This is one of those ideas that has been floating around in my head for some time. But this comment on the Broken Toys blog caught my attention because it put an interesting twist on the concept.
Dynamic NPCs are ones who interpret and react to player actions as well as those of other NPCs. There's really two parts to this. On one side, you have the various town-type NPCs; shopkeepers, quest-givers, blacksmith, etc etc. On the other, you have the mob-type NPCs; orcs, dragons, rats and all that sort of goodness. For brevity, this post will focus on the town-type NPCs and leave the mobs for another day.
I've always thought that it would be interesting if NPCs actually reacted to what was going on around them. If they could know what was happening in their local area (or on a larger area if they are the type of NPC that would care about such things) and alter their routines based on that knowledge.
There are several layers to this possibility. The first would simply be location. NPCs would migrate and set up home/shop based on their fears/desires and how the local enviroment plays into those feelings. A jeweler, for example, probably wouldnt make a very good living in a small, farming village. They would likely look for a larger city with a stable economy and plenty of wealthy potential customers. And this also ties in with the comment I linked to earlier.
TPRJones mentioned the possibility of NPCs responding to wars based from, around or in their towns. People tend to flee warzones, and the NPCs shouldnt be any different. Is the town under siege? Those NPCs who formerly farmed the now-ravaged countryside would now want to move someone safer. Or perhaps they even change, turning into beggars and thieves since they can't make an honest living anymore and
This could even be developed into a meta-game feature, where player-towns compete to make their city more advantageous for NPCs, thus drawing them away from other nearby towns.
Eventually, player-towns would come to represent the guilds controlling the town. Is the guild focused on a safe, posperous enviroment? Then the town will attract merchants, entertainers, nobles and the like. Or is the guild warlike, building defensive structures and constantly warring with their neighbors? Well then you might find more mercenaries and drifters looking to take advanatge of the wartime market. Or do the players even go so far as to kill every immigrant that shows up in their town? They'll soon find their village shunned by all NPCs. Or maybe they only kill the elves, resulting in a town populated by everyone except the elf-types.
I would even take this a step farther, and have the town's appearance change as well. Do the players in the town randomly kill NPCs and offer sacrafices to demon gods? Well then, the town will probably start looking more sinister and become more rundown, populated by crazed fanatics, the destitute and desperate, and perhaps even a few unholy minions lurking about in the shadows. Is your town full of do-gooders who uphold the virtues of justice, compassion and truth? Then the town becomes more shiny and airy, sparkling across the vista so that it can be seen by riders from miles away. The streets are immaculate, the poor and lame are well taken care of and every NPC greets you with a heartfelt salutation.
Another layer to this concept would be related to quests/jobs and shopkeeper supplies. Has a rancher been losing a lot of their livestock to wolves on the edge of town? Maybe they'll try to hire players to take care of the wolf population. And the local innkeeper will start charging more for food as the supply of meat dwindles. Then, once the wolves have been cleared out, the rancher no longer needs to hire players for that job, but maybe they have need of someone to deliver their overabundance of meat to the next town.
An important part to making this all work would be to give NPCs some longevity, so that they aren't killed on a daily basis by the more psychopathic players. But thats a different discussion.
Dynamic town-NPCs would not only make the world seem more alive and fluid, but it would force players to consider the long-term consequences of their actions. Shopkeepers for player towns wouldnt just be the drag and drop variety. Certainly there should be options for players to hire NPCs to populate their towns, but ultimately, player actions in-game will determine how successful your town will be.