Real World Tests of the Effects of Land Speculation

In a case of, "Out of the mouth of babes and sucklings," we have massive online games revealing the corrosive and deflationary impact of land speculation.

Specifically, it appears that it is essential for there to be disincentives for people who speculate in proxies for traditional real estate (i.e. limited supply) without making improvements.

That we can observe this in games gives us two advantages on the real world:

• The effects of speculation and regulation can be observed over a very short time.
• You don't have to fight the real-estate industry to implement regulations.
• You are not actually going to kicking people out of their homes if you make a bad call.

While the author is not primarily writing about the real world, it is clear that he understands that this does have real world analogues:

The hot new trend these days is games featuring "digital real estate." I'm concerned these will lead to digital land speculation bubbles that will make players, developers, and investors alike lose stupid amounts of money. If you're developing or investing in a game or app like this and expecting to ride a blistering wave of growth to a multi-billion dollar valuation you'd better take a hard look at the fundamentals before you run smack into a brick wall.

Digital real estate is not actually a new phenomenon, and history consistently shows that when "digital land" sufficiently resembles the economic properties of physical land, we see digital land speculation, digital housing crises, and even full-blown digital recessions. That means a period of exciting growth suddenly grinds to a halt once scalpers corner precious digital property and keep it out of the hands of those who actually want to play the damn game or perform valuable and productive activities for the community.

Take Axie Infinity, for example:

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I can tell you exactly what's going to happen here, because it's what always happens – speculators will buy up all the land and hold it. If there's no cost to holding onto this scarce asset that everybody needs and wants, and this asset will predictably rise in value, speculators will just sit on it and watch the price shoot through the roof and anyone who wants to use land will have to pay out the nose. This will have a negative drag on the game's entire economy, and the speculators will get rich at everyone else's expense. All this talk of emergent and spontaneous user creations built on a beautiful "digital nation" will grind to a halt, crushed by the weight of rent-seeking parasites.

………

We know this for two reasons – first, it's exactly what happens in the real world economy, and second, we've seen it happen multiple times before in the digital economy. Ultima Online, Final Fantasy XIV, and EVE Online are all prominent examples of virtual worlds with sophisticated internal economies that have all suffered from digital land shortages fueled by scalping and speculation. Two of those games are still suffering from land shortages to this very day, but one of them was able to solve their crisis thanks to a quick-thinking economist who took a page out of the book of the 19th-century populist firebrand Henry George.

Here's a spoiler if you are not familiar with Henry George: Taxing land at a different, and higher, rate than what is on the land discourages unproductive speculation and actually ends up driving the price of land, and hence unproductive rents, down while encouraging things like higher population density development.

We could theoretically run a simulation on real-estate regulation and population for a few pennies, and find the most effective way to prevent the rent from being too damn high.