Funny money

Online universe Second Life has been lauded by the serious business press as a glittering land of opportunity, a rapidly-expanding economy where fortunes can be made by game-players buying and selling land and turning tricks in return for convertible Linden dollars.

But when venture consultant Randolph Harrison and a hedge fund manager friend sunk $10,000 into the game in an attempt to earn a quick buck from apparent arbitrage opportunities in mis-priced exchange rates, the truth about the supposed economy soon dawned: you may be able to earn plenty of Linden dollars relatively easily – even accounting for the massive counterparty risk faced in all transactions - but if you try to cash out at a profit you’ll find the exchange market rates set by the game’s operators quickly moving against you.

“We concluded that we weren't playing in a market at all," says Harrison in the Capitalism 2.0 blog. "We were suckered in by a classic pyramid scheme, albeit one with a pretty new user interface. New entrants plough real money into the game. Only the guys at the top can extract that money with any volume (and in excess of the risk-free rate of return). Attempts to move anything more than token amounts out of the game generally result in real-returns of almost exactly the prevailing USD deposit interest rate.“

The allegation that Second Life is nothing more than a massive ponzi scheme arrives just as business interest in the virtual marketplace surges. ABN Amro recently set up a branch in Second Life, joining IBM, Toyota, Adidas and Reuters in the commercial colonisation of the space. The World Economic Forum and business bigwigs at the Davos hot air convention have also gotten in on the act, setting up their own avatars and hosting an alternative meeting in the parallel universe.

Harrison’s account of his experience should  provide a necessary corrective to this “irrational exuberance”. Big business needs to get real and leave the funny money where it belongs - in the fantasy economy.