Wednesday, January 23, 2008

A Counter-Intuitive Observation on Second Life Economics...

The big economic news yesterday was that the Federal Reserve is slashing short-term interest rates by 75 basis points in an attempt to mitigate the effects of a forthcoming recession. But while the U.S. and global economies struggle, localized communities in cyberspace, such as that bastion of alternate realities, Second Life, are taking an even larger hit.

As the Wall Street Journal reports, a shutdown of the banking system in the virtual world of Second Life is wreaking serious economic havoc on its 12 million users. Linden Labs, which runs the website, just "pulled the plug on about a dozen pretend financial institutions that were funded with actual money" from its users. They did so in response to certain banks' inability to repay deposits, after speculation led to a mad rush of people looking to withdraw all of their funds. Picture the Depression-era scenes from "It's a Wonderful Life", only through avatars.

As I've written about before, the Second Life economy is seriously robust - comprised of a banking system, stock exchange, currency market, bond issues, and even fledgling regulatory institutions.

All of which is proving a development that is, to many, completely counter-intuitive: the innovation and novelty of the Second Life culture and economy, defined by its pioneering ethos in a new cyberspatial frontier, is actually resembling, more and more, the characteristics of the real-world. From last year's decision to ban gambling on the site, to the current round of financial crisis, the Second Life markets are demonstrating their inability to adequately protect consumers and investors, resulting in greater regulatory intervention from a familiar breed of institutionalism.

In the end, Second Life may be doing less to instruct us of how new cyberspatial economics work, and instead doing more to reinforce our established ideas of why we have the real-world policies that we do.


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