Toby Madden - Regional Economist
Published June 1, 2006 | June 2006 issue
By Edward Castronova
University of Chicago Press
In 2005, the 5.1 million people of Kyrgyzstan produced an estimated $2.2 billion worth of goods and services. The nation of Norrath, with a population of 420,000, produced the same level of output. The difference between the two, aside from demographics, is that Kyrgyzstan lies in central Asia, while Norrath exists only in an artificial world, created online by participants in a computer game called EverQuest.
As many as 10 million people now play computer games like EverQuest, and at that level of activity, this online phenomenon was bound to catch the attention of economists. Among these, Edward Castronova, a Ph.D.-trained economist who is an associate professor of telecommunications at Indiana University, is the preeminent scholar. For several years now, he has explored the economic, political, social and business impact of EverQuest and numerous other "massively multiplayer online role-playing games" (MMORPGs) such as World of Warcraft, Star Wars Galaxies, Ultima Online and Runescape. One of his papers on the topic is the third-most-often downloaded from the Social Science Research Network, a testament to interest in the field.
In his recent book Synthetic Worlds, Castronova presents his thesis that the 10 million real people playing these make-believe games are affecting the real-world culture and economy, and creating real value. In addition, he sees opportunities for education and social science research using synthetic worlds. He even suggests that central banks can use synthetic-world technology to conduct experiments in monetary policy.
MMORPG enthusiasts are not your typical high school geeks, argues Castronova, who conducted his own survey. Over half the players of EverQuest are adults with full-time jobs, and a typical player spends 29 hours per week in Norrath, on average. Seem like a lot? Castronova sites Nielsen Media Research data that the average adult spends more time than this watching television.
While visiting their virtual worlds, users create and control an in-game character, or "avatar." The player's avatar crafts in-game goods and acquires additional goods and currency by defeating computer-controlled "nonplayer characters" (NPCs), and in so doing builds capital. The in-game goods, currency and even the avatar itself can then be sold for actual cash on eBay, IGN and other Internet sites that act as foreign exchange and trading markets. Other players buy these in-game goods with real cash to increase the amount of enjoyment in the game by forgoing a "treadmill" of repetitive tasks to accumulate the virtual gold or avatar capital. Thus, players can make real profits from the sale of assets they've created in a virtual world.
In 2001, for example, 120 EverQuest platinum pieces—the Norrathian currency—went for $1 on eBay. [In the real world, 43 units of the Kyrgyzstan currency (soms) could buy $1 in 2004.] Numerous avatars from the EverQuest game are currently on sale on the IGN Web site for as much as $1,000 apiece. Castronova estimates that in 2004, $30 million dollars traded hands on eBay for goods that exist only in artificial worlds, and, he points out, the real-world profits attained from these asset sales are not taxed or captured in the national accounts of the player's home country.
Castronova argues that this blending of synthetic and real worlds will have a major impact on both. As technology improves, more people will find these artificial worlds appealing to visit. In a few decades, he says, the number of players could grow from 10 million to 100 million. The funnel of human hours into these worlds will reduce the number of hours people spend watching television, going to movies and working their regular jobs, along with the gross domestic product accounted for by these activities.
The author discusses social as well as economic concerns. Virtual game players spend less time with people face to face and more hours with people online, affecting both how and to whom they relate. People have actually met in MMORPGs, fallen in love, married in the virtual world and then married in the real world. He argues that there are good and bad social effects emanating from virtual worlds.
As computer hardware and software advance, so does the ability to create virtual worlds. Teachers with average computer ability can now buy "engines" that allow them to lay out virtual worlds, create NPCs and generate artificial intelligence for the NPCs. In these worlds, students are immersed in algebra, geography and history as they apply their knowledge to artificial-world situations.
Castronova argues that MMORPGs also offer social scientists a valuable research tool. Traditional research methods compare theoretical predictions to real-world data, limiting their ability to hold some factors constant while others change. A synthetic world enables researchers to control variables as needed.
Economic research in particular could benefit, says Castronova. Many economists rely on computer models that may inadequately represent human decision-making. An MMORPG with actual human players could yield more realistic findings since, even in this artificial world, the players are flesh-and-blood, not computer chips. Moreover, when economists perform real-world economic experiments with human beings, their work is limited by high cost and small samples; such limits are easily overcome with inexpensive, large-scale artificial-world experiments involving real people offered real-world incentives.
Like Kyrgyzstan and the United States, Norrath has a monetary policy, but policy is controlled not by a central bank but by the programmers at Sony Online Entertainment, the corporate owners of this virtual world. Money can be injected into the virtual economy in many ways, according to Castronova. The main source is NPCs, who provide currency to human-controlled players through their economic activity. Money can also be injected simply by dropping virtual gold out of a virtual helicopter. Money is withdrawn from the in-game economy when NPCs sell items to human-controlled players or acquire virtual currency from human-controlled characters via other means.
Changes in money supply affect prices, but prices are also affected by in-game supply and demand, and by avatar skill attainment (that is, human capital). Castronova does a good job describing the factors of demand, production functions and NPC skill improvements. Usually, he explains, the natural progression of inflation in MMORPGs is for low-skill goods prices to go down, while prices for high-skill goods increase. This occurs because as NPC skills increase, productivity increases and low-skill goods are easier and cheaper to produce. And as NPC income and wealth increase, players are willing to pay more for items that are difficult to produce and therefore relatively scarce.
Just as MMORPGs are useful in classrooms and social science labs, they can serve a role in monetary policy research, suggests Castronova. Central banks could conduct large-scale virtual experiments with two identical worlds, each with thousands of real-life players. One world could serve as the control group, while the other would test the impact of changes in money supply. Such experiments would be low-cost, large-scale and reasonably realistic since the real-world market values of artificial-world assets would provide incentives for players to act as true homo economicus.
To this reviewer at least, it seems improbable that the Federal Open Market Committee will be consulting Norrath experts anytime in the foreseeable future. But Castronova presents his case well. He uses his economic tool kit wisely. He analyzes almost every aspect of synthetic worlds from an economic perspective. He leads the reader from the micro level to the macro level, from market structure to consumer preferences and from inside the artificial world to the effects on the real world.
On the other hand, he provides little economic analysis regarding the addictive nature of online games. EverQuest has been labeled "EverCrack" by those who see it as fruitlessly consuming the lives of its players. Castronova's relative neglect of this potential problem seems sloppy at best. At the very least, he might have mentioned the economic consequences of online addiction.
Other than this oversight, however, his description and analysis of massive online game-playing is both thorough and intriguing. Overall, a very satisfying book.