Virtual Economies – what can they teach us about the real world?


‘Virtual economies’ are all around us, from social media, to bitcoin, to the games on our smartphones. But what exactly is a virtual economy?   And is there anything that these virtual economies can teach us about ‘real world’ economics?

Virtual economies book jacketPod Academy’s Alex Burd returned to the Oxford Internet Institute to speak to Vili Lehdonvirta, a research fellow there.  Alex previously interviewed Vili about Bitcoin for us (podcasts: Bitcoin 1  and Bitcoin 2).

This time he went to talk about Vili’s new book, Virtual Economies: Design and Analysis (by Vili Lehdonvirta and Edward Castronova, MIT Press, 2014)



In developing digital games, designers often develop an economy within the game itself.  These economies can drive the game, just as an economy does in the real world.  Then there is bitcoin – is that developing into a useable currency?  And can we learn anything about economics from understanding what is involved in clicking ‘like’ or ‘retweet’? Vili became intrigued by what these virtual economies might teach us.  He started by explaining that he and Edward Castronova first got the idea for the book at a conference of digital game developers in San Francisco:

Vili Lehdonvirta:  I’ve been going every year for the past 5 years to a digital developers’ conference to give a talk there about what the academic study of virtual economies can teach game developers and digital developers. In 2010 I was there on a panel about virtual economies in online games, it was a panel where all of the panelists were academics and the game developers were quizzing us. One of the questions was

‘What should I read if I want to make use of economics and economic sociology. Should I just pick up an economic textbook.’

My co-author, Edward Castranova, was also on that panel. The two of us thought ‘well, if you pick up an economics textbook in theory everything is the same. But in practice everything is focused on very different objectives’.

Then we thought, we’ll write the text book for you! Obviously we also wanted to make it interesting to academics so it’s a slightly broader book than just for developers.

Alex Burd: So you you wanted to write a book for developers who wanted to know more about economics and academics who wanted to know more about games.

VL: That’s right, game developers and digital developers more broadly. Not just games but anyone who is developing online communities or shared information pools or crowd sourcing systems or a new virtual currency – that’s one of the audiences.

The other audience is academics and social scientists who are interested in media and social communications and are interested in behaviour and power in digital media.

Basically we’re arguing to scholars that if you want to understand how digital media affects behaviour, whose power it enhances, what kind of behaviours are valued and privileged, and what kind of constraints and budgets are placed on use, then you really have to take this economic perspective on digital media. You can’t just treat it as communication, as speech, as abundant bits that are only restricted by creativity.

There also these very concrete constraints and choices and ownership and exclusivity that are programmed into the infrastructure of digital media, everything from social media to numerous games that people play every day. And understanding that is crucial for any scholar studying digital media.

AB: Looking at social media specifically, it’s about being able to put some kind of value on the interactions that users have with publishers. What value someone clicking ‘like’, or someone clicking ‘retweet’, has?

VL: It’s that, yes, but it goes beyond just economic value. Microeconomics fundamentally is a science of choice, choice under constraint. Most internet scholarship is about how suddenly scarcity disappears and there is abundance. You don’t have to choose which music file you want because you can download both and then share them to your friends. You’re not constrained; you don’t have to make choices. However it turns out that there are many things in digital media that aren’t infinitely copyable – for example, there’s people’s attention. But there is also artificial scarcity built-in in the form of likes, or up-votes and so on. And it’s this scarcity where you do have to make choices (after all, you can’t just give everyone 9 billion likes). That’s actually crucial to their functioning because it involves economic choices under constraint, give and take, trade – even if not in the sense of dollars changing hands. So it turns out that an economic perspective and economic sociological, a market perspective is very useful in understanding this dynamic.

AB: You said originally this book came about through working with game developers and speaking with them. Are there any games that serve as particularly good examples of virtual economies?

VL: There are so many different types of virtual economies. If you take the premise that a virtual economy is an economy founded on virtual goods; and virtual goods are digital resources that are artificially scarce, that are not infinitely copyable – this is such a broad definition that you can find many kinds of system that fit under it.

So there isn’t a single game that is emblematic of everything. But obviously if you want to take an economy that is intriguing because of its complexity and its array of different fascinating emergent economic behaviour in it, then Eve Online – an online game set in a sci-fi universe, where players engage in space travel and trade and manufacturing and war – is a very good example. We’ve used Eve Online and economic data from the game to illustrate concepts and emergent behaviours.

AB: Eve Online which you mentioned has made mainstream news in recent years due to its sophistication and as a platform for political and economic disasters on a huge scale, including financial collapses which mirror our own.

VL: Good that you brought that up. It is one of the things we talk about a lot in the book. We have a couple of chapters on institutions and politics in games, and online systems more generally.  So we’re not only looking at markets but also non-market allocations of resources. These are part of the economy even if microeconomics only focuses on markets as a means of resource allocation. We take the wider perspective, so we also look at politics and alliances and we look at law and the construction of markets that is underpinned by rules and law and reputation and trust.

There are numerous examples in Eve Online and other online games, that really serve as fascinating illustrations of how these self-organised institutions can emerge in online communities and how the trust and the institutional rules that are developed in them can facilitate really complex forms of collaboration and resource sharing and production. But the most fascinating stories are when they break down, when someone takes advantages of the position they have reached and is able to exploit a vulnerable party. That’s something that Eve Online excels at – producing situations where that’s possible  – and that leads to really massive drama, massive space opera.

But you can also see it in less dramatic ways, playing out on social media, on Wikipedia, on quora, where there are also complex self-organisations that facilitate collaboration, exchange and production. And the way they’re maintained and the way they break down.  There are some similarities there. So I would like to claim that even though most of the examples in the book come from games, you could almost say that games provide the most extreme examples because they tend to be very..

AB  Confrontational?

VL: Yes.  But they also make a very clear break[distinction] between the virtual economy and the surrounding context. You get to see many of these phenomena. Whereas in other online systems, perhaps, they’re more mixed up with the dynamics of the context, and it’s harder to see them.

AB: Like you said, it’s such a vast topic.

Would it be fair to say that in the world of games the economies have developed beyond what the developers had in mind for them because of the role and actions of players, how they’ve taken it on themselves? For instance with World of Warcraft, you mention ‘power levelling’, the idea of employing someone to play as your character, which cannot have been envisaged by the developers, Blizzard, all those years ago.

VL:  Right. This gets to what I said about different virtual economies – all fitting in the rather abstract definition.

A lot of very fascinating stuff, and fascinating stories, can be found from these massive multiplayer, online, role-playing games like World of Warcraft. And we’ve also been discussing Eve Online.

One of the design goals in Eve Online is to provide a context where all kinds of unexpected behaviour, and emergent market-making, can emerge. You’ve mentioned one very big phenomenon  – where items and currencies in an online game can be traded for real money (a big attention-catching part of this whole phenomenon which has been in the media a lot). It continues to happen.  I’m currently studying a big marketplace where people increasingly pay someone to play for them when they’re too busy themselves.

And a new phenomenon is also emerging. People are hiring friends to play with. You have these very competitive games which are team based and if you want to do well in them, if your self-identity is based on being a high level player, then you might think that your volunteer friends are not quite committed enough to get you to where you want to be. So you pay a bunch of East Asian, extremely skilled, players to be your team members – you’re the coach or the team leader –  and then you do well.

So these virtual economies have created a market for this virtual work and virtual goods which are traded for real money.

But these emergent markets and behaviours are a feature of one kind of virtual economy, the very open ended, highly complex MMORPG (Massively Multiplayer Online Role Playing Gameeconomy.

At the same time we have a huge growth in much more controlled and managed virtual economies which you find in mobile games and tablet games – these are mostly one player experiences. With these games, even though the game might be multi player you don’t really have much economic interaction between the players- they  are designed with very different goals in mind. They’re designed to be very orchestrated, where the user is provided with the correct stimuli and the correct timing to optimise the gameplay experience, then they have to pay some real money in a micro transaction in order to get over some hurdle or to get to the next stage. That fits within the same definition and is founded on the same idea of artificially scarce resources (aka virtual goods) but it looks like a very different economy.

AB: So with mobile games it’s more about the player interacting with the developer and seeking to purchase an advantage over the game.  Whereas the previous type we talked about is about players interacting with other players.

VL:Yes.  You could see these as two archetypes, though you have a lot of crossover.  In terms of mobile, I think that as the platform develops and the devices develop and it becomes easier to interact with players, you’ll see more of this kind of player-to-player economic experience appear.

AB: Do the more advanced virtual economies offer any kind of practical use? can they teach anything that we can bring to real world economies?

VL: There are lots of learnings we can take, and we have a chapter about them in the book.

One that I would highlight is the idea that virtual economies are designed with different goals in mind which vary from economy to economy. Often they are more varied than just economic efficiency in the most effective way. Most often in games the purpose of the economy is to act as social glue. To create a way of getting players to interact, build trust and mutual dependence – building the community and increasing social capital – and at the same time providing means for the allocation of resources.

Often in national economic policy discourses,  the main concern is economic efficiency,  the efficiency of production and allocation, with little heed paid to how the economic institutions and markets that achieve these efficiency goals might affect society, social capital and communities. You have situations where a market is extremely efficient, but at the same time it alienates it’s participants and destroys the local community. What you could learn from virtual economies is to take a little broader view and look at what kind of markets and enhance mechanisms could serve both types of goals at the same time.

What’s so interesting about games is that they’re like research laboratories for this. Game developers are in some ways like experimental macro economists. They make all these designs and try them out with the aim of creating online communities that are not only functional but also have high social capital and are sticky and make people stay.

So you can look at what people are doing in practice, rather than just looking at the abstract ideas, and think that you don’t just have to prioritise economic efficiency. People understand that, but how do you do it in practice?  Well perhaps we can learn something from virtual economies.

AB: So game economies are more about keeping players coming back, so they’re more user focused?

VL: Let’s think about a so called economic problem . How to provide members of society with subsistence  – with food, shelter and everything else to prolong their material existence. Games are not concerned with this problem because you can infinitely reproduce any resource and satisfy any such problems that the players might suffer from. Instead, the game developer focuses on the other problems a community might have.

National policy makers, on the other hand, might do the opposite – the solving of economic problems. But Keynes predicted 90 years ago that the economic problem – how do we feed everyone – would be solved around this time. Now, while that’s certainly not true for everyone, it has been argued quite persuasively in our rich countries and developed economies that the economic problem has been solved, and the functions that our economies now perform have more to do with relaying meaning and building meaning and structuring social relations – soft purposes rather than the economic problem. So, you could say that we are actually living in a virtual economy, in the UK anyway. The economy is no longer there to solve the economic problem; it’s there to satisfy our desire for status or to allow us to play out an identity.

AB: The book also touches on virtual currencies such as Bitcoin. When we last spoke it was something of a media darling. But the currency itself has grown, has continued to grow and worm its way into mainstream usage. Do you think it will go on growing and work its way into more vendors and more shops?

 VL: Well I don’t have a crystal ball but my view on Bitcoin is what I said before, it’s provided a great example of what you can do with a decentralised payment system.

It’s sparked a lot of innovation, we can see other virtual currencies now spring up and using the same principles and often the same code base. Also more traditional actors in finance and payments are starting to take notice and think, ‘what can we take from this?’

But at the same time Bitcoin itself, and I stress that this is just speculation, I’m not sure that it actually has increased in mainstream usage. This might be a controversial. Clearly many, mainly online, stores (more than when we last spoke) now use bitcoin,  but I’m not convinced that it’s much more than a publicity move on their part, because almost ten years ago when Second Life was the media darling a very similar dynamic played out, where lots of companies started adopting Second Life and started going into Second Life and it was used to show that the game was breaking into the mainstream, when actually it was just their way of getting their share of the media attention. Actually Second Life adoption remained flat.

I understand that obviously Bitcoin and Second Life are completely different technologies but the media dynamic seems to be playing out in the same way. If you look at the statistics that are available on the number of transactions that are taking place on Bitcoin, those have not grown in proportion with the growth of the exchange rate. That, coupled with my informal discussions with people who buy Bitcoin, shows that the majority of people buy into Bitcoin with the expectation of then later selling it and making a profit. So at the moment it’s buying, and holding and speculation that’s fuelling Bitcoin, rather than expanding use.


See also Chris Daley’s interview with Ben Dyson on The Economics of Everyday Life – who creates money?

Picture: World of Warcraft currency: (via Flikr)

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