TruthScape.com - The RuneScape Market Crash of 2007 - What’s Going On? Is it Really a Crash?

It’s clear to nearly everyone that, on the whole, the prices of goods in RuneScape have been experiencing a steep decline for several weeks, and most significantly within the last ten days since the Grand Exchange (GE) was released. Many words have been used to describe what is happening in the market: deflation, recession, depression, crash, collapse, and so forth. This is all rather confusing, and leaves people to wonder: what’s really going on here?

The answer isn’t simple, because the situation isn’t, and neither are the terms that are being bandied about. Even in the real world, where there are professional economists who have access to reams of actual data, there are disagreements on how to analyze economic downturns. In RuneScape, where we aren’t pros and most of the data is missing, things get even tougher, so there are no absolute truths. We are in the realm of rough data and opinions.

With that said, here are my thoughts on the current state of the economy and markets in RuneScape.

Deflation is perhaps the simplest of the concepts here to understand: it refers to a situation where general price levels are decreasing over a period of time. While RuneScape doesn’t have formal price indexes such as those that exist in the real world, I believe even a casual inspection of the prices of nearly all goods will show clearly that RuneScape is experiencing a significant price deflation at the moment.

Note that the fact that some items are stable or increasing in price doesn’t negate the existence of deflation; the measurement is based on overall, aggregate measures of the markets.

One danger of deflations is that they can lead to a feedback loop problem called a deflationary spiral. In this phenomenon, a deflation in prices means that suppliers don’t want to produce as many goods and cut down on output. Since they have less production, they make less money, so they can’t spend as much; reductions in spending lead to lower demand, which in turn means even lower prices, and a vicious circle ensues. The Great Depression is often described as having been a deflationary spiral.

I don’t think we are at that point yet. I am definitely seeing price drops that lead to players no longer wanting to produce certain goods; for example, comments from people saying it’s “not worth fishing anymore” are now routine. But RuneScape is different from the real world in an important way that strongly reduces the chances of a deflationary spiral: nearly everyone can perform a variety of different activities with a high degree of skill. Where laying off a thousand factory workers might contribute to a reduction of demand in real life, in RuneScape someone who fishes can just cut wood or kill dragons or do something else. This greatly reduces the chances of a feedback loop occurring.

These two terms are commonly used by players to describe what is happening now, but they cannot used to describe RuneScape accurately based on their formal definitions. A recession is a reduction in productive output or economic growth; in the real world this is detected by tracking changes in gross domestic product (GDP), but there is no such metric in RuneScape.

Then there’s the matter of what constitutes a depression, which even professional economists cannot agree upon. Some say a depression is just a long-lasting or severe recession, while others say a downturn has to meet certain other criteria to qualify as a depression (such as high unemployment figures, plunging stock market indices and so forth.) One pundit famously quipped: “a recession is when you lose your job; a depression is when I lose mine.” That pretty much says it all in terms of the subjectivity of the issue. J

Without access to data, all I can do is estimate the current state of the market from looking at the activity I see in the game. Based on that, I believe that RuneScape is currently in a recession. I think it’s premature to toss the word “depression” around, however.

Once again, we get into matters of definitions and perceptions here. J Usually a crash is defined as a sudden and dramatic decline in prices; in the real world, the classic example of a crash would be the Black Monday stock market crash in 1987, where the Dow Jones Industrial Average fell over 22% in a single day. In RuneScape, market dynamics are somewhat different than the real world, which leaves us open to interpret what both sudden and dramatic really mean.

Of course, there is no price index or average we can use in RuneScape, and even if there were, I doubt we would have seen a 22% drop overall across all prices in a 24-hour period. Part of the reason is that the Grand Exchange—which partially triggered the deflation, even though it is not solely responsible for it—has 5% price trading caps which effectively slow down price changes. Arguably, then, one could say that the GE has prevented a crash from occuring.

On the other hand, those same preventive measures have not prevented significant price drops, but rather made them take longer. If you take a bigger picture look at the market, you can see that prices in the last two weeks have in some cases dropped over 50% compared to their average values over the preceding two years—and many prices continue to drop further.

Another characteristic that is nearly always seen in market crashes is that people start to sell for emotional reasons rather than logical ones. In particular, many begin to panic as they see prices go down and decide they need to dump their goods before the price drops further. This is definitely starting to happen here in RuneScape, and is in fact what prompted me to write this article. If you want a good example of what I mean, check out Figure 57.

**Figure 57: Sure Sign of an Overcorrecting Market**
I was amazed to find the low end price range on rune battleaxes was 24,680, and even more surprised to find that people were selling at this price—and not just a few, either! Rune battleaxes alch for 24,960 each, and nature runes are under 280 a piece at the moment, so selling at this price means giving away free Magic XP. Doesn’t make a lot of sense, does it?

Due to the magnitude of the price changes and the panic starting to creep into the market, I am inclined to say that—despite my reluctance to use the word until now—we are experiencing a market crash. It’s not as dramatic as Black Monday was; instead, it’s a crash that’s occurring in slow motion, because of the price controls that have gummed up the Grand Exchange. I’ll explain this more when I look at triggers of the crash.

Of course, not everyone agrees that we are experiencing a crash. Some feel it is only a normal correction or cycle in prices that will be over soon. On the other hand, there are those who feel things are even worse than a simple crash; I’ve seen players claim that RuneScape will experience an “economic collapse”, or say that we are heading into the “dark ages” and so forth.

In my opinion, these views are exaggerated and often unnecessarily alarmist. Yes, there are problems with the game right now—some of them quite serious. And yes, prices on many goods are dropping. But that doesn’t mean that prices are going to fall to nothing, or that nobody will ever be able to sell anything. And I don’t see us going into any “dark ages” any time soon.

Remember that analogies with the real world only go so far when it comes to economics. The law of supply and demand is the same, and many of the market dynamics are similar, as are psychological effects such as panic. But this isn’t the real world: you can’t earn money in the real world by “alching”, nor can you switch in 10 seconds from being a top lumberjack to being a world class fisherman. There are far more easy ways to earn money in a virtual world than in a real one.

Similarly, Jagex will have a much easier time turning around this current crash than would be possible in the real world. For more information, see the discussion of how Jagex can improve matters by spurring demand.