Sunday, March 27, 2011

Thoughts on Synthetic Worlds

Edward Castronova, an economist at Indiana University, is perhaps the only academic who has seriously studied the economic implications of virtual reality. People, through avatars, have recently begun to conduct economic exchanges through games and other online media. Mr. Castronova has set himself the task of exploring the consequences of this new phenomenon.

Mr. Castronova observes that the actions that occur in these virtual worlds are real, although the means used for acting are not; teamwork, exchange, and contracts are all found in these virtual worlds. From this Mr. Castronova concludes that because people voluntarily choose to spend their time in these worlds, we must take them to be having fun; therefore, as a matter of practicality, we should aim to re-orient the real world to this virtual one so that people in their normal lives will no longer have cause for escape and, possibly, despair.

Mr. Castronova has also made some more substantive contributions to this area of his research, in particular the costs of inflation (mudflation) and the speed of reproducibility in "goods." But there is so much more to this virtual reality! For one thing, we notice that these worlds operate peacefully without the enforcement of explicit rules. Basic human motives, namely greed, avarice, and power, are still present in these worlds, but the desire to transplant these manners into the "image" of one's avatar results in a setting conducive to voluntary exchange.

More importantly, however, is the question of transaction costs; it would appear that they would be reduced considerably in a virtual world. What does this mean for economic efficiency? We know that these worlds are consciously designed, and that the ways in which people can conduct exchange are restricted by boundaries established in advance of any synthetic interaction. What does this imply for the impossibility of socialist calculation? A world with negligible (approximately zero) transaction costs in a centrally planned economy would seem to trivilialize the importance Austrians assign to the market process.

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