SL Economy Not Quite Examined By Critic

ValleyWag has another bitter post attacking Second Life today, this time focusing on its economy, charging that it’s a kind of Ponzi scheme. The original blog post by Randolph Harrison is slightly more reasoned overall, but still fails to be an argument about Second Life itself. Instead, Harrison is upset that Second Life doesn’t match up to its hype.

His main complaint is that the currency exchange market isn’t liquid enough for someone to be able to cash out large amounts of L$ at current rates. Moving large volumes of currency results in a fall in the value you actually receive for your L$. This doesn’t make SL a Ponzi scheme; it simply means there’s not a lot of liquidity in the market. Large currency moves in real-world economies that can’t handle them often result in the same thing. The problem — and it’s a real one — is that Linden Lab advertises SL as an economy as robust as any mature real-world economy. It simply isn’t yet. But neither is it a scam.

Harrison also notes that many SL businesspeople don’t take into account taxes and expenses when totting up their profits. Fair enough. But this still doesn’t make SL into a pyramid scheme. There may well be pyramid schemes at work in SL, but overall it works largely like any real-world economy. What it doesn’t yet resemble, despite Philip Rosedale’s rhetoric, is an economy like the United States’s, which is grounded by what’s known as a reserve currency, i.e., a currency that’s so widely held that it’s largely insulated against shocks and sudden exchange rate movements like those Harrison describes. Harrison is correct that there are huge inefficiencies in the SL economy, but he is not correct that the economy as a whole is some kind of scam. Unfortunately, rather than examining the system and attempting to draw some conclusions about what’s actually going on there, he proceeds from the results he’s looking for (i.e., SL is as robust and mature economy as the hype would have you believe), and is disappointed when he doesn’t find the facts to support the case.

Sadly, this kind of anti-hype only clouds the waters further. A more scientific inquiry would find that what SL’s economy resembles is that of a small developing nation: The banks don’t work, the markets are subject to sudden shocks and vulnerable to bad actors, there are many hidden costs of doing business, and things that have value within the local economy are often worth much less outside it, yet there’s room for growth if things are managed carefully and in an above-board fashion. Unfortunately, the hype vs. anti-hype headline war can’t sustain that kind of inquiry. Read ValleyWag if you will, but keep in mind that the conversation going on there is not about SL, but is only a conversation about a conversation. To which I say, Yawn . . . .

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  • Comments (4)
  1. Very well put, Mark. I’m convinced the Valleywag bloggers just write about Second Life to inflate their false page view reports to increase the amount of advertising revenue they receive! :) VALLEYWAG IS ALL JUST A SCAM!

  2. Shocking… He actually used a third party exchange and Anshe’s no less. Smart!

  3. I’m not really up to speed on economics, but he seems to be saying “Most people don’t make money out of SL so it’s a Ponzi Scheme.” Is that right?

    I cover my tier and more besides, as do a bunch of friends I know. I also know there are a lot of people in SL (and I was one before I felt like a change) who are happy to *spend* money there. Not make it. I mean that’s ok isn’t it? It’s ok to vacation somewhere and only spend money, not earn it?

    It’s not like RL doesn’t have its share of failure stories. I think there’s a pretty frightening statistic about how many small UK businesses go bust in their first year, wish I knew where I’d heard that.

    Ho hum.

    • Chip Midnight
    • January 25th, 2007

    “The problem — and it’s a real one — is that Linden Lab advertises SL as an economy as robust as any mature real-world economy. It simply isn’t yet. But neither is it a scam.”

    I’m not even sure that’s a fair criticism. It’s true that Linden Lab likes to bandy about the amount of money changing hands every day, and month to month, but have you ever heard them say anything about its liquidity, it’s fitness for investors, or anything beyond comparing its GNP to that of a small country? Sure, that alone is rather gimmicky, but I think the blame really belongs to the mainstream press and the blogosphere.

    Anyway, an interesting discussion has ensued in the comments on Harrison’s own blog which can be found here: http://randolfe.typepad.com/randolfe/2007/01/secondlife_revo.html#comment-28210420

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