Tobold's Blog
Sunday, July 31, 2016
How much is $100 worth?

Sounds like a stupid question, doesn't it? Because we frequently use the US dollar as the yardstick for wealth and income, $100 are worth $100, obviously. You can fiddle around a bit with that, like calculating the net present value of $100 in a year, because $100 today are worth more than $100 in the future. Or you could change the value by looking at purchase power parity, because $100 in a poor country buys you more than in a rich country. But generally people think that $100 are worth $100.

The error in that is that $100 by itself has no utility outside an economic system in which you can purchase stuff for those $100. Stranded on a lonely island a $100 bill is best used to kindle a fire. And if you look at the utility of $100 it quickly becomes obvious that the value of those $100 depend very much on your economic situation. If this is the $100 you need to buy food or make rent, they are indeed very valuable. If you are a millionaire, the $100 more changes very little in your life. There are people in this world that earn so much money by working every second, that bending down to pick up a $100 would technically lose them money, because the time it takes is more valuable than that.

On a global perspective, $100 is a lot of money. If you earn $100 a day in the USA you are among the top %1 richest people globally. If your savings and possessions minus your debt/mortgage results in you having a total wealth of $100 in the USA, you are still among the top 10% richest people on earth. On the other hand if you don't look globally, the US median income is above $100 a day. But the median income of the top 1% is above $1,000 per day.

I do think that we can't understand the Free2Play business model of games without understanding inequality. If $100 is a lot of money, spending $100 on virtual items in a "free" game sounds incredibly stupid. But if you consider an economic system in which the elite lives in such luxury that $100 wouldn't buy them anything really useful any more, spending $100 on a game becomes quite understandable.

Classic economic theory considers that the world has limited supply of resources and unlimited demand. That is why you can make Gevlon angry by claiming that that there is not enough work around for everybody, because in a world of unlimited demand there unlimited possibility for additional useful labor. But once you consider how the added value created by labor is distributed in the real world, you can end up in a system with limited demand and too much supply: The poor don't earn enough with their labor to buy the things added labor would create, and rich already have everything. You end up with an economic system where the use of labor that makes the most sense is creating a mobile game which encourages $100 purchases, because that virtual item is the only thing that is still in demand by somebody who can pay for it.

That is why I believe that Free2Play games are a sign of the times. They exist now not only because the technology is available noz, but also because the economic situation in which people pay $100 for an in-app purchase in a game exists now. If the wealth of the world was far more equally distributed among the people of the world, the business model of Free2Play games wouldn't make sense.

Insightful post, Tobold.
Thanks :)

Games are "F2P" because it's economically possible. Servers are better than ever and network access is cheaper than ever. That's it. There have always been, and will always be a group of people who make more than others and for who "100 dollars" is easily spent on entertainment.

In 1993, when I started playing online games, it cost a minimum of 6 dollars an hour to play commercial games. That worked because the computers and networks were such shit that you could only jam 30 or so people into the entire game without the server running out of resources.

But I don't think this is about that.

What I see happening here is you're in "Social Justice Warrior" mode and looking for "income equality" as a cause to champion. There is increasing income inequality, and there are solutions to it, mostly reigning in big business and de-globalizing. but elevating it to a religion and arguing that the "only fix" has to be some global redistribution of wealth scheme is societal suicide. That's what we're doing now and it isn't working in catastrophic fashion.

Just for fun, let's do a thought experiment and implement some stupid policy in the US and see what happens. Let's go with Basic Income! Sure. Poof. Congress passes a law that guarantees 1500 bucks to every adult citizen age 18 and over. That's what, 245 million adults times 1,500 dollars each... that's a crappy 368 billion dollars. Surely we can find that in the trillion we spend over budget every year, amiright? 1500 bucks doesn't get you much in New York City or Seattle, you'll still have to stay in your day job at McDonalds or Starbucks, but in rural areas where there is cheap real estate, it's enough to live on no problem. So what happens? Everyone with a crappy job (Like in a meat packing plant.) quits. So what's next? More foreign visa workers with green cards predicated on having a job! Good news! Shitty meat packing plant jobs are available in Texas! If there is a manufacturer in a small town, without the political clout of the meat packing industry, that manufacturer just goes out of business and the products are manufactured in Indonesia instead. And this happens all over the country. Wait! This is already happening now! Even without a "Basic Income."

the value of those $100 depend very much on your economic situation.

Its value is determined by those who are in control of whatever economic system is in place where that $100 was issued. Just like your person stranded on an island, that $100 isn't going to do them much good because there is no economic system in place that serves to validate the value of it. Take your island analogy and go one step further - supposing that there is a computer and satellite internet connection available on this island. This person now has the ability to play a F2P game, but no way to manifest the value of the $100 cash they hold within the item shop of the game they are playing. But wait, this person has a credit card in their wallet that has $100 of credit on it(issued in the U.S.). They proceed to use their credit card and spend $75 of their $100 credit limit with plans to use the $100 cash to pay it off once they get rescued.

One year later they are rescued. That credit card carries a 26% interest rate, so after one year they wind up owing more than their $100 cash is worth. Let's also assume that this $100 was their annual income for that year. They now owe(depending on the state) taxes somewhere around the 30% mark on this $100 for the year in question. Uncle Sam likes to get his money first, so at the time they were stranded their $100 cash was worth only $70.

But wait! They are rescued by a Somali freighter and the person is surprised to find that they can get $57,500 Somali Shillings for their meager $100. Oh man..F2P goodness abounds now! :(
I am pretty sure you have studied more formal English grammar that I have Tobold but I think that $100 is treated as singular rather than plural in the phrase "$100 IS worth a lot of money".

I am not sure why and I have never really studied grammar formally. I think it is something to do with the fact that the dollars are being treated as a collection and the verb concerns the singular collection rather than the multiple individual dollars in it. To give a similar example: one might say that 100 soldiers ARE running up a hill because the soldiers are individually running but you would also say that 100 soldiers IS a lot of soldiers.
They might be rescued by Somali pirates and ransomed for $100k. Now THAT'S wealth creation.
@Tobold: why there are no $100/month subscription games? If someone can pay $100 for a F2P cash shop, he can also pay it on subscription.

I'm afraid, the situation is that the rich is buying pretend wins in video games.
I agrre more with Gevlon than with you. Tech (and psychology) have created a much better environment for milking people, so it happens. And it's not even the rich who get milked more, F2P (which is more or less always P2W) is not that different from the many RL gambling games who have developed over the last decade.
It makes sense, on the whole.

Inequality is not the only reason for the rise of F2P games. There are the cultural and technical changes that others have mentioned. It is definitely a strong contributing factor, however, and the change from subscription to F2P as the more 'reliable' revenue model tracks with the sharp rise in inequality in the last decade.

The model, summarised, amounts to the wealthy and committed buying themselves some companions to play with. Doesn't get starker than that, really.
I don't think it's the rich spending $100 on a game. Plenty of poor people spend more than that on cigarettes or booze.

It's addicts.

If you're spending $100 on a game or 30 hours a week, you are wasting a lot of resources on a game. Both cases are the result of a major misperception of the value of the game and the value being spent.

It's not the rich who keep casinos open, is my point. It's people who don't understand probability.
You have defined marginal utility and I think there is a place for it all payment schemes but you haven't shown any link between inequality and FTP gaming.
Every activity has its whales. While there is a correlation that richer people will spend more in total, that relationship becomes less dominant as disposable income increases because the spending is more likely to be spread across a wider number of vices. The net result is that it is very hard to infer much about the financial situation of a person from the amount they have spent on any one transaction.
"If the wealth of the world was far more equally distributed among the people of the world, the business model of Free2Play games wouldn't make sense."

No. No. No. The thing why f2p works is because the game is free. And no one forces you to spend. And if you like to spend you can spend as much as you want. That is the reason why f2p works. Free. Spending optional. Amount anything.
Herein is why I read Tobold. I have read this three times and shared it even more. Thanks Tobold. by the way I agree with some of the arguments to the contrary but the subjection in itself is the reason I love this post.
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