Even a virtual economy needs a Ben Bernanke
NEW YORK - Just before a global credit squeeze roiled US financial markets this summer, an equally dramatic financial crisis threatened Second Life, the much-hyped online world.
On July 25, the company controlling Second Life said it would no longer allow gambling. Economic activity was cut by nearly half as gambling halls shut down.
That's a recipe for disaster in any economy, with job losses and a possible currency collapse, but the online world stayed on an even keel. That's in part due to the fact that few people make a living there. But Second Life's equivalent of Ben Bernanke, chairman of the Federal Reserve, also keeps a firm grip on the currency.
It's just one example of how economists and virtual worlds are teaming up, to mutual benefit. Outside Second Life, a game company just hired its first full-time economist. Another economist, coming from the academic side, believes that just as virtual economies need economists, so economists need virtual economies - to experiment with.
The Second Life equivalent of Bernanke is John Zdanowski, chief financial officer at Linden Lab, which runs the online world. Using Second Life software, he spoke to the Associated Press in Linden Lab's virtual headquarters.
Before the gambling crackdown, "residents" exchanged about 2 million US dollars a day in Second Life. That dropped to $1 million shortly after. Gambling wasn't quite as important as those figures indicate, Zdanowski said. Second Life is more than an online Las Vegas - it's a place for socializing, games, advertising, and other activities enabled by a world where residents can, with sufficient skill, create almost anything they want out of thin air.
Gambling inflated the economic activity because it meant small amounts of money changed hands relatively quickly, often several times a day.
But the gambling shutdown was still a potential problem, because Second Life has its own currency. The Linden dollar is convertible to US dollars at an ostensibly floating exchange rate.
Losing even 10 or 20 percent of its real economy set it up for a currency crisis, as gamblers and gambling hall operators tried to cash in their gains for US dollars and put their money to use elsewhere.
If the exchange rate started to plummet, remaining, nongambling residents would also feel compelled to trade their virtual dollars for real ones, making the currency nearly worthless. Zimbabwe is currently struggling with that kind of hyperinflation. But in Second Life, that's not what happened.
"The reason it hasn't hit the exchange rate is that we were exercising one of the controls we have," Zdanowski said.
Linden Lab has for more than a year put a ceiling on the value of its currency. It's done that by selling Linden dollars on the currency exchange for around 270 to the US dollar, and that's where the exchange rate has stayed since then. In a year, the company has made about $5 million on this trade.
Like China, "we basically manage the supply of our currency so that the exchange rate stays fixed against the US dollar," Zdanowski said.
With visitors taking money out of the world because of the gambling shutdown, Linden Lab simply stopped selling its currency to compensate for the greater supply of Linden dollars for sale on the exchange.
Eve Online, an online science-fiction game, has avoided some of the complications of having an online currency by banning its conversion to real money. Yet the company this summer hired its first full-time economist to keep tabs on what goes on inside the game and to look at whether more complex financial institutions, like banks, are needed, and try to cultivate relationships with real-world academic institutions.