposed to the habitually prescribed Titan’s Revenge. In this case, Titan’s Revenge has an elastic demand curve that fluctuates up and down in response to price changes. The outcome of a potential ingame tariff, or trade barrier, depends on what goods receive “preferential” treatment. Taxing a rune or jewel, for instance, may have a minimal impact on the Diablo ecosystem, but levying a similar policy on an intermediate good like the monsters, could ravage the marketplace. Real world situations would play out in a similar fashion; importing fewer intermediate goods could cause domestic production, consumption, and GDP to decline.

Bottom Line

The constant threats to free trade undermine the engines of economic growth. When a country retreats into isolationism, it effectively hinders competition, limits choices, and disincentives innovation. To a lesser extent, community-based games would suffer a similar fate with stricter trade barriers.

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