Virtual Diamonds - This is Only the Beginning

This is the beginning of the essay I planned to submit along with my graduate school application today. The completed version - when I get there - will of course be submitted unsolicited as an addendum to my portfolio. Read on.

Virtual Diamonds: The Economics of Massively Multiplayer Online Role-Playing Games and the Impact on Perceptions of the Value of Intangible Goods


A revolution is occurring in our economy. As economists in rich countries note the diminishing returns of happiness from large increases in wealth , and the developing world strives to reach even the most basic foundations of modern life , a conceptual shift in human understanding of value is taking place in the vibrant economies of Massively Multiplayer Online Role-Playing Games (MMORPGs) . The integration of these “virtual” economies with the “real world” economy will have far reaching implications across all social systems, and may cause a dramatic revision in global systems of exchange and the valuation of goods, especially intangible goods and their importance to the global economy.

Massively Multiplayer Online Role-Playing Games (MMORPGs) exist in a digitally rendered environment, popularly referred to as “virtual” or “synthetic” worlds. Definitions of these worlds use three main components: computer- or digitally-mediated interactions with humans, persistence of the world through time, and the existence of a complete environment based on a set of rules . The exceptional aspect of this communication technology is its immersive quality, which translates into an investment of emotional energy through an (almost) all-encompassing medium. This immensely powerful pull relies on two essential human phenomena: the brain registers all visual stimuli as “real”, and collective confidence or belief reinforces the individual’s tendency to have “real” interactions with the game environment . Because of this, the societies growing in these worlds develop many, if not all of the systems that arise from human interactions in Earth societies.

The economies of virtual worlds demand particular notice, partly because they have already resulted in measurable transactions with Earth societies, and partly because they have the most potential for generating conflict with the systems and conventions accepted by Earth’s economy. The mainstream acceptance, and future integration of the conceptual and financial aspects of virtual world economies, however, has the potential for far-reaching benefits to the global economy in the form of expanded productivity, harnessed human capital and the redistribution, or reassessment of wealth.

The popular, and, to a small extent, academic debate surrounding the emerging economies of MMORPGs hinges on the real world monetizing of the goods that exist in these virtual worlds. The exchange of real world currencies for these goods outside of the game platforms is called Real Money Trade (RMT). For some critics and players, the commodifying of these goods by assigning a dollar value represents a rejection of these worlds as fantasy, and is resented as cheating and undermining the purity of play, inspiring some game companies and player organizations to take an active position against RMT. Sony Online Entertainment, the developer of EverQuest and partner (with LucasArts) in Star Wars: Galaxies, “has done a u-turn in its hardline position on virtual trade. The company was adamant about pursuing professional virtual traders, and even made a deal with eBay to prosecute sellers of EverQuest goods. Yet last month it announced Sony Online Station Exchange, a service that acts as an in-game marketplace for players who wish to trade real money for virtual properties” . The potential for real world profits is too compelling to reject for philosophical objections; MMORPG goods have already developed trade on a massive scale – some estimates for the year 2006 put the total value at around $1 billion, rising to $1.5 billion in 2007 . For all participants, the existence of RMT has altered the perceptions of virtual worlds as games, and for some, has changed the nature of their participation in these worlds .

Concepts of value, the foundation of all systems of economic exchange, develop in virtual worlds in a similar way to the concepts of value that apply to the physical world, even though the goods that exist in these game worlds may not be rendered in physical form. The intangible value of virtual goods distinguishes them from their physical equivalents only in cases where the primary function of the good is for physical consumption; virtual food and water, though they may sustain your avatar (your virtual world projected identity) in the game, can not hold the same value to your physical body. All other real world goods, however, retain elements of intangible value that are directly translated into the virtual realm. Building a large, architecturally imposing home serves two purposes – it provides shelter, certainly, but its value is derived from the intangible aspects of status and wealth that it represents. The value of a virtual good is derived from the same intangible elements of collective consensus – the more that the society desires it and individuals can apply it to their real or perceived advantage, the more valuable it becomes.

Value is a social construct. As expressed in economist language, “Society consists of thousands or millions of people in decentralized relationships, quietly expressing their interests; the aggregate effect of their activity is to create an anonymous force that dictates the price of things” . The “activity” refers to the buying and selling of goods and services - this movement is the economy. Since the introduction of Keynesian economics, even capitalist governments (and in the game context, the developers) have influenced the supply side of the market to manipulate price, but the value of goods and services still exists as a social perception. “The more people who accept an illusion…the more it becomes real. A ‘share in a company’ is not a tangible thing, for example, but folk deal in them on stock exchanges every day. If a player can buy and sell virtual goods in a virtual world, there’s no conceptual barrier to buying and selling them in the real world. People can trade in intellectual property, so why not virtual property” ?

All forms of currency, from the cowrie shells of ancient times to the stocks, bonds and e-gold of today, have derived value from a collective agreement. The abstraction of value into currency, and the comparative valuation and exchange of many currencies, has created increasingly complex and expansive systems of exchange, upon which much of the planet’s population is now entirely dependent – the advanced industrialized countries most of all. “Egyptians were casting bars of gold thousands of years ago; but the thrust of human history has been away from hard money and toward virtual money, like paper bills, or even electronic pulses shot off by the trillion across the ether” . Metcalf goes on to say that, “the set of conventions that lend money its credibility as a medium of exchange must be universal and stable, so that the shells for which I relinquished my good cow today will be worth as much tomorrow, when I exchange them for something else.” .

Gold served as the universally accepted common denominator of value until forty years ago, when the world’s economies formally freed their currencies from the Bretton-Woods Agreement and the limitations of the gold standard. The United States government still owns huge reserves, despite the obvious fact that, “If the markets and economies were to crash, a basement full of gold bullion would just take space. I couldn’t imagine farmers trading chickens and milk cows or fresh vegetables for gold bullion. For guns, ammunition, gas and oil, yes. For gold, no” . Nonetheless, for a small and enthusiastic cadre of traders and hoarders, gold is the only medium of exchange that they trust – into which they have invested unparalleled value. For them, “Gold is money; and not just money, but the one true money” . This collective illusion of value is worth approximately $2 trillion annually in movement through the world’s economy . It is, however, interesting to note that the value of the world’s gold is expressed in dollars, what the gold bugs call “fiat currency” , because the dollars that gold can be converted into have more practical value in the real world.

If we understand that all currency serves as a representation of value, a medium of exchange to acquire those things we need to live – at a lower or higher standard – then the tangible existence of the currency itself is irrelevant. We should, therefore, have no difficulty accepting the viable economic contribution of digital gold pieces, or Linden Dollars (from Second Life). And once we move past the conceptual barrier of “real”, or tangible, as a predicate for value, and see parity in the convention of value accepted by participants in MMORPGs, we can address the globally economic relevance of monetizing the productivity generated by humans in “games”. For the purposes of the remainder of this essay, then, we shall agree to suspend the distinction between “real” and “virtual” economic activity, and discuss all MMORPG-generated value as equal to value in the physical world.

If currency is merely a representation of value, its form irrelevant, we must take a closer look at what these markers of value attempt to quantify. This is simple: all money represents the hours of time and levels of skill we do not have to “spend” on acquiring the goods and services we need (or want) to live.