In late 2001 an economist called Edward Castronova made tsunami sized waves in the world of economics
when he published a paper claiming that an isolated place called Norrath had a currency
stronger than that of the Japanese Yen- an especially bold claim considering Norrath
had less than a million inhabitants, had only existed for about two years and didn’t exist
physically.
Yes, Norrath was entirely virtual and populated exclusively by players of the video game EverQuest.
Released in 1999, EverQuest is an immensely popular and influential massively multiplayer
online role playing gaming (MMORPG).
Set in the magical fantasy world of Narroth and boasting an impressive (for the time)
near half million subscribers at the apex of its success, EverQuest came to the attention
of Castronova at first much in the same way it came to the attention of anyone- he just
thought it sounded like a fun game to play.
However, as he became more familiar with the game, he noticed some rather fascinating things
about how the virtual economy had developed within the game.
This all culminated in him publishing on the Social Science Research Network a humorous
but excellently researched, and ultimately groundbreaking, paper titled, Virtual Worlds:
A First-Hand Account of Market and Society on the Cyberian Frontier.
By his own admission, Castronova stated, “I thought maybe seventy-five people would read
it and that’d be great.”
Instead, it quickly received over 16,000 downloads (and today is sitting at closer to 50,000).
While this might not seem like much, let’s remember context here- this was an academic
paper published on an online academic journal.
Needless to say, that number of downloads made it the most downloaded paper in the history
of the Social Science Research Network, which at the time featured almost 50,000 academic
papers, including many dozens written by Nobel laureates.
Why was this paper so fascinating to the world of economics?
As economist Yanis Varoufakis noted, “Economic theory has come to a dead end — the last
real breakthroughs were in the 1960s.
But that’s not because we stopped being clever.
We came up against a hard barrier.
The future is going to be in experimentation and simulation — and video game communities
give us a chance to do all that.”
What Castronova had stumbled upon was essentially an economist’s dream- virtual worlds the
researchers could use to analyze in a scientific manner various concepts in their field using
large data sets and real people populating those worlds.
Or as Washington Post journalist Brad Plumer succinctly stated, in virtual worlds, “The
data is richer.
And it’s easier to run economy-wide experiments in a video game — experiments that, for
obvious reasons, can’t be run on countries.”
In short, economists in academia were intrigued with Castronova’s paper and its implications
for future research.
So what did Castronova find?
After painstakingly pouring over the available data surrounding the world of Norrath, he
was shocked to discover that in real world dollars Norrath had the 77th highest GNP per
capita, placing it squarely between Russia and Bulgaria at the time.
How was this possible for a virtual world with only virtual currency?
At the height of EverQuest’s popularity, sale of in-game items ran rampant and at one
point in time a player could pretty much buy anything they wanted in-game, regardless of
how rare or powerful it was, so long as they could flash the cash to make it happen.
Although Sony, who published the game, would make several attempts to quash this practice,
claiming amongst other things that all of the items for sale were their intellectual
property, as well as outright banning players they caught doing this, the sale of in-game
items and avatars became a thriving industry on sites like Ebay.
In fact, former child actor Brock Pierce (perhaps best known as a kid for his roles in Mighty
Ducks and First Kid, and as an adult for his work in crypto currency) even started a surprisingly
successful company, Internet Gaming Entertainment Ltd (IGE), which dealt in these virtual goods
in exchange for real money.
The company maintained a rather large staff of low-waged workers who worked in Norrath
and the real world, doing things like meeting to exchange goods, as well as building up
avatars and acquiring virtual goods for future sale.
In any event, Castronova analysed over 600 illicit sales outside the realm of Norrath
on sites like Ebay and then simply compared this to the value of the item in-game in the
principle currency of Norrath- Platinum Pieces.
When he did this, Castronova discovered that the relative value of a single Platinum Piece
compared to the US Dollar was $0.01072.
While this may not seem all that much, as Castronova pointed out, at the time, “its
value exceeds that of the Japanese Yen and the Italian Lira.”
With this value in hand, Castronova was then able to roughly calculate a number of other
interesting things about the economy of Norrath.
For example, it turned out the average citizen of Norrath earned around $3.42 per hour (or
about $5 an hour today) when taking into account the value of the items and in-game currency
they could realistically acquire during normal play per hour on average.
Combining this with the estimated time extreme players sunk into the game (according to data
gleaned by Castronova in surveying over three thousands players), Castronova calculated:
Many users spend upwards of 80 hours per week in Norrath, hours of time input that are not
unheard of in Earth professions.
In 80 hours, at the average wage, the typical user generates Norrathian cash and goods worth
$273.60.
In a month, that would be over $1,000, in a year over $12,000.
The poverty line for a single person in the United States is $8,794.
Looking at players of every time commitment level, Castronova determined that, despite
the game being extremely new, the average player of EverQuest already had over $3,000
worth of sellable goods locked up in the game.
But we’re not done yet because Castronova was then able to roughly calculate the gross
national product of Norrath based on the value of the (entirely virtual) goods it produced
in 2001.
His final number?
About $135 million.
While, again, this may not sound like much, divided amongst the estimated total number
of Norrath denizens, that meant the GNP per capita of the virtual kingdom was $2,266-
a figure that, as previously mentioned, theoretically ranked the computerised state the 77th highest
on Earth at the time.
Naturally, this information peaked the interest of Castronova’s fellow economists, as did
other observations he made about the virtual world and economy he was studying.
For example, according to Castronova one of the more curious things he noticed during
his research was that, despite every effort being made by Sony to give everyone an equal
footing when the game began, financial inequality was quickly rife amongst the denizens of Norrath.
Additionally Castronova also observed how, much like in the real world, the wealthiest
players would often hoard their wealth and use their vast resources to pay poorer characters
to do all of the pointless busy work they didn’t want to waste time with, in effect
becoming pseudo-employers who kept the lion’s share of any profits made via the work of
the plebeians to themselves.
Anecdotally, Castronova would say of his own time in-game as a low level player with no
resources: “My problem is that I am under-equipped.
I have been basically naked, carrying only a simple club, a caveman in a world of cavaliers.
My poverty is oppressive – no amount of rat fur is sufficient to buy even a simple
tunic at the ludicrously high prices of the merchant biots.”
Naturally, as the game evolved, the whole “initial equality” thing also died off
for some, thanks to those markets where players who had disposable income in the physical
world could simply buy whatever they wanted for real money and enter the game vastly more
powerful and capable than a player without this option.
Since Castronova’s paper, and partially as a direct result of his work studying virtual
economies, the one time self professed “academic failure” and “schmo at a state school”
managed to leverage this to level up in real life- securing a tenured position at Indiana
University Bloomington as a professor of Telecommunication and Cognitive Science, as well as coming to
be known as the “founder of the field of virtual economics”.
And as many other virtual worlds with complex virtual economies have likewise sprung up,
economists and other scientists continue to study them, as they make great petri dishes
to observe how various variables result in changes in economy and human behavior.
Going the other way, gaming companies like Valve have taken to hiring economists to help
them manage their virtual worlds.
As economist Robert Bloomfield notes, “If you’re creating a game with 100,000 users,
with things that they can buy and sell, you need an economist just to help you tweak that
system so that it doesn’t spin out of control.”
As for Castronova, he concluded his ground breaking paper by waxing poetic about the
potential virtual worlds could have with the application of new technology, stating
The impact on Earth society is hard to overestimate.
With the development of voice technology, communication in Virtual Worlds will move
from cumbersome chat to telephone-like conversation, thus greatly enhancing the Virtual World as
a place of social interaction.
Families living thousands of miles apart will meet every day for a few hours in the evening,
gathering their avatars around the virtual kitchen table and catching up.
And the day of driving to the store may well be over.
Earth roads will be empty because, instead of using them, everyone will be sailing across
the azure heavens on their flying purple horses, to shimmering virtual Walmarts
in
the sky.