[music playing] Usually when people talk about virtual economies, what they mean are game economies.

They'll create a bunch of markets that allow people to trade things that are useful in the game and they'll pay real money.

Something like EVE Online has around half a million players.

There are giant spaceships that can be bought for $10,000 US.

And then there are smaller ones that can be bought for a few hundred or a few thousand.

And the economy of that virtual world is worth around $36 million.

How many people are in virtual economies generally?

Probably over a billion at this point.

[music playing] Real world economic theories definitely can be applied to virtual worlds.

Economics is all about scarcity and the allocation of resources.

Just about every large game ends up having a virtual economy, whether the developers want it or not.

There's scarcity in virtual economies, but it's an artificial scarcity.

Once a developer creates a fancy sword, they could, in principle, create any number of them at virtually no additional cost to them.

But to make that sword special, they're going to limit how many there are.

These can be very complex economies.

And if you think about it, you've got hundreds of thousands or millions of people who are all vying for the same goods and services.

And so these can be quite complicated.

The game developers keep a very close eye on the economy in these large games.

And many of them have hired economist to help them keep the game in check.

They want to keep a steady rate of growth, but if they allow the economy to grow too quickly then all of a sudden it becomes a lot less fun because you don't have the scarcity and the challenge that people are looking for in any game.

If you go back to the history of social gaming, in the 1970s there were players who would sell accounts for items to other players for real money.

There was a graphical game in the 1980s called Habitat that had a pretty robust virtual economy.

And in the late '90s, two MMORPG games came about.

Ultima Online was one of the first, and EverQuest by Sony was another one.

And those were the ones that really started the business of making money off of virtual economies.

So essentially, some people quit their day jobs and full time went about collecting virtual items and then reselling them for real money.

So basically any mechanism that you use to acquire virtual wealth within a game can also be a mechanism for making real money as long as you have that crucial component of being able to figure out a way to get the player who wants the valuable item to transfer you real money in exchange for it.

They do it for two reasons.

One is to acquire status by having a very rare prestigious item that makes their character look neat.

And the other one is that they'll spend money in order to buy things that help them advance their career in the game.

So I think it's just inevitable that when you have the choice between spending a couple of hours doing something you don't really want to do, you will trade real money in exchange for a virtual artifact.

I think the biggest misconception about virtual economies is that the virtual objects are essentially imaginary and have no value.

And I think you should compare it to something like a person who plays golf and is willing to spend a lot of money to buy golf clubs because it's an enjoyable leisure activity.

What do they get out of it?

Nothing.

Maybe walking around and talking with people.

But essentially I think a lot of people that participate in virtual economies are doing the same thing.

And I think there are a lot of players in video games that don't want to buy power ups.

They don't want to participate in the black market of virtual economies.

They just want to play the game for the regular subscription fees.

So often it's a pretty small percentage of players that are willing to pay a whole lot of money, and those are the ones that, I think, are driving, primarily, the virtual economies.

The remarkable thing about virtual economies is that they don't exist in a bubble.

There's inequality, there's imbalance, there's difficulty regulating how much currency is flowing to who.

And those are problems that face video game players just as well as office workers.

Gold farms are these kind of sweatshop operations where players are almost chained to their keyboards playing the game and, you know, chopping away at monsters or trying to harvest resources that they can then sell and turn it over into real world currency.

And in China in particular, there have been instances where prisons have actually been found to be running gold farms.

And they make the inmates play these games as a form of labor, that then the guards will take the fruits of.

So with gold farming, you're really treating a lot of people badly.

And it creates a situation where not only can a virtual experience be corrupted, but actual people can be harmed.

The virtual economies as they exist now are only regulated by the game designers.

But now that virtual economies are actually amounting to tens of millions of dollars in real money, lawmakers might want to step in and say that gold farming can't happen or virtual economies need to be more harshly regulated.

The US already has a Gaming Commission that controls what happens with casinos.

And a similar situation could come into effect with video games to ensure that players aren't cheated out of things that they've worked to earn.

So some games have made the decision that they won't allow any in-game purchases at all and the player really has to go through the whole experience.

It is sad that these virtual economies have stumbled into such a position when they didn't really mean to be initially.

But really the situation is that any kind of group of flawed humanity clustering around a single currency or valuable item, there will always be those who want to cheat the system.

There's always going to be a group of people who are willing to invest in the technology needed to run these big, immersive game experiences.

But I think more and more what we're seeing are smaller screens, people interacting in a very casual way.

And I think that is going to continue and blossom.

The questions facing virtual economies in the future are things like, should they be connected to the real economy?

Are video game objects worth real money?

How will in-game objects be taxed?

Will the government step in to economies like World of Warcraft or EVE?

And all of these things really can't be answered until they happen and the legal precedent is set.

GREG LASTOWKA: I think the virtual economies are only going to grow.

If anything, we're going to put more value on intangible items.

And I could see the development of virtual economies being very important to our technological future.

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