Intrinsic vs. Extrinsic Valuations (or: Why I Find Second Life Boring)

I can't understand the hoopla about Second Life. Don't misunderstand, as an MMO player I can fully comprehend the many reasons to participate in an online world. What strikes me as odd about it is that despite paying a monthly fee for access, a "land purchase" fee (more aptly described as a rental fee, more on this later), and additional monthly land use fees, the company still can't turn a profit. Joking aside, the currency exchange markets are reasonably sophisticated for an MMO, allowing direct buyer/seller matching and providing a host of useful economic statistics for review. It's no wonder that economists are enthralled with Second Life as a medium to study virtual economies. Still, something rings false about it.

In a recent conversation with William, he raised valid points for its attractiveness to researchers -- among them a broader experience than that of monsters, level grinds, and difficult mechanics. Undoubtedly this attracts a wider demographic than, say, World of Warcraft or Final Fantasy XI, and further encourages innovation by virtual entrepreneurs earning a virtual currency easil translatable into a real currency (in this specific case, US Dollars) at prevailing public or black market rates. One might look into this as the rise of a new cottage industry. All fascinating, no doubt.

Here's the catch: What troubles me about the economics of Second Life is precisely Linden Labs' private valuation of land. Yes, a Second Lifer can be a land speculator or developer, buying newly available land and hoping to resell it as the area grows in demand. However, even the purchase of land is really a rental: these are just the graphical representation of bits on some corporate server (ceci n'est pas une pipe!) which can be shut down or repossessed ("seized under the right of eminent domain"?) at any time. Furthermore, the monthly use fee charged by the company sets a base rate of exchange for a harder form of currency -- the land itself. As such, there is no real in-world mechanic for assessing the valuation of any item, except, perhaps, in out-of-game terms (a sort of aesthetic appeal). The motivation is largely just a kind of vanity. As William put it, it's a kind of Lockean model, where the player "mixes his labour" with the virtual land.

In contrast, more traditional MMO settings, with all the features that might discourage many researchers, tend to take a harsher stance on what's known as RMT -- Real Money Trade (though some exceptions exist, such as Sony Online Entertainment's "Station Exchange"). However, the existence of well-defined game mechanics and of concrete goals established by story arcs similarly gives rise to economies. Unlike Second Life, in which valuations are extrinsically linked to dollar-valued land prices, the valuations of items in goal-driven games are intrinsic; they are established and agreed-upon by the player base, and are exclusively determined by the rarity and usefulness of the items within the parameters of the rule set (and to some extent by the supply of money, but the ratio of prices tends to remain somewhat constant). This alone makes the study of these economies interesting, as there is no sanctioned method for external valuation (or even an external floor value, such as the purchase price and upkeep fees in Second Life). It can be more properly considered as a natural experiment, and the difficulty in foreign exchange may very well place a greater lag, reduce the coefficient, or have no significant correlation of the effects of real world inflation on game economies. As an economist, I can find far more interesting questions to ask in this setting than I would in Second Life.