Alice has a dollar. A virtual economic failure

Alice and Bob are participants in an economy. Alice has a dollar.

Alice gives the dollar to Bob. In Second Life terms, that’s a user-to-user transaction.

Bob gives the dollar back to Alice. That’s another user-to-user transaction.

Repeat this sequence four more times. Is Alice and Bob’s economy now worth ten dollars? Or is it still worth one dollar?

Well, that depends.

Linden Lab will tell you that’s ten dollars. In reality, though, it depends on why Alice and Bob keep handing that dollar back and forth.

You see economic activity isn’t the movement of money. Economic activity is the trade in goods and services, not money. Money is just one of the tools that are used to value goods and services.

If Alice and Bob are just passing money to each-other without an exchange of goods and services, the economic activity – by definition – is zero, whether there’s one dollar or a thousand dollars, and whether it’s just Alice and Bob, or hundreds or thousands of other people involved.

The movement of money is one method by which we can see economic activity happening, but doesn’t constitute economic activity itself, just as we can determine the approximate size and movement of ducks on a pond by watching the ripples – but the ripples aren’t the ducks.

In any economy money moves between people, between accounts and between businesses for many reasons that do not constitute economic activity. Also, the exchange of goods and services for no money at all still constitutes economic activity of a non-zero value.

Alice and Bob might be exchanging goods or services, in which case there’s economic activity accompanying that dollar in their inefficient little economy. If so, then yes, Alice and Bob’s economy is worth ten dollars. If not, then their economy isn’t worth ten dollars, or even one dollar. It’s zero, because no economic activity accompanies the exchange.

Economics understands this, and when measuring the economies of nations, considerable effort is spent to separate out the movements of money which are not accompanying economic activity from those which are.

Granted, for any economy much larger than Alice and Bob’s it requires a lot of estimation and educated guesswork to get even remotely close to the truth, but the practices are well-established (even though they undergo continuous improvement).

For virtual environments, though, centuries of economic thought and learning are discarded, and the focus is incorrectly placed solely on the movements of money. Small wonder that the operators of many virtual environments really seem to have no idea which direction their economies are actually heading in.

Linden Lab issues further warning on virtual currency trading

In a Linden blog post today, a further warning has been given on use of third-party Linden dollar trading sites. It’s all pretty much common sense – if it looks to good to be true it probably is and if you’re asked for your password by a provider then let the alarm bells start ringing.

The introduction of a system of registration to provide alternate currency exchange services in Second Life would be a nice evolution. I’m pretty safe in saying that won’t be something that occurs in 2008.

World Stock Exchange facing legal problems?

The Second Life Herald are running a story on the Midas Bank saga, alleging that Midas have done some legal investigations around their issues with the World Stock Exchange, run by Australian Luke Connell (LukeConnell Vandeverre).


If the issues aren’t resolved and things do go legal, it’ll provide a fascinating test-case for the status of finance in virtual worlds and associated governance policies. We’ve stated numerous times that the state of financial regulation in Second Life is farcical and there doesn’t appear to be an end in sight at this stage.

I attempted to catch up with Vandeverre in-world this afternoon for comment but his status was set to Away for the 30 minutes or so that I waited around.

Stock Exchange churn continues

The near-farcical nature of the multiple stock exchanges in SL continues, with the delisting of a number of companies on the fledgling ISE (International Stock Exchange). A number of these delisted companies were refugees from the World Stock Exchange and they now state they’ll list elsewhere.

The obvious question is – why would anyone have confidence in any virtual world stock exchange or the companies listed on them, when it’s so easy to change exchanges at a whim. To be fair to the ISE, they have implemented “a policy of disclosing all CEO’s stock transactions in direct relation to their listed company”. If this is the reason that the companies have delisted, then the concern should be focused on the company side of the equation. It’s a fair expectation that shareholders know the shareholdings of a company’s CEO.


It’s been discussed in detail all over the SL blogosphere: the current situation is a murky mess full of contradictions and conflicts of interest and it’s fair to assume the churn isn’t going to improve until some fundamental transparency measures are implemented across the board.

On a related note I received the following IM overnight:

[23:41] MouzurX Wise: (Saved Mon Aug 20 01:13:14 2007) You have been ejected from ‘World Stock Exchange’ by MouzurX Wise.

His profile claims:

“I work at WSE Customer Service, am GMG PR/IR Manager and I run an investment company in SL, Wise Financial. Also, I am the CEO of Builders Paradise – Franchise.”

Aside from no explanation about my ejection, here’s one of many examples of the conflicts of interest that abound. Can you imagine someone in RL who owned a financial services company also working for the stock exchange?

Second Life’s financial underpinnings under threat?

The past week has seen some significant economic turbulence from two fronts. The gambling ban, combined with the defection of multiple businesses from the World Stock Exchange (WSE) to the International Stock Exchange (ISE) has created a fair amount of uncertainty for business in SL, particularly the native businesses.



There is some well-reasoned analysis that a recession may be on the way. Even looking at the basics makes this a reasonable proposition: less cash flowing, business uncertainty and falling land prices and the assocated consumer demand. Unless Linden Labs know something we don’t in regard to population growth, things do look a little grim. Does this pessimism extend to SL’s financial underpinnings being under threat? The gambling intervention certainly made a fundamental change to the economic foundations but the WSE / ISE / AVIX / Ginko saga isn’t likely to cause long-term ramifications as long as there some confidence from investors and businesses that at least one of the stock exchanges is a viable and transparent entity.

We’ve contacted WSE CEO LukeConnell Vandeverre multiple times during the week with no success, in order to give him the opportunity to give his views on WSE’s fortunes – something he did in detail previously. We’ll keep on trying.

(Update: an interview will appear tomorrow)

A sampling of coverage of financial goings-on in SL over the past week:

1. Mises Institute – The Coming Second Life Business Cycle

2. Your2ndPlace – Being Even-Handed About Ginko Financial’s Situation

3. Woolly Wildcat Writings – Ginko Doubles Down – Bigger Bust, or More Secure Future?

The wolves are out for WSE

Over the past 24 hours reports have started appearing around companies delisting from the World Stock Exchange and moving to smaller competitor ISE. The impetus was the theft reported last week. What hasn’t helped is the current trading halt:


We’ve had some brief IM discussions with WSE Chairman / CEO LukeConnell Vandeverre about setting up an interview in order for him to put WSE’s perspective on events. We’re hoping this will occur in the next day or so.


We’d also like to hear from SL users with funds invested on the WSE – how concerned are you?

WSE – problems?

Second Life Insider have run a story providing some information on some challenges WSE may be facing. The grid is down presently so we can’t contact LukeConnell Vandeverre for clarification but we’ll attempt to do so later in the day.

Update: Reuters are now running the story based on a WSE announcement confirming the theft.

Hope Capital Island opens

The World Stock Exchange has made another location move – only weeks after its last one.



The multi-lingual exchange options are certainly a step forward – we weren’t able to determine their operability at this stage. With the pending partnership with the World Internet Currency and support from Anshe Chung, Hope Capital certainly has some big opportunities. Capitalising on them in a way that benefits the community will be the pivotal challenge over the coming months.

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