Realities of a virtual economy

Realities of a virtual economy

To most people, the internet is nothing more than a powerful communications tool, a quick way to find information, buy goods and reach likeminded people. However, to players of one type of computer game it is nothing less than a second home, a virtual world in which they can socialise, fight battles and trade with others.

More than 6m people pay $10-$20 a month to take part in huge online games - simulated worlds inhabited by thousands of players, each controlling one or more substitute selves, known as avatars.

The games are visually rich environments where fantastic things are possible, such as magic or space travel. They offer a more profound escape from reality than traditional video games - indeed, a study of one of the most popular showed it occupied the average player for 20-30 hours a week.

However, these games have become so heavily populated and commercially significant that their effects are increasingly being felt in the real world, with some odd legal consequences.

The idea of enabling players from different locations to meet in a virtual world has been around since the mid-1980s. However, it was not until 1997 that the first true "massively multiplayer online game", or MMOG, was launched to commercial success. Ultima Online was based on a successful series of conventional video games and has since built a subscriber base of about 250,000 players. Like many MMOGs, it takes place in a medieval-type landscape replete with wizards, monsters and quests for glory.

However, not all players are drawn to the life of an adventurer within the game, and many choose to settle down and start their own business - for example as a merchant, a blacksmith or a tavernkeeper. All MMOGs involve an element of trade using a virtual currency, and they usually offer numerous potential sources of income, ranging from simple entrepreneurialism (such as cornering the market in one particular ingredient for a spell) to service provision (training as a healer and treating other players) to armed robbery.

However, as the games communities grow larger and more sophisticated, more and more players are trading imaginary goods created within the games - products, services and even spare avatars - with other players for real money.

It is the rise of internet auction sites that has enabled MMOG players to sell imaginary items to one another, on the understanding they will be exchanged by one another's avatars within the game. On eBay, for example, a special category has been set up to deal with these goods which now has a weekly turnover of more than 28,000 trades, with a total value of more than $500,000 (£282,000).

Typical items for sale include spells (from about $5), property (up to several hundred dollars for a house or castle, depending on size and location) and avatars themselves, which are proving the most valuable commodities. This month a rare "Jedi knight" in the Star Wars Galaxies game sold on eBay for $1,900.

The currency used in the games is also being traded. On December 6 a block of 100,000 Norrathian Platinum Pieces (the currency used in the EverQuest online game) was sold on eBay for $65, implying an exchange rate of just over 1,538 to the dollar.

Dr Edward Castronova, an associate professor of economics at California State University, Fullerton, has been a keen watcher of the MMOG world for some years and since 2001 has published two popular studies of these virtual economies.

"All you need for an exchange rate is a robust market and eBay is very robust," he says. "It represents around 75-80 per cent of the US market [for this category of goods] and around 35-40 per cent of the global market, because MMOGs are very popular in the Far East.

"Since July 1 it has seen a really large increase in trading. It's too early to understand whether this is a seasonal trend or something related to macroeconomics or a genuine growth in this sort of economic activity, but if it's the latter then it's a really big annual growth rate of around 600 per cent."

Dr Castronova has used such calculations to make some unlikely comparisons between real-world economies and that of Norrath, the virtual world where EverQuest takes place. In 2001, for example, he looked at the EverQuest avatars being sold on eBay and used the information to calculate a rough and ready per capita gross national product for Norrath.

At the top end of his range, this came out at $2,266 per head, making Norrath the 77th richest country in the world.

There are even reports of real-world companies being set up to trade in imaginary goods. One such company claims to have more than 50 full-time employees in the US and Hong Kong.

Of course, as soon as an imaginary item is given a value in the real world, it can potentially be protected by real-world laws. This became a reality this month when a Chinese player of a science-fiction game called Red Moon successfully sued the administrator after his avatar's property had been stolen by hackers.

A loophole in the game's security was to blame, but the case set a precedent because a Beijing court rejected the administrator's argument that virtual property in the game was "just piles of data to our operating companies". Player Li Hongchen, 24, had spent two years and the equivalent of more than $1,200 building a stockpile of virtual chemical weapons. d4 It was the growing complexity and need for internal regulation of these virtual societies that inspired Professor Beth Noveck, director of the Institute for Information Law and Policy at New York Law School, to organise a conference in November entitled "The State of Play: Law, Games and Virtual Worlds", which brought together games designers, lawyers, economists and even government representatives.

"You can liken a regulated world to a regulated industry or set of stakeholders - all confront common problems of governance," says Prof Noveck.

She describes a conference workshop involving game designers and officials from Washington responsible for putting the regulatory work of all 180 federal agencies online. "We wanted to see if game designers could come up with ideas for a game to train citizens to use these governmental systems.

"In fact, what generated the most interest was the exchange of best practices between game designers and regulators about ways to manage regulated communities."

Some games have already experienced serious dissent among their players over unpopular regulation. For example, the administrators of Star Wars Galaxies recently asked players, for technical reasons, to reduce to 100 the number of items in their virtual houses.

"There was a tremendous outcry," says Prof Noveck. "This had a lot of resonance with the officials from Washington, particularly a representative from the Department of Transportation, which is responsible for rules that get millions of people to wear seat belts or change their driving habits."

She predicts that the law will soon adapt to MMOGs, with case law establishing "the rights of avatars, ownership of intellectual property within games and the rights of players to emulate or modify games", over the next few years.

One MMOG, Second Life, pre-empted this process at the conference by announcing that it would change its terms of service to respect intellectual property rights in the virtual world and "recognise the ownership of in-world content by the subscribers who make it".

In Second Life, players are not set challenges but are rewarded for creating impressive clothing, art, architecture or other items that attract visitors to their plot of virtual land.

Founder Philip Rosedale says its economy is regulated like a real economy in order to stimulate content creation. "We created pressure for better and better content by levying a property tax on land and objects. We also wanted very high liquidity, so we made transaction costs low, and we wanted a high level of price transparency to incentivise more rapid evolution."

Dr Castronova argues that the world of the MMOGs could have uses beyond occupying the time of millions of internet fantasy fans.

"The great potential of this technology is to build parallel worlds and give one, say, a central bank independent of political authority, and another a central bank dependent on political authority, and one where we don't have a central bank at all," he says.

"If someone could build a public-use world in this way, they could watch what happens to inflation, production rates, populations or any other factor in isolation. What we're groping towards is what the physical sciences have been doing with computers - experimenting on simulations of plant life or the cosmos.

"This would be the sociological equivalent, subjecting them to well-chosen interventions."