'Second Life' Lessons from a Virtual World

Someday, someone might write a book called "Everything I Needed To Know About Economics, I Learned in My 'Second Life.'" That's because the multiplayer online gaming space "Second Life" provides, along with fun, valuable lessons about economics and human behavior.

Created by the San Francisco-based company Linden Lab, "Second Life" (SL) is an online digital world where real people interact with each other through image representations called avatars. Everyone who joins is given an avatar whose appearance they can alter as they wish.

The reasons for participating in this rich 3D world are about as varied as the people who join -- some are looking for adventure, others for an alternate experience or perhaps an escape from what is sometimes called the "earth world."

Virtual Currency

Avatars can build and sell things, such as clothing or airplanes, and these transactions can be paid for with the game's currency, dubbed the Linden dollar (LD). The fascinating thing about the LD is that at sites such as The Gaming Open Market, it trades against the U.S. dollar, making economic activity in the digital space directly connected to the earth-based economy.

For those not involved in the gaming world, it might be surprising to discover that digital world currency trading is rapidly growing.

According to Cory Ondrejka, Linden Lab's VP of product development, "In the first quarter of 2004 alone, eBay (Nasdaq: EBAY) users sold more than US$5.85 million worth of digital world currency, objects and accounts. This nine-percent year-on-year increase is all the more impressive, as eBay captures neither the Korean market nor EverQuest sales." And with the growth of this digital economy, one can see economic truths hold in both digital and earth worlds.

Earth Economy

First, intellectual property is an extremely important driver of creativity and economic activity. As Ondrejka told participants last weekend at the Accelerating Change conference at Stanford University, people own all the things they make in SL.

This ownership matters not only from a profit-making point of view, but also from a reputation or acknowledgement standpoint. That is, even if people do not immediately get cash for their creations, the acknowledgment they get when ownership is assigned motivates them to take great care with their projects.

When asked about open-source methods of creation, where multiple authors contribute to a work which is often distributed for free, Ondrejka explained that, in his experience, it is "not good for art or games." Indeed, anyone swayed by earth economy idealists that intellectual property doesn't matter should heed examples from the digital world.

In games like SL, where people can reap the benefits of their labor, huge amounts of fascinating items and services are produced. Strolling around SL, one is taken aback by the abundance of art works and creativity, including avatar clothing shops, hip dance clubs and wild-west towns.

More Than Money

Utopians might lament that economics is a significant motivator, even in the digital world, but what they should learn from this demonstration is that value, not money, ultimately matters. The physical components of a hundred-dollar bill, for example, are not worth one hundred dollars. The real worth lies in the value that one can get from trading the bill.

When I buy a leather outfit from an SL designer for $80 LD, that $80 LD is an expression of the value of the outfit to me, not the objective value of the piece of digital code. People seek to carry out commerce in a world where the characters don't need food or shelter or any of the basic physical needs, and that says something about human nature.

Trading goods and services maximizes time and utility, allowing individuals to obtain their goals and increase their happiness. When gaming communities try to stop commerce, as some have done, a black market forms and trading continues as people ultimately always follow their self interest.

A digital economy teaches that intellectual property matters, that value comes from perceived worth, and that commerce is a tool for humans to obtain happiness. Capitalism, an economic system based on private property, voluntary exchange, and individual choices, matters a great deal , even in one's "Second Life."