What Can Virtual-World Economists Tell Us about Real-World Economies?

As virtual economies expand, the study of their inner workings is shaping up to become a serious discipline

CCP Games

Eyjólfur Guðmundsson is the only economist on Earth who spends his days studying the fluctuating cost of warp-disruption batteries and T2 light drones. That's because he's the world's first virtual-world economist.

This past August, Guðmundsson took up residence in EVE Online, a massively multiplayer online game, to report on its economy, research its society and coordinate with academic institutions on their entrance into virtual worlds.

Think Alan Greenspan—only in Battlestar Galactica. In EVE Online players buy, sell, trade, earn, steal and otherwise work to accumulate interstellar kredits (ISKs)—a currency that, officially at least, is only valuable inside EVE. To earn ISKs, players can mine ore from asteroids, process it into salable goods, clear the world of computer-controlled pirates or turn pirate themselves and attack other players.

"The players are very specialized," Guðmundsson notes. "All some do is mine, move stuff around and trade, just like any other industrialist. Pilots need bigger and better weapons and people to trade them. They all need information to communicate [about] the economy, just like any community needs to know how interest and inflation affect its wealth. It's important to have a visible economist to analyze events and participate in discussion[s]."

Why Do Virtual Worlds Even Need Economists?
Other virtual worlds, such as Second Life and Entropia Universe (and unlike EVE Online), use currencies that can be cashed out for real-world dollars and also have economists who work behind the scenes. Guðmundsson's role, however, is as both a spokesman and an analyst. He aims to provide the EVE player community, which numbers over 200,000, with vital information about their trades. He'll then study those trades to learn what insights from a virtual economy can be applied to the real one.

"Generally speaking, economists are dealing with the same principle, no matter what the product," Guðmundsson says. "How do we know what to produce and when to produce? Those are the questions from Econ 101."

John Zdanowski, CFO of Linden Lab, which makes Second Life, provides similar information to the Second Life community while managing the supply of its currency, lindens, to keep a steady exchange rate with the U.S. dollar. He agrees that economic management is important, but believes that EVE might be going overboard.

"When you break it down at the end of the day, it can end up being quite a bit simpler than it seems," he says. "I don't think you need a PhD in economics to manage this."

In theory, EVE is a closed system with a player-controlled economy. The game operators may seed the asteroid belts with ore and write the mission requirements for pirate hunting, but they also try to allow players to dominate in the realm of trade.

"We try to follow the philosophy of laissez-faire," Guðmundsson explains. "I've been looking at the mineral markets [in EVE], and it's quite obvious that the markets operate just like Adam Smith predicted 200 years ago: The market succeeds without interference."

In fact, Guðmundsson says that so far his work hasn't had any direct effects on the virtual economy. His recommendations for price caps are still pending, and the tools he is developing that will affect in-game economic behavior have yet to launch.

"I am keeping a special watch on the money supply, but so far all indications show that the monetary system is healthy," he remarks. "And as long as the economy is in good shape, I remain hands-off."

When Too Much Zydrine Is a Bad Thing
That doesn't mean that the developers of EVE Online won't occasionally take a hands-on approach. Just as in real-world markets, in-game prices are sensitive to the law of supply and demand. Prior to Guðmundsson's arrival, a new asteroid belt was seeded with an abnormally high level of the usually rare mineral zydrine. Prices dropped for six months until the ore sold for half its normal cost. The developers then updated the game so that less zydrine could be refined from other compounds. In the meantime, players began to stockpile the mineral until the price leveled out, which Guðmundsson points to as proof of a working economy.

In Entropia Universe, a virtual world in which the exchange rate has been fixed at 10 Project Entropia dollars for every one U.S. dollar, "balancing manager," Magnus Eriksson, has worked for six years tuning the in-game "laws of nature" to maintain a stable, predictable economy.

Because he mostly works behind the scenes, Eriksson's work is not readily apparent to players of Entropia. He says that Entropia plans, however, to make more economic information available to its users. "As our virtual universe strengthens its bonds with the real world, we must constantly remain aware of real-world economics and principles," Eriksson asserts. "This work is critical in preventing digital anarchy, a state we can observe in other areas of the digital universe we call the Internet, where companies and private persons are bewildered by which rules they should relate to, who owns what and what is work time actually worth."

Can Virtual Economies Help the Real World?
There are some differences—beyond the obvious ones—between EVE and the real world. In October 2006 Magnus Bergsson, EVE Online's chief marketing officer, reported that the average user was 27 years old and male. Guðmundsson doesn't see that as a problem for experimenting, though. He points out that the real business world often consists of a similar demographic.

Likewise, there's not really any such thing as subsistence living inside a virtual economy. But even in the absence of poverty, and with less economic regulation than any existing country, Guðmundsson still sees the foundations of societies, even safety nets, forming.

"The new player who isn't able to succeed roams around space trying to make ISK[s]. He tries to be a player-versus-player pilot and loses in battle. He needs help to succeed in the community. Players themselves have found ways to deal with this by creating corporations and alliances. It's not just economics, but also socioeconomics in general. It may be that we have a prime example of a laissez-faire laboratory that we don't have in any country in the world."

Right now Guðmundsson sees real-world applications as purely theoretical. But he expects that to change. Part of his job is simply to find what, if anything, sets virtual economies apart from their real-world counterparts. And he's not the only interested party. Even before he assumed his position, several universities across Europe had already expressed interest in using EVE's data for research.

One partnership, with the Helsinki Institute of Information Technology, has already begun. The goal is to study macroeconomic indicators in virtual societies. The project will run through early 2009 but Guðmundsson expects to see "some interesting comparisons and tests of real-life economic theories" by the middle of 2008. Other grant proposals, too new to discuss, are also in the works and will focus more on philosophy and democracy.

Real-World Economists Have Their Doubts
Not all academics are so optimistic, however. "I'm skeptical about using virtual worlds to do economics, at least as it is now," says Tyler Cowen, who holds the Holbert C. Harris Chair of Economics at George Mason University. "What you do in experimental economics is you take undergraduates and put them in lab settings and play economics games and you measure the results. It's like a created world, but it's not in cyberspace. What makes experimental economics work is that you truly have a controlled experiment. When you have these virtual worlds, as I understand, people are not conducting controlled experiments. They're running these onetime simulations. Whatever result you get is interesting, but you don't know what to make of it. You're stuck."

Cowen also believes that the motivation to participate in real versus virtual economies differs: In virtual worlds, most people play for fun; in the real world they play for money to live on.

Guðmundsson, on the other hand, compares his academic research to the kind of computer simulations real-world economists already conduct, such as those used by 2002 Nobel Prize in Economics–co-winner Vernon L. Smith to study electricity markets in the wake of the California energy crisis. Unlike Guðmundsson's work in EVE, many of these previous simulations were controlled experiments that involved amounts of money closer to $50, versus the billions of ISKs that are traded daily on the open virtual market.

But even these much smaller simulations showed results, Guðmundsson notes. "That shows that virtual realities can be used as experiments for change in our parallel, real-world environment."

Stephen J. Rassenti, Vernon L. Smith, and Bart J. Wilson. "Controlling market power and price spikes in electricity networks: Demand-side bidding." PNAS; published February 24, 2003; 10.1073/pnas.0437942100

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