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Linden Lab, the company behind Second Life, made an announcement yesterday about a change in the virtual world’s economy. No longer will LL make cash awards to property owners based on the amount of traffic their parcels see each month. Because of the particular way the SL economy works, this amounts to a significant change, something akin to the U.S. Federal Reserve Bank raising a key interest rate by half a percentage point or so. For LL, it’s a step in the right direction, moving the world toward a more liberal open-market economy, and should help foster the kind of development LL would like to see there. The question now is whether LL is ready to go as far as will be necessary, in terms of transparency and fiscal responsibility, to make its world truly robust.

Because the Linden dollar is freely tradeable, the Second Life economy very closely resembles a real-world economy. The money supply grows and shrinks in a finite number of ways, and these fluctuations affect the Linden’s rate of exchange against the U.S. dollar (or any other real-world currency). The traffic payments LL will discontinue on June 13 contributed to a growth in the money supply that drove down the strength of the L$, which has fallen by more than 10 percent against the US dollar since February (and by more than that over a longer period).

LL is probably wise to make the move. Traffic payments have contributed to a de facto welfare state mindset among many SL residents, and have led some to take advantage of the system by paying people to hang out at their property. The result has been a rash of “camping chairs” across the land of Second Life — chairs which pay residents a small amount simply to sit in them. Many needy residents simply park themselves in such chairs and walk away from their computers, making the Grid seem like a ghostly landscape of zombified avatars.

Doing away with traffic payments should solve that problem, and point the economy more in the direction of entrepreneurship. But if Linden Lab really wants to see its world take off in terms of what user-developers are willing to do there, they’ll have to go further.

Two issues remain: stipends and transparency. SL residents with premium accounts (i.e., those that own land on the Grid) receive a weekly stipend of some L$500, a little less than US$2, at current rates. If you own a small enough plot of land, you essentially pay nothing for the privilege. LL has made noises in recent weeks about possibly discontinuing stipend payments as well at some point in the future. (Another issue is how much freedom residents have to exchange large amounts of money. There is currently a constraint on this, which is something that often gets real-world economies in trouble.)

Stipends account for the largest source of monetary growth, totalling some 72 percent of monetary expansion in March 2006. It’s difficult to fathom the impact of stipends, however, since the company releases precious little useful information about the economy itself. Figures like monetary growth are leaked out only occasionally, and there is no public metric for total money supply. The value of daily transactions on the Grid is made public (though what exactly this includes is less than crystal clear), but there is no central source for information on land sales, for instance, and several other useful metrics.

One way in which the SL economy differs from that of a real-world system is in the fact that its land mass is constantly growing. LL adds many acres of new land each week, and this land too has an impact on the economy and the money supply. Some is sold for US$, some for Linden$. But information on how much land is out there and how much is being added and at what rate is difficult to come by.

To tie all this information together, LL will also need to give clearer information about the population of the Grid. The company claims 186,842 residents, but this figure represents only people who have logged in at least once, and it’s not clear whether two avatars on one account are counted as one resident or two. Little information is given out as to active accounts (i.e., accounts that have logged in within the last 30 or 90 days, or a similar period). This is typical for a game company, but Linden Lab is at constant pains to remind the world that Second Life is not a game.

If the company wants to see its world become truly useful and attractive to the kind of user-developers it claims to be trying to garner, all this information and more should become public. Transaction figures and accounts of the money supply are nearly meaningless on an absolute basis, and only begin to have some meaning on a per capita basis, once population is taken into account — especially in a world in which the population is growing so quickly. Entrepreneurs and businesspeople in the real world rely heavily on the kind of demographic and economic information made available by the Federal Reserve Board, the Bureau of Labor Statistics, and by private-sector organizations that aggregate economic and business data. Linden Lab should learn from this lesson and step up to a similar level of transparency and disclosure.

In addition, the company will need to decide what its role in the economy is to be. The Federal Reserve has well defined metrics and well defined tools that it uses to manage the U.S. economy. So far, Linden Lab has found it necessary to develop only vague targets, and it’s not clear that the company has any internal metric for the health of the economy other than the exchange rate. Developing such metrics and tools is not a trivial matter, but neither is it very difficult. To really see Second Life flourish, though, I’d argue that it’s crucial.