There has been some debate recently about what items The Goods should carry. Understanding the fundamental pricing equation used at The Goods is essential to this debate. In this essay, I hope to prove that decreases in total inventory valuation and increases in the number of different items stocked reduce the size of trades that are practical at The Goods. Because of these facts, the two fundamental goals of The Goods as an organization -- to sell everything, and to have a large stock of common goods -- conflict with one another. I urge the reader to work through the simple computations I use throughout this essay, to gain a working understanding of the ideas I present.
Consider the basic equation fundamental to The Goods. The value of one stack of items at The Goods is 10000 * log2( N + 1 ), where log2 is the logarithmn with base 2, and where N is the total number of items in that stack. We could call this V_item. The total value of all items at The Goods is the sum of V_item for each specific item. Let's call this V_total. If there are 127 iron in stock, the total value of iron is 70,000 goodscrip. If there are also 511 flax, the total value of flax is 90,000 goodscrip. If there are 3 large rubies, the total value of large rubies is 20,000 goodscrip. The total value of an inventory of just these three items is 180,000 goodscrip.
Assume for a moment that trades take place with no net change in assets at The Goods. Traders may exchange one good for another, but they do not buy or reedeem goodscrip. In other words, V_total remains constant. In this case, traders make trades if they think that the ratio between one item and another is a good one. After any one trade, the ratio between the prices of any two items will be closer to what that particular trader thinks is the equilibrium ratio. After enough trades, all of the ratios will be within what is considered equilibrium for some trader or other. In the example inventory, a reasonable trade would be to sell 512 flax in exchange for 64 iron. After this trade, the total value of flax would be 100,000 goodscrip and the total value of iron would be 60,000 goodscrip. Including the value of large rubies, which did not change, the total value of the inventory would still be 180,000 goodscrip.
What happens when a new inventory item is added in this situation? Assuming that The Goods has no stock in that item, and that the item is worth less than one first good (10000 goodscrip), traders will sell the new item and aquire a stock of the old ones. Over time, the amount of stock in every other item will decrease, as traders take advantage of the changes in ratio occuring in the inventory. Going back to our first imaginary inventory, if a new item such as rotten flax was added to the inventory, someone might choose to sell 15 rotten flax, with a value of 40,000 goodscrip, and buy 480 flax, which also have a value of 40,000 goodscrip. This would leave the inventory of The Goods at 127 iron, 31 flax, 15 rotten flax, and 2 large rubies. Now, another trader might notice that iron is low, and trade in 16 rotten flax for 64 iron. Adding new items whose value is much less than 10,000 goodscrip, reduces the stock in every other item at the store. This effectively reduces the value of goodscrip in terms of debens of real items.
The effect of adding just one item is not decreased when the total value of goods in the store is very large. Consider the case with 4095 flax (12K gs), 1023 iron (10K gs) and 127 large rubies (7K gs). If an item is added which is worth about as much as flax, we might see trades of 63 of the new item for 4032 flax, thus making the inventory of both items 63 units. Other large trades would quickly be registered, and finally the value of goodscrip per unit of real items would be greatly reduced.
The effect of adding a new inventory item with an inventory in the widely accepted range of trade values is significantly more favorable for owners of stock in the exchange. Consider the first inventory again, 127 iron (70,000 goodscrip), 511 flax (90,000 goodscrip), and 3 large rubies (20,000 goodscrip). If one person owns the entire stock, they might consider their ownership of 180,000 goodscrip to be somewhat equivalent to the ownership of all of these real items. Now imagine that the exchange wants to add rotten flax to the exchange. If added with 0 inventory, the current owner of 180,000 goodscrip would see the real value of his stock quickly plummet, as we have already seen.
One way that has been suggested is to open a donation period during which anyone can donate rotten flax to the exchange. The majority owner of the goodscrip might decide to sell some of his stock for flax, or donate rotten flax, in order to preserve the value of his or her stock in the exchange. Although donations of items to a store might seem unusual, it was on the basis of donations that The Goods was founded in the first place. The announcement of a donation period of several days prior to opening of trade in a new good, would be the simplest and most effective way for The Goods to prevent devaluation through diversity.
Another way that has been suggested is to open a short auction of a block of goodscrip for the new item, to both aquire a starting stock and to determine a reasonable price for the new item. In the simple scenario presented, 512 flax would be needed to buy 10,000 new goodscrip in the exchange. A flax trader might pay nearly that much for the chance to buy 10,000 goodscrip at auction. The idea of an auction is not inconsitent with donations, nor would it need to be floated by the elders of the exchange, or even a teller. An ousider who could not produce the new item, but who owned a small share of goodscrip, might decide to float such an auction either to donate or sell the new item.
It should be clear from these examples that diversity of The Goods exchange is in conflict with volume or size of trades. I hope that the Elders of The Goods will decide to implement the donation period when adding new items to the exchange. If they did so, I would be glad to put forward my own goodscrip to operate auctions and donate the new item.
I would like to see The Goods either double its stock as valued in first goods (amounts to a 10x increase in all stocks) or get rid of its position in individual herbs entirely. The sheer number of herbs has skewed prices and makes Tellering quite cumbersome at times.
Furthermore, I think that carrying other scrips could be dangerous to The Goods, because of the variability associated with the amount of the other scrip that is available. Even if we fully trust the other store, there are still problems.
Lets imagine that TG carries only ItemA, 3 of it in stock, so 20,000 goodscrip in stock. While TGCopystore carries ItemA, but 7 of it in stock, so 30,000 Copyscrip in stock.
Now TG wants to carry a new Item, Copyscrip. Should it accept it in units of 1 Copyscrip? So now whoever brings in a 1 Copyscrip can buy 2 of ItemA? That is obviously a problem, TG would soon only carry Copscrip, and only 3 of it... Probably would have to wait until ItemA was worth 3 Copyscrip at TGCopystore, for TG to carry ItemA again. Most likely the shareholders would turn in Goodscrip then, cut their loss, and close the store.
Perhaps a better way would be to accept TGCopyscrip in units of first goods? So, keeping the example from the previous case, 10,000 Copyscrip can buy 2 of ItemA at TG? But 10,000 Copyscrip could buy 4 of ItemA at TGCopystore. So people would not turn in Copyscrip at TG. Only if Copyscrip was worth less in terms of real items than Goodscrip, would people turn it in at TG. So, if TG has a larger inventory than TGCopystore, people will start to turn in Copyscrip. So for example TG has 15 of ItemA now, stock 40,000 Goodscrip, TGCopystore has 7 for 30,000 Copyscrip. Now 10,000 Copyscrip come to TG, and 8 of ItemA leaves. Then a shareholder in TG could exchange 10,000 Goodscrip for 10,000 Copyscrip, and redeem it for only 4 of ItemA, or the shareholder could redeem that same Gooscrip for 4 of ItemA at TG. Either way, the shareholder can't redeem the 8 units of ItemA that should have been in stock.
A similar argument can be made for any other arbitrary currency, including the Beso and the PN, where the value of the currency in terms of ItemA can vary. Scrip is an unusual commodity because it has little intrinsic value, and only to collectors -- about the same as Tadpoles. I suspect that the TN or a similarly backed currency would not be as disasterous for TG, because the argument about changing value might not hold.
Therefore I think it would be bad for The Goods to accept other currencies.
Or am I missing something?
Tamutnefret wrote:
I don't think you're missing something. Treating currencies as commodities isn't a great idea. It's worse than tadpoles for intrinsic value, since you can print ridiculously large denominations of scrip for the same cost as a single unit.
Your argument is more general than it appears. Goodscrip loses value whenever any new item with a market value of less than 1 First Good is added to The Goods trading list. The more types of item that are added, the worse the devaluation.
However, I think you're overestimating the magnitude of the problem. Suppose there was a GoodsCopy with CopyScrip pretty similar in value to Goodscrip. The Goods opens trading in CopyScrip, with the first unit priced at 1 First Good (10000 goodscrip). CopyScrip would flood in until there was 14426 CopyScrip in inventory. At that point, selling 1 CopyScrip to The Goods would get you less than 1 Goodscrip and it wouldn't be worth it anymore. 138,000 Goodscrip would have been spent to acquire those CopyScrip out of the 22 million valuation of existing stock. That's less than 1% devaluation.
The introduction of the massive list of herbs to the trade list already ran its course of devaluing Goodscrip (by about 20-30%, based on my observations). Getting rid of herbs may ease ongoing burdens on Tellers, but it's too late to reverse the devaluation caused by their listing.
Edit: To clarify my position, adding new currencies does devalue Goodscrip a bit. However, adding almost anything devalues Goodscrip a bit. Adding a few common currencies is pretty safe, even a completely rogue printing press that runs off a trillion units of its currency (and a Teller accepts it!) will only chew up 400k Goodscrip out of 22 million. It's adding lots of currencies that would be dangerous.
Originally Posted by Tamutnefret Your argument is more general than it appears.
I suspect this also, but I haven't proven it yet.
Quote: Originally Posted by Tamutnefret However, I think you're overestimating the magnitude of the problem. Suppose there was a GoodsCopy with CopyScrip pretty similar in value to Goodscrip. The Goods opens trading in CopyScrip, with the first unit priced at 1 First Good (10000 goodscrip). CopyScrip would flood in until there was 14426 CopyScrip in inventory. At that point, selling 1 CopyScrip to The Goods would get you less than 1 Goodscrip and it wouldn't be worth it anymore. 138,000 Goodscrip would have been spent to acquire those CopyScrip out of the 22 million valuation of existing stock. That's less than 1% devaluation.
Another way to look at this is to note that you would need roughly 10^2200 items of any particular item to buy out the entire inventory of The Goods. That is a huge amount. Inconcievably huge. I'm sure the printing press won't let you add that many zeroes. (ASIDE: Anyone with a hobby mint want to sell me huge denomination notes? See my other post.) If each item were considered individually, you'd only need 2200 first goods. Adding many new items to inventory is a much bigger threat.
Taking your line of reasoning a bit farther, The Goods elders could prevent new items from diluting the value of Goodscrip by determining a target value of the new item in Goodscrip, and only start accepting regular trades when the right stock of the new item had been aquired. The stock of the new item could be aquired through trades at the target price, or through donations. To be really clever, the target price could be set through an auction.
I still think there is a problem with accepting currencies. I suspect that trading between CopyStore and TheGoods would result in their real inventories being of equal value as the number of trades between them increased, provided that both CopyStore and TheGoods accepted each other's currencies. I will get back to this topic later.
--Erika
Tortanick wrote:
We could write a book about how the lack of required goods, easy communication and travel affects the economy. I wish someone actually would
Back to topic. I do think that its impossible to destroy the goods by accepting scripts, unless you accept any script rather than scripts that are worth something simply because you can't flood the goods with one item and few people will actually buy currency.
As for goods-copy my predictions are
A) It vanishes quickly or just freezes kind of like TE (no tellers for ages)
B) People sell to Goods because they aren’t selling they are trading, Copy may build up small stocks from people who want to get in early, eventually it may become a prominent trading outpost but it will take a while.
C) If script is traded at both places on a 1:1 basis (not likely) then hordes of people will sell to Copy then buy at Goods, stocks will balance out until GS and CS is roughly worth the same. People will buy where stocks are higher and sell where they are lower constantly making price differences smaller
D) If script is traded like a normal item then it will poor in like wood, clay, etcetera. This will provide a boost as people get the initial scrip from Copy but otherwise things will be roughly the same as in B, unless this boost is a make-or-break.
If I want to compair two scrip's (admitadly I havn't had to yet) I'd use the quicksilver method of pricing scrip, I call it quicksilver because like RL silver; the items that are the centre of this method are worth a reasonable amount to all and I call it quick because these items move quickly across the trade routs.
Quicksilver goods are things like iron & canvas that lots of people will happily accept knowing that they could sell it later.
In the quicksilver method the goods takes the value of QS goods from a scrip’s backing (more likely a package of that good, 10 iron, 5 canvas, 100 charcoal) then it sees how much GS is needed to buy just that and works out the relative value of the scrip.
For example: Egyptian piasta
Note: I rounded the GS values
100 CC is worth 1,753 GS or 50 EP
10 iron is worth 1,504 GS or 100 EP
5 canvas is worth 2,095 GS or 150 EP
Using charcoal as the basis of comparison 1 EP = 35.06 GS
Using iron as the basis of comparison 1 EP = 15.04 GS
Using canvas as the basis of comparison 1 EP = 13.9 GS (rounded, reoccurring decimal)
According to these 3 QS goods (take the mean), (is CC a QS good in T2?) 1 EP is = 21.34 GS until someone buys or sells a QS good.
The problems with useing this to determane prices of a scrip is that you could buy goodscrip for EP and suddenly the total gs is greater than the total value of the items. Not good. As such I think the goods is better of just treating well managed scrip like a normall item, like most things it will settle around market value. As for the QS method, thats here because I was thinking of how the goods should price scrip and when I created the QS method I decided to post it as a comparason method rather than forget about it
Tamutnefret wrote:
It can be shown fairly easily. Suppose the total goodscrip issued is G, and market value of inventory before the trade is V. The new item is valued at N.
Before the trade, each goodscrip is worth V/G.
After the trade, each goodscrip is worth (V+N)/(G+10000).
The difference is (N - 10000 V/G) / (G+10000).
If N < 10000 V/G, then the goodscrip has lost value. In other words, whenever the item is worth less than 1 First Good.
Quote:
The stock of the new item could be aquired through trades at the target price, or through donations. To be really clever, the target price could be set through an auction.
A target price is equivalent to a target stock level, since for The Goods price is uniquely determined by stock.
I think the best way would be to call for bids on supplying stock. Rather than just accepting one bid, start at the lowest offer and accept them until the bid price is less than the normal Goods price for the current stock. If there are insufficient bids for that to happen, extend the bidding period.
This way, bidders can always choose their bids so as to make a profit (at The Goods expense), but you get to choose the bids that result in the least profit. For a given target price T, the target stock level will be approximately 14426/T.
Quote:
I suspect that trading between CopyStore and TheGoods would result in their real inventories being of equal value as the number of trades between them increased, provided that both CopyStore and TheGoods accepted each other's currencies.
Not really. For simplicity, suppose stores B and C are both based on the same pricing model, and their trade overlaps only in iron and the other's scrip. Suppose B has 200 debens of iron, and C has 100 debens.
The two exchanges can be in equilibrium if B has about 28640 Cscrip, and C has about 7265 Bscrip. Both exchanges then have prices of 1 iron ~= 71.6 Bscrip ~= 142 Cscrip. Due to the convexity of the pricing formula, the equilibrium is stable. Plugging in some numbers verifies that it is indeed a loss-making proposition to try to move, for example, 10 iron from either exchange to the other.