Remarks on virtual economies

Recently, I have devoted a lot of attention to the notion of virtual game economies. I am fascinated by some of the recent transactions that have solely involved virtual property. (e.g. the virtual mall or whatever that was sold in the virtual world known as Second Life for millions of dollars). Most intriguing to me is the debate going on between lawmakers on whether or not these economies are taxable in the same way typical (i.e. involving the physical or real transaction of goods or services) transactions are taxed.

On the one hand, taxing virtual game economies can be seen as perverse: these markets don’t ‘exist’ in the way we tend to think of live, active markets. On the other hand, these economies certainly are not insignificant, and notions such as scarcity and supply and demand play a real role in their development.

But ignoring for the moment the question of whether these economies should be taxed, there still exists the question of what sort of tax(es) could be levied. I presume that if these economies are taxed, the form the tax would take would be something akin to a flat state sales tax. On average, a user of the game world Second Life has made something like $38.00 this year. Others make several thousand a month. Does it make sense to implement the same tax rate on significant transactions (i.e. to the tune of >$1 million) versus insignificant transactions (i.e. to the tune of $1.00-$200.00)?

Of further interest in this development is the variable responses of the developers of these games/worlds. The company responsible for World of Warcraft, Blizzard Inc, has taken measures that oppose the possibility of exploiting the game’s economy for real financial transactions. Of course, there are only so many measures that can be taken, and gold farming, for instance, is extremely difficult to oppose (after all, Blizzard does not have access to paypal transactions). Other MMO developers explicitly welcome financial transactions involving their virtual property, and some have gone so far as to create forums where players can sell gold or other items they have come across via PayPal or E-Gold.

Second Life goes a step beyond that by issuing an explicit exchange rate for the in-game currency (right now its something like 270 lindens=1 US dollar). To call Second Life a game would be slightly reductive: the developers leave a significant portion of the content of the world in the creative hands of subscribers. The users are limited by imagination and knowledge of the various functions of the world itself, but it is the users which create most of the actual content. Because of this, there is little in the way of universal rules. The rules are what the users provide in various locations within the world of Second Life. In terms of economy, the notion of scarcity here takes a more fluid role, one that cannot be elucidated easily. Hell, at least with World of Warcraft the presence of raw materials is somewhat determined by the developers.

These are interesting developments, and I think they only complicate the question of “in what sense are these virtual economies real economies?” If we say that they are real, in what sense do we mean that, and whom is responsible for governing their development–national governments, the developers, or the users themselves?


One thought on “Remarks on virtual economies

  1. “…these markets don’t ‘exist’ in the way we tend to think of live, active markets.”

    Indeed, and it also brings to light the extent to which our economic systems are tied into the idea of the nation-state. Which government would collect taxes on transactions made in a place with no geographic existence?
    Our highest forms of political organization become increasingly dated as the nature and location of our lives and activities becomes increasingly immaterial.

    “I presume that if these economies are taxed, the form the tax would take would be something akin to a flat state sales tax. ”

    I would say it would more likely take the form of an income tax, asking users to declare money made in-game for taxation. I don’t believe it would be possible to implement a sales tax ingame; requiring users or developers to record and report all ingame transactions seems excessive.

    Sales tax is a regressive tax; the problems you observe in your hypothetical in-game sales tax already exist with regards to real-world sales taxes.

    It seems to me that Blizzard regulates transactions outside of the game world because such transactions run the risk of destabilizing gameplay balances that have been painstakingly developed. The economies of the Diablo games ran rampant and the gameplay experiences became far different than was originally intended.

    Second Life is defined by these transactions; the gameplay experience is composed, essentially, of a series of them.

    I think you’ll see attempts to further regulate activities of significance on the internet, as they threaten the relevance of existing structures.

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