What Can Economists in the Virtual World Teach Us About Real-World Economies?


Eyjólfur Gumundsson is the sole economist on the planet who studies the cost of warp-disruption batteries and T2 light drones. He’s the world’s first virtual-world economist, after all.

Gumundsson moved into EVE Online, a massively multiplayer online game, in August to report on the game’s economics, conduct studies on its society, and collaborate with academic institutions on their entry into virtual worlds.

Think of Alan Greenspan, but in the context of Battlestar Galactica. Players in EVE Online purchase, sell, trade, earn, steal, and do other things to amass interstellar kredits (ISKs), a currency that is exclusively used within EVE. Players can earn ISKs by mining ore from asteroids, processing it into marketable items, eradicating computer-controlled pirates, or becoming pirates themselves and attacking other players.

Gumundsson observes, “The players are quite specialized.” “Some people only mine, trade, and transfer things around, just like any other industrialist. Pilots require larger and better weaponry, as well as individuals to trade them with. They all require information in order to speak about the economy, just as any community requires knowledge of how interest and inflation affect wealth. It’s critical to have a visible economist who can examine events and take part in debates.”

Why Do Economists Need to Work in Virtual Worlds?

Other virtual worlds, like Second Life and Entropia Universe (though not EVE Online), include currencies that can be exchanged for real-world dollars, as well as economists on staff. Gumundsson, on the other hand, serves as both a spokesperson and an analyst. He hopes to disclose important information about their trades to the EVE player community, which numbers over 200,000. He’ll next examine those exchanges to see what lessons can be learned from a virtual economy that can be applied to the real world.

“In general, economists deal with the same idea, regardless of the commodity,” Gumundsson explains. “How do we decide what to make and when to make it? Those are the Econ 101 questions.”

Linden Lab’s CFO, John Zdanowski, offers similar information to the Second Life community while controlling the supply of its currency, lindens, to maintain a stable exchange rate with the US dollar. He recognizes the importance of economic control but believes EVE is going too far.

“It can end up being a lot simpler than it appears when you break it down at the end of the day,” he explains. “I don’t believe you need an economics Ph.D. to handle this.”

EVE Online is a closed system with a player-controlled economy in theory. Although the game’s operators may fill the asteroid belts with minerals and create the mission criteria for pirate hunting, they also strive to provide players a competitive advantage in the domain of trade.

“We aim to follow the laissez-faire principle,” Gumundsson explains. “I’ve been watching the mineral markets [in EVE], and it’s clear that they work exactly as Adam Smith predicted 200 years ago: the market succeeds without intervention.”

In reality, Gumundsson claims that his study has had no direct impact on the virtual economy thus far. His price cap proposals have yet to be implemented, and the tools he is building to influence in-game economic behavior have yet to be released.

“I’m keeping a close eye on the money supply,” he says, “but all signals so far indicate that the monetary system is in good shape.” “And as long as the economy is doing well, I’ll keep my hands off.”

When Is Having Too Much Zydrine a Bad Thing?

That isn’t to say that EVE Online’s creators won’t get their hands dirty now and then. In-game prices are subject to the rule of supply and demand, just like in real-world marketplaces. A new asteroid belt was seeded with an abnormally high level of the usually rare mineral zydrine prior to Gumundsson’s arrival. Prices fell for six months until the ore was sold for half of its original price. The game was later upgraded to allow for the refinement of less zydrine from other substances. Meanwhile, players began stockpiling the mineral until the price stabilized, which Gumundsson cites as evidence of a functioning economy.

Magnus Eriksson, the “balance manager” in Entropia Universe, a virtual world where the exchange rate is set at 10 Project Entropia dollars for every one US dollar, has spent six years fine-tuning the in-game “rules of nature” to keep the economy stable and predictable.

Eriksson’s labor is not readily evident to Entropia players because he primarily works behind the scenes. However, he claims that Entropia intends to provide more economic data to its consumers. “As our virtual universe’s ties to the real world grow stronger, we must always be conscious of real-world economics and morals,” Eriksson says. “This effort is crucial in averting digital anarchy, which we can see in other parts of the digital world we call the Internet, where businesses and individuals are unsure of which laws to follow, who owns what, and how much work time is actually worth.”

Can Virtual Economies Assist Real-World Economies?

Beyond the obvious, there are some contrasts between EVE and the actual world. EVE Online’s chief marketing officer, Magnus Bergsson, stated in October 2006 that the average user was 27 years old and male. Gumundsson, on the other hand, does not regard this as a barrier to experimentation. He points out that comparable demography exists in the real world of business.

In the same way, there is no such thing as subsistence living in a virtual economy. Gumundsson sees the foundations of society, including safety nets, forming even in the absence of poverty and with less economic control than any actual country.

“The new player who is unable to succeed wanders through space in search of ISK[s]. In battle, he tries to be a player-versus-player pilot and loses. He requires assistance in order to succeed in the community. Players have devised strategies to deal with this by forming corporations and forming alliances. It’s not just about economics; it’s about socioeconomics as a whole. It’s possible that we have a prime example of a free-market laboratory that no other country in the world has.”

Gumundsson now regards real-world applications as strictly theoretical. But he believes that will change in the future. Part of his job is to figure out what, if anything, distinguishes virtual economies from their physical equivalents. And he isn’t the only one who is intrigued. Several colleges around Europe had indicated an interest in using EVE’s data for study even before he became an office.

One collaboration has already begun, with the Helsinki Institute of Information Technology. The purpose of this research is to look at macroeconomic indicators in virtual societies. The experiment will run until early 2009, but by the middle of 2008, Gumundsson expects to see “some fascinating contrasts and tests of real-life economic ideas.” Other funding ideas are in the works as well but are too new to mention. They will focus on philosophy and democracy.

Economists in the real world have reservations.

However, not all academics share this optimism. Tyler Cowen, the Holbert C. Harris Chair of Economics at George Mason University, says, “I’m cautious about utilizing virtual worlds to do economics, at least as it is currently.” “In experimental economics, you take undergraduates and place them in lab settings, where they play economics games and the results are measured. It’s like a made-up universe, but it’s not on the internet. The success of experimental economics is due to the fact that it is a true controlled experiment. People are not performing controlled experiments in these virtual worlds, as far as I can tell. These one-time simulations are being executed. Whatever the outcome is, it’s intriguing, but you’re not sure what to make of it. You’re in a bind.”

Cowen also feels that participation in real vs virtual economies is motivated differently: Most individuals play for enjoyment in virtual worlds, but they play for money in the real world.

Gumundsson, on the other hand, compares his academic research to the types of computer simulations that real-world economists already use, such as those used by Vernon L. Smith, co-winner of the Nobel Prize in Economics in 2002, to study electricity markets in the aftermath of the California energy crisis. Unlike Gumundsson’s work in EVE, many of these prior simulations were controlled studies involving smaller sums of money, such as $50, rather than the billions of ISKs traded on the open virtual market every day.

Gumundsson points out that even these far smaller simulations yielded results. “This demonstrates how virtual realities can be used as change experiments in our parallel, real-world environment.”

Subscribe to our Newsletter

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.

Share this post with your friends