Loot is the kind of driving force that can make forty people get together in a game once a week to spend four hours of their lives trying to kill very difficult mobs, dying several times. Loot is the kind of thing that builds guilds and rips them apart. Loot is a very fickle mistress, and the holy grail to some players.
A lot of games have economies based off of loot. In Neverwinter Nights and the Elder Scrolls games, you’re encouraged to take everything that’s not bolted down and sell it. In the MMORPG genre, loot usually comes from killing mobs or finding a treasure chest. This loot is usually better than items that can be crafted (for a loot-based economic system at least) and crafted items exist to fill slots and compliment loot, or to temporarily provide benefit until the character can loot something better.
The system for loot dropping is usually based on some formula and chance. Item X will drop Y% of the time off of mob Z. When mob Z is killed, a check is made to see if item X is there. If it is, the player loots the corpse and finds it. If not, there might be something else or nothing. Most systems have trash loot drop very often with good loot dropping a less percentage of the time. World of Warcraft uses a system where each mob has several loot tables associated with it. There are instance/area loot tables, where the area the mob lives in determines drops, there are creature type loot tables, e.g. dogs will drop wolf meat, and there are global loot tables, e.g. items that rarely drop but can drop off of any mob in the world.
What makes this an economic system is the fact that players usually get items that are useless to their class or character, and that they can trade these items to a vendor or another player. In games with this economy type, there are usually very low drop rate, very useful items that sell for huge amounts. The economy runs off of the relatively low availability of specific items. Sure, there are usually a number of items that are good, and available, but those really good items are very expensive and/or difficult to obtain.
This economy type has the benefit of forcing players to explore the world and kill mobs. Usually only endgame mobs have the best loot, and with loot drops being low, players will spend a lot of time playing for that loot item. If players are playing for a long time, they are paying the developers for a long time to play the game. For a developer, that’s good. For a player, not so much. However, a free MMORPG would be good for a player to have a loot-based economy.
Up next, the infamous SWG example: The player based economy.