Optimal Area Currency with Milton

Friedman and Mario are about the same height.
Friedman and Mario are about the same height.

In hindsight, one of Friedman’s great predictions is the Eurozone crisis. Despite being a huge champion for flexible exchange rates, Friedman never advocated for a common European currency.

Europe exemplifies a situation unfavourable to a common currency. It is composed of separate nations, speaking different languages, with different customs, and having citizens feeling far greater loyalty and attachment to their own country than to a common market or to the idea of Europe.

— Milton Friedman, The Times, November 19, 1997

The crisis of Greece exemplifies many of the problems Friedman points out. In times of economic recession/depression, central banks devalue the domestic currency to return the country to full employment. When economies are similar recessions/depressions move together, if there’s a crisis in Texas it’s probable there’s one in Washington. This makes central bank policy more effective because capital won’t escape from ‘recessed’ areas to one’s with higher returns – there are none. It can be much harder to accomplish this in Europe where every country’s economy is dramatically different and institutional policy fluctuates widely.

What the hell does this have to do with game design?

Why do multiple currencies exist in games to begin with? Why not just have one type of currency rather then four or five?

Simply put, it’s all about segmentation. Once again, Supercell has provided us with a wonderful example, Clash of Clans (CoC). Consider which items cost gold and others elixir, the choice was not an arbitrary one. After a quick scan, you’ll notice only the defensive items (cannons, archer towers, walls) cost gold and only the offensive items (troops, barracks, spells). Why might this be the case? Segmenting these items gives designers greater control over the economy and minimizes the potential for ‘contagion’ effects. Consider a world in which Clash of Clans only contained gold. It’s possible players might have a preference for attacking rather then defending, encapsulating the idea of capital going to its highest return. If this were the case the game could become unbalanced as all players attack and none spend gold to upgrade their base defense. By segmenting base defense into elixir, you remove any opportunity cost from from spending on base defense. This is similar to giving your relatives a gift card, rather then spending it on whatever they fancy, they must now spend it on whatever is from the gift card’s store. A domestic currency is much like a gift card to that country’s ‘store’ just as elixir is a gift card to only CoC’s offense ‘store’.

If Supercell finds players are not creating challenging defenses, it’s very easy increase the rate of gold production without worrying that money will be spent on offense. They can also do this by lowering the cost of items priced in gold. Supercell has toyed more with this strategy in their other title, Boom Beach.

The rules for when segmentation is worthwhile emerge reading Mundell’s famous paper 1 backwards.

Segmentation in games, just like in real world economies, gives game designers and central bankers more control.