The Future of Cyberspace Economies

1
The Future ofCyberspace Economies

• Edward Castronova
• Associate Professor of Economics
• Cal State Fullerton
• Terra Nova at terranova.blogs.com

2
Synthetic Worlds

• 10 20 million users in 2003
• Compare Attended basketball game, 21 million
  (US)
• Played basketball, 27 million (US)
• Predictions of strong growth 10 years out
• Basis Broadband and game industry
• Interesting spillages
• eBay
• Policy movements
• Retreats from reality

3
Economic Indicators

• Annual GDP per capita 2,000 (EverQuest)
• Annual volume of eBay trade 20 million (all
  Anglo-European except EverQuest)
• Annual volume of in-world trade a large multiple
  of eBay trade
• A guess 50m of out-world trade, times 20 1
  billion of in-world trade.
• Compare Basketball shoes 834 million (US),
  Spectator sports 13.6 billion (US)

4
The Virtual Economy

• Synthetic scarcity. Misery is fun! (huh?)
• Users create all goods, including money
• Grotesque inequality, but based on time
  investments alone
• MUDflation rising prices at the high end,
  falling prices at the low end overall increase
  in real wealth per capita
• Intense player interest in markets, prices, and
  trading
• Urban locations appear at trade nodes

5
The Virtual Economy (cont.)

• Out-world trade is between time-holders and
  money-holders
• Frequent dupes, hacks, macros, exploits
• No taxation, storage fees, transportation costs,
  depreciation, insurance, finance.
• Dangerous markets often quashed (No Drop items)
• Evolution in favor of fluid markets (vendors)
• Risk-less worlds and lawless worlds generally
  unpopular

6
Inference A Fun Economy Has

• Self-employment
• Securely manageable risk
• Observable, guaranteed formulas for building
  capital and wealth
• No skill bottlenecks with enough time, you
  eventually reach any goal
• Relative income positions, inequality related to
  time only, prestige treadmills, and conspicuous
  consumption
• Social networks are fluid but required for
  advancement

7
Table 1. Participation in Norrath and Earth
Society
N 3,353 to 3,365. Source NES 2001. The data
are weighted so that the distribution of avatar
levels in the data is comparable to the
distribution of avatar levels in Norrath.
8
Table 2. Population Characteristics
Source NES 2001. N 3,619.
9
Table 3. Norrath Characteristics
Source NES 2001. N ranges from 2,809 (adult
respondents only) to 3,467 (whole sample).
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Q How big will these places really be?

• Theory 1 Fun
• Theory 2 Economics of communication
• Theory 3 Economics of Play
• Theory 4 Economics of Post-Industrial Cultural
  Decline

11
Growth Theory I Fun

• People like this kind of world
• Explore, Achieve, Socialize, Dominate (Bartles
  types)
• Interactive entertainment TV
• Social interactive entertainment all

12
Growth Theory II Economics of Communication

• Avatar worlds allow body-mediated communication
  in a shared space.
• Only competitor Face to face meetings
• Its a lot cheaper, and the quality will improve
• It also offers more than live video conferencing
  (shared space, richer gesture set)
• Enables image-sculpting and removes the Earth
  body as a source of social discrimination

13
Growth Theory III Economics of Play

• Piaget The drive to play is innate at a level
  lower than consciousness, albeit higher than
  hunger and sex. Mammals play. So should we.
• Huizinga A not so cool thing about modernity
  Its too serious.
• Carmack internet a new opportunity to play
• People bought cars, radios, movies, records, TV.
  Theyre going to buy into avatar worlds.

14
Growth Theory IV Virtual Worlds as Cultural
Criticism

• All major virtual worlds are based on Tolkien or
  his heirs romantic, anti-industrial, spiritual
• Economic development pursues paths that enhance
  but do not optimize the human condition.
  Something has been lost.
• Connection independence identity firm place in
  society firm place in geography creative
  community history meaning
• Before judging the wholly-immersed players, we
  must learn about their alternatives. What is
  their daily life like?
• For how many people do virtual worlds compare
  favorably to daily life on Earth? Guess very,
  very many.

15
Implications of Growth

• For the Earth economy Negative
• Labor supply and consumption migrate online
• Central Statistical Offices measure only a
  decline in Earth-based activity
• Where is everyone?
• Evidence
• Lower Earth wages for intense EverQuest users
• Asset value changes in response to world vs.
  world competition

16
Implications that Matter

• From the standpoint of individual well being, the
  decline of Country Xs GDP is not, in itself,
  indicative of a problem
• Much well-being is not material
• GDP is not consumption
• A country is not a person
• To ask about well-being is to ask about the
  status of individual people, regardless of the
  locus of their economic activity

17
Avatars and Well-Being

• An avatar is an extension of the body (the root
  avatar)
• Its a car
• Supply a new car to the world and you raise
  well-being
• People who dont buy the car are unaffected
• People who do are better off
• Ergo the average well-being across all people is
  higher

18
Welfare Effects of Choice

• More choice Higher well-being
• Hence the opportunity to inhabit different
  avatars (different from your body) enhances human
  well-being
• The opportunity to visit new worlds also enhances
  well-being

19
Equity Effects of Choice

• If all people just had to accept the color of the
  car they were given, they would attain a certain
  level of well-being
• If you allowed them to choose color, they would
  attain a higher level of well-being
• And those who switch colors raise their
  well-being while those who dont switch stay at
  the same level of well-being
• Hence Choice of color reduces the disparity in
  well-being across people

20
Equity Effects of the Avatar

• The avatar removes from the human inequality
  calculus all effects that derive from the body.
• Think about that. All inequality based on the
  body goes away. Forever. Thats a fairly
  important change in the human condition. There
  may still be sexism, but no one has to be female
  there may still be racism, but no one has to have
  dark skin. The effect of these false judgments
  becomes moot anyone who wishes to avoid them,
  can. In the long run, they will lose their force
  completely.
• If the material advancement system is mostly
  time-based, it also removes effects of player
  skills in essence, the mind on material
  inequality.
• With virtual worlds, its now possible to tie
  material gain very tightly to time investment.
  Time is the most equally-distributed resource on
  the planet.
• Avatar bodies will not all be the same. Human
  skills will not all be the same. But people will
  have the avatar bodies they want, and their
  skills will not prevent them from achieving their
  goals.

21
Wage Equity Effects

• Avatars that work best in teams and can freely
  move from world to world should end up with about
  the same net wage.
• As more worlds open, more people will find an
  avatar/employment combination that suits their
  skills, reducing real wage inequality.
• Workers suited to Earth will work the Earth, and
  workers suited to synthetic worlds will work the
  fantasy.

22
Conclusions

• Synthetic worlds will probably occupy more of our
  time
• Many current trade and revenue streams will be
  diverted
• Avatars raise average material well-being (even
  though the CSO wont notice that)
• Prospect A dramatic decline in inequality
  mental and physical skills and handicaps removed
  from the equation