The Importance of Virtual World Economics

How much would you pay for a virtual spaceship? Ten dollars? One hundred dollars? One thousand dollars?

Try $10,000. Yes, for a virtual spaceship.

With online gaming on the rise, what can we expect to see from games like World of Warcraft, Eve, and Second Life? Well there are big spenders, like the hot shots that own Titans in the massive interstellar reality Eve, which go for $10,000. Then there are people who have quit their day jobs to pursue a full-time career in acquiring and selling virtual items. What you have is a free market consisting of potions, laser guns, and monsters, in terms of a currency that can be converted to dollars, that is having a real life impact.

When different virtual economies link currency, the effects are not unlike when multiple countries link currencies. It is in this way that the combination of the virtual gaming company Valve and their Steam platforms’ currencies is not so different from the European Union when it comes to economic issues like arbitrage. You can read all about it at Yanis Varoufakis’s blog here.

The need for online game developers to hire an in-house economist is growing all the time, to protect players from inflation, economic crisis, and monitor the market that results from game play.

Academic potential

Virtual realities are an economist’s ideal research tool. Imagine a market where every transaction, including the price, goods and time, is recorded. The potential for testing both widely accepted and developing economic theories is so fruitful, it’s hard to pass up.

The legitimacy of these virtual economies as an accurate representation of a market economy is debatable. How can we expect people to treat virtual currencies that only exist to buy virtual weapons like real money? The idea is that while a currency can at least be converted to a tangible and credible currency, it has real value. Some of these virtual worlds are even larger than countries, so while they might be used to buy virtual objects, these online currencies are not so different than foreign currencies.

So if these virtual realities are not so different, than maybe we can learn from them. Just think, what if we could simulate the Great Depression in a virtual world over and over, until we understand it well enough to be sure that it never happens again?

Game developers recognize that economists might be interested in using their virtual worlds as an academic tool and may be hesitant to let an economist be involved. The scholars might just suck all the fun out of their profitable games. But, as virtual reality developers recognize the need for an in-house economist, we can expect to see more research on these kinds of issues.

The negative externalities

Like in any economy, there is corruption in the virtual world too. In the video below, Kyle Chayka is interviewed about the virtual economies sweatshop equivalent called “gold farms”, where individuals are forced to play online games so that others can collect the benefits. At what point should lawmakers step in and regulate virtual economies, if not to protect their citizen’s private assets but individual human rights?

In other instances, gamers have collectively lost hundreds of thousands of dollars in virtual economic crises. During the Great Recession in 2008, Second Life made a lot of noise when they experienced a run on their virtual banks, which is estimated to have cost Second Life players $750,000 in actual money.

The Rise of Video Game Economies

This is a PBS video full of video game footage and techno, as well of fun stuff like economic interviews. If you’ve got the time, it’s worth the watch. 

One Reply to “The Importance of Virtual World Economics”

  1. Collin,

    I enjoyed the post. Yanis Varoufakis’s blog is an excellent resource and a great idea generator for anyone wanting to study money.

    You bring up the potential for “testing” the Great Depression in a virtual world, and I agree this is a an interesting avenue. I think you might want to explore the flip-side to deflationary problems like the Great Depression, and look into hyperinflation. There are a few “ready to order” natural experiments like the glitch in Diablo 3 last year (

    With regards to gold farms, I’m going to play devil’s advocate for a moment: how is gold farming exploitation in the same way sweatshop labor is? Sweatshops traditionally are more labor intensive, dangerous, and (from what I have read) pay less than a gold farmer in China. If these workers can get a relatively higher wage at a relatively safer job, how is that not an improvement? It is not a perfect job, but it is safer and better paying than agricultural labor in rural China. China’s response was to ban the purchase of real goods with virtual currency (so says the Wiki), which I think would just drive these firms further underground, and more towards the human rights problems you mention. I’m not familiar with Kyle Chaykra’s argument of forced gaming, though, so perhaps I’ve missed something. What does he mean when the workers are “almost chained to their computers”? Is he referring to a situation where the job market is so difficult that this is one of the few places they can earn a wage? I think the blog post and the YouTube interview could give more support to the arguing why this practice is a problem with regards to the welfare of the workers. I’m not convinced these workers would be better off if farming were completely banned.

    These are older articles, but I think still good on gold farming. They also bring up the issue of verbal abuse and targeting that gold farmers face from non-farming players:

    Lastly, its amazing to me how little money has changed, even with regards to a virtual world the likes of which we have never seen. I think the Radford (1945) paper on prisoner of war camps and cigarettes as currency still sums things up very well. If you have not read that yet, I highly recommend it.

    or ungated:

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