Is the Virtual Economy Contributing to Our Real World Recession?

Edward Castronova, the academic who pioneered the study of virtual world economies, makes a very provocative argument on Terra Nova: Essentially, that the virtual economy is contributing to our real world recession. Castronova isn't just referring to virtual worlds, but defines the term this way:

Let’s construe the notion of “virtual economy” quite broadly: If you receive an experience by yourself through a machine that runs on digital technology, without doing or buying anything physical (other than press a few buttons), it’s virtual.

Because so much of our daily activity is now virtual (so defined), we're less inclined to spend our money on physical goods, and consumer spending is a main indicator of a healthy economy. But virtual activity can impact our spending patterns in interesting ways. For instance:

People who spend time online don’t have to worry about what they are wearing. Suppose that some percent of a given day can be spent in pajama’s, the rest must be spent in decent clothes. For decent clothes, you need a whole and varied wardrobe. For PJ’s, you need a few comfy ones. Now increase the amount of time that can be spent in PJ’s. The demand for decent clothes falls, if ever so slightly.

That seems totally plausible. Consider activity that's more explicitly virtual: Facebook social games, which are played by roughly 200 million people, and virtual worlds/MMOs, which in the West, easily account for over 50 million regular users. That's 250 million people who are devoting their leisure time to harvesting virtual farms, fighting digital dragons, chatting with avatars, etc. While doing that, they're generally not buying movie tickets at theaters, shopping at malls, going on vacations. So again, consumer spending takes a hit.

I don't totally buy Edward's thesis, or rather, I think it needs enhancement: For example, the Chinese economy is booming, even while the virtual economy there is far, far larger than ours. (Virtual world and MMO usage in China far outstrips the West.) So virtual economies don't always contribute to real world recession. However, the Chinese economic boom is due in great part to the country's emerging middle class, which is still purchasing consumer items. With Western economies, where the basic necessities and modern comforts are already accounted for, it's likely, as Edward argues, that more and more of our spending will be virtual, and less about physical products. In any case, read all of his essay here.

Image from the cover of Edward's book, Exodus to the Virtual World: How Online Fun Is Changing Reality.

Comments

[Justin Bovington]

Interesting, but I think the shift is towards new and interesting patterns of new behaviour: a change that's happening faster than we can compute and absorb.

It won't mean the end of 'decent clothing', but it could be the demand for 'decent Pj's'.

It will mean new opportunities for entrepreneurs to develop new markets, products and services.

The ad world, product developers are all now building their future ideas from the virtual perspective: FB, XBOX and WOW as the major cultural influencers.

A generation is emerging, who's sphere of exposure hasn't come from traditional controllable media: Music, Film and TV. The problem is, the people who are in control, are still that traditional media generation. Or as David Puttnam said:

"We're in a world where 50 year old men, tell 40 year old men what to think, and they in-turn, make the 30 year olds do that work".

So the question, is how far out are these predictions. 10 years, 20 years or 30 years?

[Arcadia Codesmith]

I find the other half of Castronova's thesis interesting -- that in order to compete with virtual experiences, the real world will have to become more fun and compelling.

I love the virtual world, and if it serves as an impetus to make the real world more connected, engaging and entertaining, I love it even more.

[Nan]

Sounds like another lame attempt to throw the worlds problems at the feet of American consumers. If we don't BUY BUY BUY, we hurt the world! What a bunch of nonsense. Maybe he should consider the reality of post-consumerism.

[LokiLoki]

Edward mentions that you dont have to worry about clothes, but you do. You spend alot of time and money getting your avatar to look right and in some virtual spaces you may want to wear certain stuff.

Along with things like mesh and the amount of time creators spend now making these amazing virtual objects of desire, can we not expect the price of virtual goods to rise in the next year?

[Rin Tae]

I am not sure I can agree with this thesis. Virtual world economies are nto virtual economies as the trade that is going on on those world is (especially on SL) very much tied to RL. Despite what LL has written into their ToS, L$ have a RL value and the RL money we spend here goes to creators and fills their RL pockets (to some extend at least) and make sure, that the LL employees are paid. The same goes for online games where people pay subscription fees etc. This money too is used to pay for very much non virtual equipment and work.

Besides, the size of any virtual economy .. or all of them put together .. is not big enough to even add half of a percent to the overall economy of the countries most of it's participants are located in. So it's impace might be rather small.
So rather then taking money out of RL economy into a virtual one, it is more of a different way to do the same. The good might be virtual, but the economic transaction is (indirectly for the msot time) very real. It all stays in the economy just the 'market' changes.

I would have to read the whole thesis I guess, but the author might have overestimated the impact of virtual world economies, overestimated the ammount of money the general user pours into it and also overestimated the number of people who develop a addiction that is strong enough to shift their consumption pattern in such fundamental ways as to stop buying clothes etc.
The fact of any virtual world economy being a part of RL economy and as much part of the GDP as anything else (SL means profit for LL and LLs activities to create, maintain and grow SL adds to the GDP) on the other hand seem to be underestimated.

But to kow for sure, one would need to read the entire thesis and I have not done so so far.

[Corcosman Voom]

"nominal GDP was estimated to be $14.3 trillion in 2009" http://en.wikipedia.org/wiki/Economy_of_the_United_States

That's still a large number. From the same article, 70% of that is consumer spending and government spending on health care.

Virtual activity might have a fractional effect on discretionary entertainment spending but I would imagine that to be a very small fraction. And it may well be neutral or positive, don't FB social gamers spend money on those games? (I don't know if that is correct.)

[Hamlet Au]

About 10% of social game players spend money on them -- buying virtual goods. A larger percent earn virtual goods by taking offers, such as marketing surveys or even doing crowdsourced real world work tasks.

Consider what happens if you spend more time online: not only do you buy less clothes, you probably drive less, which means gas sales go down, which means car sales go down (we saw what happened with Detroit), etc. etc.

[Rin Tae]

*Consider what happens if you spend more time online: not only do you buy less clothes, you probably drive less, which means gas sales go down, which means car sales go down (we saw what happened with Detroit), etc. etc.*

And then the rest of the oil will last longer as it is not burned in cars and if now the server farms are going to be powered by renewable energy sources the climate might be preserved .. ^_^ .. but jokes aside, the point is, that in order to really have a impact on the economy, the general user of virtual envoiramants would not only have to spend several times the ammount of money they are spending now, but also the number of users would have to go up significantly. Most likely up to the point where 20% or more of the population of the countries were virtual envoiraments are used mostly don't go out of their homes anymore and starve.

But this would be rather drastic and only servs as a exammple for the point that virtual activites that are not related in any way to the RL economy not only don't exist, but the overall size of the virtual world economies is too small to create any significant impact.

Money spend on a virtual activity is still real and has to be earned and while spend or earned it is added to the normal economic money transfer .. the difference is that the money is not going to the gas station but to a software developer or virtual content creator. It is bad of the gas station and good for the software developer but economically it is entirly the same.

The difference is, that in future the software developers will earn more money then people working in gas stations but this is not only already here but also nothing new. People spend money on different things and new professions push out old ones but for the economy as such .. nothing changes.
The ammounts of money flowing form one point to the other is always the same and is always part of the economy.

[Caliburn Susanto]

I've read the book (a year or two ago). Like Arcadia, I think the other premise, that people will become less tolerant of drudgery and insist that the world, and workplace, become more fun is more appealing and plausible.

As far as affecting recession, no. Globally and even nationally, gaming and virtual world spending is not pervasive enough to affect significant societal changes.

However, on a personal level, it has a definite affect. I, for one, socked away more cash into savings in the 3-1/2 years I was obsessing with Second Life® than I ever had in the same period previously. Because I like to shop for recreation I often spent a lot of money on goods in First Life that I had no need for merely for the enjoyment of consuming. I found that accumulating digital goods in SL® gave me much of the same satisfaction for a tiny fraction of the cost, so I wound up with many thousands of dollars in savings I would have otherwise splurged. Digital crap is still crap, but it's cheap crap. :-)

[smiles large]

pointless dichotomy

[Nyoko Salome]

;0 s'a bit too 'trickle-up' for my personal 'voting' beliefs, but sure... i've certainly supplemented a number of movies i would've seen first-run (if theater prices historically have been so exorbitant) otherwise buying (or 'investing in' ;0) my sl inventory. better to wait for basic-cable replay or library check-out, anymore!

but as i say, i wouldn't base my voting principles mostly upon it. (and my voting includes my everyday shopping, the 'buy blue' ethic somewhat - where you shop most everyday are political donors themselves; it's important to keep that in mind. you vote everyday with your money! :)

[Nyoko Salome]

p.s. to say, seeing as how i'd best want to spend my extra money on entertainment (movies/music/etc), it is unfortunately these artists - i audaciously including myself and all other sl/otherverse artists along with them ;0 - are the ones penalized during economic r/depressions. i know, it sounds 'so liberal' - wanting to take care of myself and other artists, lol. ;0 but i don't know much any other better way to make a life for myself... how is that any different than anybody else?? :0 somehow this american 'elitist' bridge must be crossed and burned... lol, poor starving artists -cannot- possibly 'elitist!' ;0

[Ignatius Onomatopoeia]

I found Castronova's Exodus compelling and entertaining reading but I didn't accept the governing claim. I liked his earlier Synthetic Worlds better, to be honest.

The pushback against virtuality from its very users is going to be stronger than Castronova thinks, unless he includes agumentationist tech (my students' constant texting puts them in another world or at least two mediated places at once). It's been said before, but US Millennials are not immersionists: that's for geeks, in their view.

Maybe this demographic will be immersionist in China?

And who knows what would happen if we get photo-realistic VWs that vault across that Uncanny Valley? They might be the ticket to the exodus Castronova predicts.

Like Caliburn and Arcadia, however, I hope that Castronova's secondary one--that VWs will lead to more fun IRL--comes to pass.

I still want that flying car and trip to an orbital Howard Johnson's.

[Adeon Writer]

Well, the best thing for the real world is to have a little bit of a rival, right? ;)

[Komuso Tokugawa]

A completely pointless "thesis" considering Fiat currencies, which run the RL "economy" (wtf that actually is [emphasis on is]), are as virtual as the L$.

Quantitative Easing anyone?

or maybe you should just read http://www.rollingstone.com/politics/news/17390/232611?RS_show_page=0# for insight into how virtual finance is practiced in the real world;-)

[Ciaran Laval]

I fail to see how this is any different to the invention of radio, television, record players, games consoles and video recorders. All of those allowed people to spend more time in the home in their PJ's.

[Ann Otoole InSL]

Be the character.
Be the movie.
Be the fantasy.

Simple really. A lot of people yearn for this type of entertainment. And it is a force that is unstoppable. So you can either adapt and profit from it or be a Luddite. The people whining about it are Luddites trying to get the government to ban the inevitable. Excuse me while I go watch some more Vocaloid hologram concerts. They are cool and fun.

The tide is becoming a tsunami. Either learn to surf it or get wiped out.

[Komuso Tokugawa]

Here you go:
http://www.youtube.com/watch?v=IGYAhiMwd5E

[Arcadia Codesmith]

The music industry is an obvious example where virtual distribution has had a profound economic impact on a sector of the economy.

And the consequence is not just that people are shifting their spending to the new distribution model. The consequence is that overall spending on music has taken a nosedive.

It's not mere displacement. It's reduction.

Castronova may be overstating the impact, but it's NOT trivial. The fundamental nature of the US consumer market is transforming, and I have serious doubts that any political party is going to have significant impact on that change, no matter how clever their slogans.

The virtual economy isn't the whole story, but neither is it irrelevant.