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<nettime> Game Theories: The Economics of Virtual Worlds
Prem Chandavarkar on Thu, 12 Aug 2004 11:52:35 +0200 (CEST)


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<nettime> Game Theories: The Economics of Virtual Worlds


In this post-modern age where there has been so much debate over the
nature of reality (is it really "true" or is it a construct of our
imagination), I find this article provokes an eerie echo in its
description of how the virtual mimics the real.  We have had a lot of
thinking on how networks create culture, societies and economies - but
that thinking has either focused exclusively either on the 'real' or the
'virtual'.  Perhaps it will not be long before the networks between these
two worlds demand to be a specialised field of study.

Prem

http://www.walrusmagazine.com/article.pl?sid=04/05/06/1929205&tid=1

GAME THEORIES

On-line fantasy games have booming economies and citizens who love their
political systems. Are these virtual worlds the best place to study the real
one?
By Clive Thompson

Edward Castronova had hit bottom. Three years ago, the
thirty-eight-year-old economist was, by his own account, an academic
failure. He had chosen an unpopular field  welfare research  and
published only a handful of papers that, as far as he could tell, "had
never influenced anybody." He'd scraped together a professorship at the
Fullerton campus of California State University, a school that did not
even grant Ph.D.s. He lived in a lunar, vacant suburb. He'd once dreamed
of being a major economics thinker, but now faced the grim sense that he
might already have hit his plateau. "I'm a schmo at a state school," he
thought. And since his wife worked in another city, he was, on top of it
all, lonely.

To fill his evenings, Castronova did what he'd always done: he played
video games. In April, 2001, he paid a $10 monthly fee to a multiplayer
on-line game called EverQuest. More than 450,000 players worldwide log
into EverQuest's "virtual world." They each pick a medieval character to
play, such as a warrior or a blacksmith or a "healer," then band together
in errant quests to slay magical beasts; their avatars appear as tiny,
inch-tall characters striding across a Tolkienesque land. Soon, Castronova
was playing EverQuest several hours a night.

Then he noticed something curious: EverQuest had its own economy, a
bustling trade in virtual goods. Players generate goods as they play,
often by killing creatures for their treasure and trading it. The longer
they play, the more powerful they get  but everyone starts the game at
Level 1, barely strong enough to kill rats or bunnies and harvest their
fur. Castronova would sell his fur to other characters who'd pay him with
"platinum pieces," the artificial currency inside the game. It was a tough
slog, so he was always stunned by the opulence of the richest players.
EverQuest had been launched in 1999, and some veteran players now owned
entire castles filled with treasures from their quests.

Things got even more interesting when Castronova learned about the "player
auctions." EverQuest players would sometimes tire of the game, and decide
to sell off their characters orvirtual possessions at an on-line auction
site such as eBay. When Castronova checked the auction sites, he saw that
a Belt of the Great Turtle or a Robe of Primordial Waters might fetch
forty dollars; powerful characters would go for several hundred or more.
And sometimes people would sell off 500,000-fold bags of platinum pieces
for as much as $1,000.

As Castronova stared at the auction listings, he recognized with a shock
what he was looking at. It was a form of currency trading. Each item had a
value in virtual "platinum pieces"; when it was sold on eBay, someone was
paying cold hard American cash for it. That meant the platinum piece was
worth something in real currency. EverQuest's economy actually had
real-world value.

He began calculating frantically. He gathered data on 616 auctions,
observing how much each item sold for in U.S. dollars. When he averaged
the results, he was stunned to discover that the EverQuest platinum piece
was worth about one cent U.S.  higher than the Japanese yen or the
Italian lira. With that information, he could figure out how fast the
EverQuest economy was growing. Since players were killing monsters or
skinning bunnies every day, they were, in effect, creating wealth.
Crunching more numbers, Castronova found that the average player was
generating 319 platinum pieces each hour he or she was in the game  the
equivalent of $3.42 (U.S.) per hour. "That's higher than the minimum wage
in most countries," he marvelled. Then he performed one final analysis:
The Gross National Product of EverQuest, measured by how much wealth all
the players together created in a single year inside the game. It turned
out to be $2,266 U.S. per capita. By World Bank rankings, that made
EverQuest richer than India, Bulgaria, or China, and nearly as wealthy as
Russia.

It was the seventy-seventh richest country in the world. And it didn't
even exist.

Castronova sat back in his chair in his cramped home office, and the weird
enormity of his findings dawned on him. Many economists define their
careers by studying a country. He had discovered one.

I first met Castronova at a piano lounge last summer at the Caesar's
Palace casino in Las Vegas, where he was attending a high-tech conference.
We talked over a few drinks, though our conversation was soon drowned out
by the bar's syrupy Frank Sinatra impersonator, belting out a version of
"New York, New York." Castronova winced. "Where better in the world to
talk about virtual worlds than Las Vegas?" he said. "This place invented
the idea of virtual life."

Castronova is a natural role-player. He's a short, nebbishy guy with a
neat goatee and horn-rimmed glasses. When he lectures he radiates
charisma; he is the cool professor you wish you'd had when you were trying
to grasp the dry mechanics of price theory. Until recently, he acted in a
Shakespearean troupe, and in his spare time he explores the world of
"multiple-user domains"  Internet chat environments where people assume
different personae as they hang out together.

Castronova suspects his eclectic background is why he never made the
powerful connections necessary to secure a good academic job. "I've always
been an outsider. I've just been floating around outside communities, sort
of flitting from topic to topic," he said.

With virtual worlds, he had finally hit upon a subject that was exploding
into the mainstream. Experimental online worlds had been kicking around
for years, but they took a leap forward in 1997, when Ultima Online  a
medieval fantasy world similar to EverQuest  launched, and quickly
amassed a hundred thousand users. The idea of having a second life on-line
suddenly didn't seem so geeky, or, at the very least, it seemed a
profitable niche; companies like Sony and Microsoft swarmed on-line. Today
there are more than fifty active games worldwide, and anywhere from two to
three million people playing regularly in the U.S. The games range from
Star Wars Galaxies (where you can wander around as a Wookie and fight the
Dark Side) to There.com (where you can wander around Disneyfied islands as
an attractive Gap-style model and admire your hot new body). In Korea, a
single game called Lineage claims more than four million players.

To figure out precisely who was playing EverQuest, Castronova persuaded
thirty-five hundred users to fill out a survey. As one might expect, the
average age turned out to be twenty-four, and the players were
overwhelmingly male. The amount of time spent "in game" was staggering:
over twenty hours a week, with the most devoted players logging six hours
daily. Twenty percent of players agreed with the cheeky (if alarming)
statement "I live in Norrath but I travel outside of it regularly"; on
average, each of these "residents" possessed virtual goods worth about
$3,000 U.S. "When you consider that the average real-life income in
America is only, like, thirty-seven thousand," Castronova tells me, "you
realize these people have a non-trivial amount of wealth locked up inside
the games."

When he finished his research, Castronova assembled it in a paper called
"Virtual Worlds: A First-Hand Account of Market and Society on the
Cyberian Frontier." He submitted it to an academic Web site, the Social
Science Research Network, that distributes working papers, free for anyone
to read. The site has 43,982 papers, by more than 37,000 authors. He
didn't expect too much. "I thought maybe seventy-five people would read
it," he recalls, "and that'd be great."

He was wrong. The paper sent a shock wave through the on-line world.
EverQuest players pounced on it and wrote up excited descriptions on
game-discussion boards. That led to a flurry of posts on popular blog
sites. Soon, academics and pundits in Washington were rushing to read it.
Barely a few months later, Castronova's paper became the most downloaded
paper in the entire database  beating out works by dozens of Nobel
laureates. Today, it's still in the top three.

Why the rush of interest? What can a game filled with elves and warrior
dwarves tell us about the real world?

Quite a lot, if you believe the economist Edward Chamberlin. In 1948,
Chamberlin admitted that all economists face a critical problem: they have
no clean "laboratory" in which to study behaviour. "The social scientist .
. . cannot observe the actual operation of a real model under controlled
circumstances," he wrote. "Economics is limited by the fact that resort
cannot be had to the laboratory techniques of the natural sciences."
Instead, classical economics tries to predict economic behaviour by
theorizing about a completely fair marketplace in which people are
rational actors and all things are equal.

The problem with this  as plenty of left-wing critics have pointed out 
is that all things aren't equal. Some people are born into rich families,
and blessed with great opportunities. Others are born into dirt-poor
neighbourhoods where even the most brilliant mind coupled with hard work
may not forge success. As a result, economists have warred for centuries
over two diverging visions. Adam Smith argued that people inherently
prefer a free market and the ability to rise above others; Karl Marx
countered that capital was inherently unfair and those with power would
abuse it. But no pristine world exists in which to test these theories 
there is no country with a truly level playing field.

Except, possibly, for EverQuest, the world's first truly egalitarian
polity. Everyone begins the same way: with nothing. You enter with
pathetic skills, no money, and only the clothes on your back. Wealth comes
from working hard, honing your skills, and clever trading. It is a genuine
meritocracy, which is precisely why players love the game, Castronova
argues. "It undoes all the inequities in society. They're wiped away. Sir
Thomas More would have dreamt about that possibility, that kind of
utopia," he says.

Virtual worlds have produced some surreal rags-to-riches stories. When the
on-line world Second Life launched, the players were impressed to see a
female avatar industriously building a sprawling monster home. An in-game
neighbour stopped by to say hello only to discover she was a homeless
person in British Columbia, logging on using her single remaining
possession, a laptop. Penniless in the real world, she belonged to a
social elite in the fake one.

Not all social inequities are absent, of course. For instance, Castronova
discovered that women in the game are worth less than men, in a very
measurable way: when he compared the sale of male and female avatars, he
found than female characters sold for 10 percent less than male ones at
precisely the same power level. Players with female avatars also say it's
harder to advance in the game, at least initially  even though the female
characters are often being played, in real life, by men. (A study by the
game academic Nick Yee found that male players "cross-dress" as female
characters at least one-third of the time.) Men play as women characters
partly for the kinky thrill, but also because female characters are given
random presents of free stuff by other players, a chivalric custom known
as "gifting." "Personally, you receive a lot more stuff when you start out
as a female," as one male cross-dresser wrote to Yee.

Ultimately, Castronova says, EverQuest supports one of Adam Smith's main
points, which is that people actually prefer unequal outcomes. In fact,
EverQuest eerily mirrors the state of modern free-market societies: only a
small minority of players attain Level 65 power and own castles; most
remain quite poor. When game companies offer socialist alternatives,
players reject them. "They've tried to make games where you can't amass
more property than someone else," says Castronova, "but everybody hated
it. It seems that we definitely do not want everybody to have the same
stuff all the time; people find it boring." It is a result that would warm
the heart of a conservative.

Yet progressives, too, have been drawn to Castronova's research. Robert
Shapiro, formerly an undersecretary of commerce for Bill Clinton, views
the economist's findings as nothing less than a liberal call-to-arms.
EverQuest players tolerate the massive split between the virtual rich and
the poor, Shapiro tells me, only because they know that this is a level
playing field. If you work hard enough, you'll eventually grow wealthy. In
Shapiro's view, Castronova's research proves that the only way to create a
truly free market is to support programs that give everyone a fair chance
at success, such as good education and health care. "This may provide the
most important lesson of all from the EverQuest experiment," he wrote in
an essay. "Real equality can obviate much of a democratic government's
intervention in a modern economy. . . . If EverQuest is any guide, the
liberal dream of genuine equality would usher in the conservative vision
of truly limited government." In other words, maybe the best way to save
the real world is to make it more like EverQuest.

A few months ago, a powerful warrior showed up on EverQuest. He was at
Level 50, an indication that he was an experienced player. But when he
tried to join a group of other similarly powerful players on a quest to
kill a dragon, they quickly realized he had no idea what the hell he was
doing. He didn't understand teamwork or even the basic language of the
game. Then they discovered his secret: he was a thirteen-year-old kid
whose parents had gone to PlayerAuctions.com and bought him the character
for $500.

"He kept getting killed over and over and over again. People were like,
Who is this idiot?" says Sean Stalzer, a thirty-three-year-old who is a
five-year veteran of EverQuest. Stalzer runs The Syndicate, one of the
game's most respected "guilds." Guilds are groups of powerful characters
who co-operate to defeat the deadliest monsters (which provide the richest
loot). The most elite guilds generally have a no-buying ethic. They accept
only players who have "levelled up" their characters the old-fashioned
way. "They put hours and hours into it," Stalzer says. "So when someone
comes along to make a profit or buy a character, it makes a mockery of
what they do. Why should you be better than me because you have more
money?" His disdain is like that of a hardscrabble kid from the projects
who works for years to get into Yale  only to watch George W. Bush sail
in because his daddy is a rich donor.

This culture war underscores the big irony of EverQuest politics. Sure,
most players love a level playing field  but they love a leg up even
more. Adam Smith might smile at EverQuest's booming marketplace, but
beneath the surface, Marx's bleaker vision of capital might be winning the
day.

Of course, many people buy "pre-levelled" characters not to cheat at the
game, but to save time. They're usually busy professionals who can't waste
six numbing hours a day killing bunnies to make their warrior elf more
powerful. Game companies frown on the selling of characters because they
feel it destroys the meritocratic feel of their worlds. But because so
many millions of players clearly want to buy their way to power, the
companies have mostly turned a blind eye to the on-line auctions. Last
year, Ultima Online caved in and began to sell "pre-levelled" characters
to new players; demand was so high on the first day that their phone banks
crashed.

Even the most stoic guild members are tempted by the booming market.
Stalzer's guild was once offered $50,000 for all of its characters and
loot. The members declined. But, sometimes, when individual guild members
run into financial difficulties in the real world, they quietly pawn off
virtual goods on the side. "One guy had an 'Enchanter' and he sold it for
two thousand dollars," Stalzer tells me. "That happens a lot. You get a
guy who says, 'Dude, I just graduated and I can't find a job, so I gotta
sell this thing.' But I don't mind it when it's real financial need."

Guild members hesitate to sell their goods in part because they do not
feel they are the sole owners. When a guild vanquishes a monster, it
divides the loot among the members. Each player's booty winds up feeling
more like a piece of communal property. At the Las Vegas computer
conference, Castronova and I ran into a blue-haired nineteen-year-old who
plays EverQuest as a Level 55 "cleric" in a powerful guild. "I've got
dozens of reagents, these magical potions," she said. "And some of them
are probably worth, like, a hundred bucks apiece. I could totally sell
them. But I always think, damn, I only have this stuff because of how
other people helped me get it. So they sort of own it, too. It's not my
right to sell it." In EverQuest, even socialism finds a home.

Within months of Ultima Online's launch, in 1997, the game spiralled into
a currency crisis. The developers woke up one morning to discover that the
value of their gold currency was plummeting. Why? A handful of sneaky
players had discovered a bug in the code that allowed them to artificially
duplicate gold pieces (called "duping"). The economy had been hit by a
counterfeiting ring. Inflation soared, and for weeks, players would log in
each day to find their assets worth less and less. Ultima programmers soon
fixed the bug. But then they had a new problem: How do you drain all the
excess gold out of the economy and bring prices back to normal? They hit
upon the idea of creating a rare type of red hair dye and offering it for
sale in small quantities. It had no real use, but, because it was rare, it
became instantly popular and commanded an enormous price  which leached
so much gold out of the system that inflation subsided. But the
programmers had to meditate for hours on what possible side effects their
"fix" might have.

Game designers are, in a sense, the government of their worlds,
continually tweaking the system to try and keep it from ruining the lives
of their "citizens." In essence, they face the political question that
bedevils real-life politicians everywhere: How much should a government
meddle in the marketplace?

In Ultima Online, players pick jobs and produce goods: blacksmiths make
iron tools; tailors make shirts. In the early days, the players were
forced to find other players to buy the stuff. They had to act like
entrepreneurs and, as it turned out, few people really wanted to do that;
they just wanted to do their jobs and get paid. So the game designers
created "shopkeepers," robot characters that would automatically buy
whatever goods the players made. This forced the designers to behave like
Soviet central planners, micromanaging every aspect of the marketplace
with arcane algorithms of supply and demand. How much would a chair be
worth, compared to a rabbit skin? If horseshoes were suddenly in low
supply, how would that affect the price of magical healing potions? How
much inflation is too little, or too much?

Citizens, too, began to complain that the economic system was bafflingly
arbitrary. One irate player pointed out that a spool of thread could be
bought for two gold pieces, then instantly transformed by a tailor into a
shirt worth twenty gold pieces  a profit margin that massively overshot
any other activity, for no apparent reason. Eventually the game designers
mostly gave up, and built a system in which players could trade more
easily among themselves.The Berlin Wall fell, and capitalism rushed in.

The free market made things more fluid, but also more unfair. Soon, rich
players drove the price of basic goods so high that poor players became
much poorer. Once again, the designers had to step in. They would "drop"
objects in places where new players could easily scavenge them, giving
them a chance to amass a bit of wealth. The designers also set up programs
to buy the otherwise useless items generated by poor players (such as
animal skins) to give them a chance to make money. In essence, they
created handouts for the disadvantaged. Ultima Online had morphed into a
modern welfare state, where a free market coexists uneasily with an
activist government. "As a developer, I would love to leave it all as a
free market," says Anthony Castoro, one of Ultima Online's first
designers. "But people who are new to the game would have nothing, and the
big players would have everything."

A year after Castronova began his writings on the field, on-line games
were sufficiently mainstream that he was a media celebrity, with CNN,
National Public Radio, and endless newspapers calling him for comment. But
economists at universities still weren't impressed. Castronova submitted
his original EverQuest paper to a few economics journals. They rejected it
instantly. One reviewer wrote a snippy note saying he preferred "to stick
with things that are real rather than virtual." One can appreciate the
economists' confusion. Even the most highly valued virtual goods do not
seem, in some essential way, real. An Axe of the Heavens may be great for
killing virtual orcs, but it cannot be enjoyed in the physical world. You
can't eat virtual food to stay alive. But that distinction shouldn't
matter  at least not in economics, which is, as Castronova never tires of
pointing out, the study of the entirely arbitrary values that people
ascribe to things. "Most of a diamond's value is virtual, too," he adds.

The ultimate proof of this idea is in the game world's emerging merchant
class  people who make their real-world income purely by "flipping"
virtual goods. Much of their everyday jobs is conducted within the game.

One of these merchants is Robert Kiblinger, a thirty-three-year-old West
Virginian. A commercial chemist by training, he worked for Febreze, the
company that invented the popular cleaning agent, for which he still holds
a couple of patents. ("I was basically selling perfumed water," he jokes.)
But then he started playing Ultima Online, where he ran into a player who
was tired of the game and wanted to sell his entire account. The player
owned two houses and towers and oodles of rare items, and only wanted
$500, which Kiblinger figured was a steal. He drove to Cincinnati to close
the deal. "I met him in a Taco Bell parking lot and I gave him a cheque,"
he recalls. The next day, they met inside the game, and the seller handed
over the virtual goods. Kiblinger turned around and resold the whole
shebang a few days later to another player on eBay for $8,000, producing a
tidy profit.

He was hooked. He began buying up items from anyone who was willing to
sell, and set up a Web site  UOTreasures  to advertise his inventory.
Today the site gets thirty-five thousand visitors a week. Kiblinger
employs five hundred people inside the game, paying them a small stipend
(in Ultima Gold and cash) to act as virtual couriers, scurrying around
inside the game to deliver the goods to the players who've paid for them.
A few elite customers have bought more than $20,000 of stuff from him. A
couple of years ago, business was so good that Kiblinger quit his job as a
research associate at Procter & Gamble to work full-time as a virtual
vendor, though he won't tell me his exact income. "It's in the six
figures," he says. "It's a decent living."

Kiblinger introduced me to one of his clients, Becky Ruttenbur, a
thirty-seven-year-old woman in Montana. Outside the game she's a single
mother; inside she is "married" to another virtual character, played by a
soldier who is currently stationed in Iraq. Ruttenbur and the soldier have
a joint house and property in the game, even though the soldier is married
in real life. Such in-game polygamy is common; Ruttenbur has even met her
cyberhusband's real-life wife, and says, "She thinks we're nuttier than
you could imagine." After playing Ultima Online for five years, Ruttenbur
has a huge estate of in-game property, including a set of potted plants
that goes for an average of $75 in real U.S. dollars on an auction board.
Her stash of on-line goods would fetch $15,000 if she sold it.

Now there's a company rich enough to buy the entire lot. Three years ago,
a company called IGE, whose sole function is to buy and sell virtual
goods, launched. I met one of the company's founders, Brock Pierce, at a
gaming conference in New York. A fresh-faced, blond twenty-three-year-old
who is based in Boca Raton, Florida, he said IGE has "thousands of
suppliers" who scout the games all day long to find cut-rate goods. He has
a hundred full-time staff members at an office in Hong Kong to handle
customer service. On any given day, he says, they handle "several million
dollars'" worth of virtual inventory. Several million? "We're ten times
the size of anyone else," Pierce bragged. Many players call IGE the
Wal-Mart of virtual games. But it is more like a Morgan Stanley or a Long
Term Capital Management, a company whose holdings are significant enough
to singlehandedly affect the cash flow of the markets.

Of course, every booming economy has not only its white-shoe financiers
but also its lowly offshore workers. A few years ago, a company called
Black Snow Interactive opened up a "levelling" service for the game Dark
Age of Camelot. It had a digital sweatshop in Mexico; there,
ultra-low-wage workers would click away at computers, playing the
characters twenty-four hours a day to level them up. Mythic, the company
that runs Dark Age of Camelot, got wind of the scheme and closed down
Black Snow's accounts and auctions. The operators vanished, and have not
been heard of since.

An even more intriguing financial institution opened for business a few
months ago: the Gaming Open Market. Based in Toronto, it is an on-line
service that exists solely for trading the currencies of virtual games 
Gold/Silver from Horizons, Linden Dollars from Second Life, Therebucks
from There.com. If you're a player who wants some quick virtual currency
for your favourite game, you can buy it there using real-world U.S. cash.
Sometimes people who play several different virtual games use the market
to transfer money from one world to another, like travellers at an airport
exchanging currencies. As on Wall Street, the value of each game currency
fluctuates wildly depending on how badly it's needed. "It's just supply
and demand. If somebody really wants a currency, it can drive the price
sky-high," says Jamie Hale, the thirty-year-old founder of the Gaming Open
Market. The day I spoke to him, a single player had bought every Linden
Dollar on the market, about $500 (U.S.) worth. It cleaned out the Market's
entire stock and produced a sudden spike in the Linden Dollar's value.
Sometimes Hale himself will jump in to do some quick currency trading if
he spots a profitable spread. He admits he has no official training in
finance; in fact, he's a programmer by trade, and his co-founder  who
helped write the Market's software  is an astrophysicist. "We keep a
bunch of economics texts on my shelf to appear smart," he jokes. Hale's
operation is still small, with only nine hundred users. But, as it grows,
it could conceivably produce a virtual George Soros  someone who amasses
so many billions of units of a currency that he could provoke a crisis in
that game's economy for the purposes of profiting off it, much as Soros
destroyed the British pound in September, 1992. "The value of the currency
would drop through the floor," Hale notes. "But that's the game company's
problem."

As virtual worlds increasingly mirror the real one, game companies are
already dealing with another problem: crime. Indeed, there's even
organized crime in The Sims Online, the cyberspace version of the
top-selling computer hit. In the game, players assume control of tiny
suburbanites, build houses, and work at jobs to earn "Simoleans," the
in-game currency. The Sim Mafia was founded by Jeremy Chase, a
twenty-six-year-old in Sacramento. Players who want to destroy another
character's reputation turn to the mob. The game has a system of black
marks for punishing bad behaviour. If Chase is paid to "tag" someone, he
gets his crime family  a loose collection of a hundred players  to place
dozens and dozens of red tags on the victim. When they're done, other
players will assume the character must have done something awful, and
refuse to speak or trade with him. Peter Ludlow, a professor of philosophy
at the University of Michigan, became fascinated by The Sims Online last
year and founded a blog  "The Alphaville Herald"  that reports on
interesting social situations inside the world. Last November, he
discovered something truly strange: The game had a chain of
cyber-brothels, run by a family of avatars, all played by a character
named "Evangeline." Evangeline had organized a handful of Sim women to
perform hot-sex chat inside the game for customers, who paid in Simoleans.
"Girls set their own prices," she told Ludlow. "Bj's" were 20,000
Simoleans, the equivalent of roughly $4.50 (U.S.); Evangeline reserved the
richest customers for herself, making up to $40 or $50 (U.S.) a trick.
Ludlow later discovered that some of Evangeline's "girls" were underage
girls in real life, and that Evangeline herself was a seventeen-year-old
boy living in Florida. When he blogged about his findings, reporters
nationwide snapped to attention, and soon The Sims Online was on the front
page of The New York Times.

Maxis  the company that runs the game  struck back. They cancelled
Ludlow's account, claiming he had broken the game's rules by advertising
his blog inside the world. (Maxis prohibits anyone from advertising
real-world services or goods inside the game.) Ludlow insists he never
made a dime off "The Alphaville Herald," and that he was booted out solely
because his research had embarrassed the game company.

Either way, Ludlow lost most of his goods. When game owners cancel your
account, it's like having your house instantly destroyed in a fire: your
property winks out of existence. Ludlow figures he had about two hundred
dollars' worth of virtual goods deleted, including a pet cheetah ("which
is like a fifteen-dollar animal") that he'd bought from a vendor on-line.
Yet Maxis could not entirely delete his virtual wealth. A week before his
account was deleted, Ludlow had deposited eight hundred thousand Simoleans
into an account at the Gaming Open Market. And Maxis has no power over the
Market; it cannot forcibly demand that Hale, the owner of the exchange,
delete that money. In effect, Ludlow had parked his money in the
virtual-world equivalent of an overseas bank, where no game government
could touch it.

Ludlow's case points to the ultimate question, with enormous legal
implications for the real world: What, precisely, is the legal status of
virtual property? Does anyone actually "own" it?

Last November, I accompanied Castronova to a legal conference in New York
devoted to this subject. There game-company executives argued that when a
player joins a world such as Ultima Online, he or she agrees to a user
licence that explicitly says the game company owns everything that happens
on the servers. "It's a game, and what we're doing is inviting you in to
play with the toys. But you don't own the toys. We do," said Richard
Bartle, who pioneered the first virtual world back in the 1980s.

The problem is that people who play the games act as if their virtual
castles were their own private property. And, when it comes to property
issues, courts in the U.S., at least, have traditionally tended to take
the view that if it quacks like a duck, it is a duck. If enough people
treat their Robe of Primordial Waters as though it's genuine personal
property, the law might respect that  no matter what the game companies
say.

This debate may appear rather abstract right now. But, sooner or later,
one of these game companies will start losing money and decide it can't
afford to keep its virtual world. (Many observers expect at least one
major world to go bankrupt this year.) If a game shut down, it would
instantly destroy hundreds of thousands  perhaps even millions  of
dollars. The homeless woman with the virtual mansion, for instance, could
probably sell her goods for several hundred dollars; she would lose her
single most valuable possession.

For now, there is no clear precedent on how to deal with virtual property.
Owning a virtual castle is not like owning other virtual things, such as
stock in a company, because the value is not in an external, tangible
object such as a corporation, but in the work and money invested in
acquiring it.

With stakes like that, said Jack Balkin, a Yale law professor and a host
of the legal conference, players will probably fight back with lawsuits,
or by going right to politicians, demanding legislation to prevent worlds
from closing down. Julian Dibbell, a journalist who began trading virtual
goods himself last summer  he aims to report "revenue from the sale of
virtual goods" as the single biggest line-item on his 2004 tax return 
later suggested an even stranger scenario. He said that players could well
band together and try to buy back the world at the company's bankruptcy
hearing  and then run it themselves as a breakaway republic. "Some
renegade players have done things like that before, actually," he noted.
"They've gotten access to the code of the game and then illicitly created
their own duplicate world."

In a few years, these questions will creep into the mainstream, because
online environments such as EverQuest are likely to become a significant
way that people interact with the Internet. Only a small chunk of the
population will ever go into a brooding medieval-fantasy such as
EverQuest, but virtual worlds have emerged that are much friendlier, and
do not use dungeons-and-dragons themes at all. Indeed, they're not even
games: they have no goals, no "levels" to achieve, no points to score.

There.com, for example, is a 3-D world devoted to nothing but chatting and
socializing, using avatars that look like seductive, attractive models.
You'd probably prefer it to real life, because everything is just so much
prettier in There. As in the real world, one of the main activities in
There is shopping. The company created a currency, Therebucks, and tied it
directly to the value of the American dollar to prevent inflation. Players
spend a lot of time customizing their appearance (often for the purposes
of flirting), so Nike and Levis have virtual clothes that they sell solely
inside the game. Individual players, too, have become designers, creating
outfits they sell to other There citizens. "One of the leading clothes
designers is making $3,000 to $4,000 a month, which is a full-time job,"
says There's founder, Will Harvey. A place like There is not so much a
game as a platform for life. A large chunk of our everyday experiences 
meetings, conversation, music, shopping  could port nicely to a 3-D
space. There Inc. is already talking to companies about licensing "land"
inside the game, so far-flung employees can conduct meetings there instead
of on the old-fashioned Internet. It's not as far-fetched as it sounds.
The U.S. military has already licensed a private chunk of There and
created a simulation of the planet on it. The army is currently using the
virtual Baghdad in There as a training space for American soldiers. The
prospect of life moving into an area such as There both amazes and
terrifies Balkin. "So, what happens when people start doing therapy inside
a virtual world?" he asked. "Or teaching? It's a convenient place to meet,
but literally everything can be recorded. So what do you do when doctors
are meeting to talk with patients in a virtual world?"

Castronova sighs. Though he has made his career out of studying these
economies, he is dismayed by how the real world has bled into the virtual
one. "I liked it better when they were just, you know, games," he says
wistfully. He preferred the meritocratic feel of EverQuest, before all the
duping and the auctions and the bidding wars for powerful avatars. He
liked the idea of on-line worlds as a place you migrated to when, like an
immigrant, you wanted a new lease on life  just as three years ago, when,
depressed and lonely, he first stumbled into EverQuest.

His own voyage had a good ending. A few months ago, the communications
department at Indiana University in Bloomington called. They had read his
work and wanted to talk. Weeks later, they offered him a fully tenured
position in a new department. Castronova had still never published a
single one of his EverQuest papers in print; all his analyses had been
distributed on-line. "It's all PDFs and Web sites," he joked. Like an
avatar in the game, he had levelled up.

Clive Thompson writes about science and technology for The New York Times
Magazine, Wired, and Details, and runs the tech-culture blog
collisiondetection.net.

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