Yes, economic activity in Second Life continues to rise. I am interested in the Second Life currency, Linden Dollars, which trades against the U.S. dollar at a market-determined exchange rate.
Free banking economists used to debate whether a private sector fiat currency could succeed. Hayek, in his Denationalisation of Money, said yes but most other people said no. The obvious problem is time inconsistency, namely that the fiat currency issuer will at some point inflate away its value to the seigniorage-maximizing margin, noting that such a margin changes with the passage of time and not necessarily in a favorable direction.
Who would have foreseen that maximizing income from "land" sales might check this outcome? I think of Linden Dollars as akin to legal tender currencies: you can’t buy anything in Second Life without them. Since the goods and services in Second Life have value the currency does too.
Who had expected that the next generation of private currency suppliers would make it work by, in God-like fashion, supplying accompanying worlds as well? What other problems can be solved this way? Or are Linden Dollars the next bubble waiting to burst?
About a year and a half ago, there was a very good discussion about this here:
http://randolfe.typepad.com/randolfe/2007/01/secondlife_revo.html
I think Hayek’s booklet should be much more widely known in libertarian/Austrian circles; I think part of the problem is that Hayek can be difficult reading, especially when he’s talking about a topic like this.
I haven’t had the time to get into these virtual worlds, so I confess I don’t really know what I am talking about. But a while ago there was some issue where people would pay teenagers in Vietnam or wherever to go around killing monsters in a MMORPG and generating inflation in the virtual world (since the game would endow the dead monsters with some money).
Relying on Hayek’s ideas, I suggested that people in the world of the game could set up their own private fiat currency, which would be stable in purchasing power of some bundle of important goods (in contrast to the game’s default currency).
The way it would work is that the people running the new currency would keep records in the real world (on Excel or whatever), and then the players in the game would trade knowing that their bank balances (in the Excel spreadsheet in the real world) would be changed accordingly.
(To understand the incentives for why someone should bother to set up such a private fiat currency, read the article linked above.)
In general I think radical libertarians should look more into virtual worlds to conduct experiments with their theories that would be far too unpopular / risky to try out in the real world.
‘The company can and does confiscate Linden dollars if it believes they were created through fraud, even if those Linden dollars subsequently end up in the hands of an innocent third party (ie, unlike real life, “receiving stolen property” applies to cash as well).’
That’s a bad analogy. A better analogy would be that of counterfeit bills, and, in that case, the government is allowed to take those away with no recompense, even if the person found with the bill received it in exchange for a legitimate good or service.
You might find Charles Stross’ “Halting State” interesting. Once of the conceits in the book is a corporation that makes its business regulating virtual economies. In the real-world, Iceland’s “Eve On-line” has had a staff economist running the virtual economy for three or four years.
There’s no reason why real-world businesses couldn’t do something similar. Imagine a train or bus system that paid its employees in tokens — the more demand from riders, the more your salary is worth in dollars.
If Linden Dollars hyperinflate to the point of damaging the Second Life world, Linden stands to lose money from tremendous loss of playership.
On the other hand, airline miles are only a minor promotional incentive for airlines, and should airline miles have “currency failure”, airlines will still fly.
Second Life is not a sovereign country; the company that runs it (Linden Lab) is headquartered in the real world in California and is very much beholden to both the US federal and state governments and to the FBI. In-world gambling (including poker) was banned almost a year ago for this very reason; more recently, in-world banks (mostly Ponzi schemes) were banned unless operated by organizations with a real-world banking charter. Until such time as the company and all its employees set up shop in a floating data haven in the middle of the ocean, libertarian experiments will have to remain a fantasy.
In any case, virtual worlds are an extremely poor venue for libertarian experimentation because by their very nature, they are (or can be) surveillance societies. In theory, every single instant-message conversation, every single financial transaction to a fraction of a penny, every movement in-world, all can be logged, recorded forever for posterity, and datamined at leisure.
Even if the company itself doesn’t do surveillance, that doesn’t stop eavesdropping and spying by third-party avatars or their (arbitrarily-tiny or transparent) scripted objects. For instance, if two avatars wish to have (what passes for) sex in Second Life, it is in general impossible to guarantee that they are not being observed, since an avatar’s “camera” (its visual point of view) can be moved independently hundreds of meters away from the avatar’s “physical” location. Unlike avatars themselves, the camera’s range of motion cannot be blocked by opaque objects or by “no trespassing” ban lines at the borders of plots of land.
Conversely, informal institutions and organizations are much harder to set up in virtual worlds. For example, democratic groups can’t really be set up, because it is trivially easy to create multiple avatars and thus vote multiple times. How do reputations work, when identity itself is fluid and unreliable, and actions are generally consequence-free? The company running Second Life generally washes its hands of delinquency, griefing, harassment and petty fraud. You can’t even have the kind of rough frontier justice or community peer pressure that operates in the real world in the absence of formal law and order. It would be like punching smoke; even banned users can usually come back immediately in a brand new guise.
I think some problems are inherent to virtual worlds, by their very nature. Consider this analogy: when it became possible to send e-mail for zero cents instead of sending junk mail for a few pennies, then spam became possible (and therefore, perhaps, inevitable). When literally everything in the world is free of costs and consequences — travel from one point to another, creation of scripted objects, cloning of existing objects, creation of brand new anonymous identities, creation of bot-controlled avatars — then to the extent that the in-world economy grows sufficiently to make it worth someone’s while, I suspect the inevitable consequence will be increasing amounts of “spamlike” in-world behavior, which the company running the virtual world will be both unwilling to police and unable to control.
Tyler,
I’m not sure what you mean about land sales keeping inflationary tendencies in check (if that’s what you’re saying). How so?
Note that Linden Lab (the company that runs Second Life) can and does create new “land” at will, simply by bringing new servers online. This newly created “land” is sold wholesale in 256 x 256 meter chunks (for good old US dollars only!) at auction to “land baron” speculators, who then turn around and subdivide it and resell it to other Second Life players for Linden dollars.
Anyone who “owns” “land” pays monthly fees to Linden Lab (again in US dollars) based on how much land they own. A full 256 x 256 meter parcel costs $195/month for “mainland”, or $295/month for “private islands” that allow greater control. You could think of this as property tax, except in Second Life you end up paying as much in property tax every 6 to 12 months or so as the land cost you in the first place. Thus, speculatively buying and holding empty land long term in the hope that prices will go up would be a ruinously pointless strategy. There is little real necessity to own land in any case, since avatars after all have no physical needs for sleep or shelter.
In general, there are only a few things that Linden Lab accepts Linden dollars as payment for: taking snapshots costs the equivalent of about 4 US cents each; in-game classified advertising; auctions of sufficiently-small abandoned parcels of land.
They also control the money supply by creating Linden dollars and selling them on the Linden exchange for US dollars, as needed for the use of a growing player population and to ensure stability of exchange rates.
Note that Linden Lab explicitly does not redeem Linden dollars for US dollars, ever. You can sell your Linden dollars for US dollars on the company-operated Linden exchange, but the buyers are other Second Life players.
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I think that it’s booklet should be much more widely known in libertarian/Austrian circles; I think part of the problem is that you can be difficult reading
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