On Tuesday, a Dutch land speculator bought a digitally re-created Amsterdam, replete with red light district, houseboats and murky canals, for the princely sum of $50,000 on eBay. The fact that this simulated city exists only in the virtual world of Second Life was hardly a problem for the buyer. In fact, that was the appeal.

Speculating in virtual land is big business in Second Life, as is selling virtual sunglasses, pets and apparel. Your avatar can hardly afford to be seen in something other than the latest Second Life styles – which seem to be crisp, tight T-shirts for the fellas and cleavage-revealing tops for the ladies; for the other life forms, it varies – nor live in some ordinary flat. Island idylls are all the rage in Second Life, as are simulated versions of the world’s hippest and coolest cities. Forget Essex. Your avatar wants a kitted-out pad in Amsterdam. This is your Second Life. Live it up, virtual worlder. Spend a little bit.

And, therein lies the secret to the economic success of virtual worlds. Unlike the inefficient real world we grumble about daily, in virtual worlds there is hope for a better future. And, when there is hope, people spend money. Some of them will even spend $50,000 on a pixelated city. Other virtual worlds provide other opportunities to spend real cash. World of Warcraft warriors may want to invest in something more practical, such as ghost mushrooms, a handy ingredient for demon slaying and invisibility potions.

While one might question the buyer’s logic, such purchases are good for the community as a whole. It’s simple, really: when people spend money, the economic outlook looks bright. In contrast to this year's forecast growth for the EU – the actual EU, I mean – of about 2 per cent, in Second Life business is booming and entrepreneurialism is thriving. According to Reuters, the number of Second Lifers with positive cash flow grew by 17.2 per cent last month to 25,365 users, and the number of people pocketing more than $5,000 per month in profit grew by nearly 20 per cent. Contrast that to my current hometown, Rome, where risk-averse banks seem to lend to young business professionals, if they do at all, more on a basis of the applicant’s surname than on his business plan. Undoubtedly, there are fewer labour strikes in these pixelated planets too, and there’s none of the economic protectionism practised by short-sighted policy makers. You may scoff, ‘this is merely a game, a far cry from the real world’. ‘Precisely’, a contented virtual worlder would undoubtedly respond.

But this is no Xanadu either. Second Life has all-too-familiar problems. As the Amsterdam acquisition shows, real estate prices have been rising at precipitous rates, nearly doubling in January alone. A downturn in the virtual housing market is very likely, the game’s creators Linden Lab warns. There is also talk of pegging the Second Life currency, the Linden Dollar, to a basket of world currencies rather than to the underperforming US dollar, a move that would be cheered by European Second Life speculators. And the virtual world’s nascent World Stock Exchange has been beset with management turnover recently. Nothing like the New York Stock Exchange’s $140 million pay-off of ex-chief Dick Grasso, mind you. Besides, it hasn’t dented investor enthusiasm as 30 new companies listed during the past month. It is this robust economic activity that has so many economists flocking to the game, testing their latest models. “It’s a Petri dish for economists,” Adam Pasick, a Reuters correspondent who has been covering Second Life daily for the past six months, says. “Virtual worlds enable economists to conduct experiments on economic behaviour in real time. What if Marx could have tested communism in advance?”

Academics aren’t the only ones studying virtual worlds. Politicians are too. With the virtual world looking a lot more like the real world every day, it’s no surprise then that government policy makers are considering some form of regulation of Second Life and World of Warcraft and Everquest business transactions. One question they are asking – should virtual world profiteers be taxed? – is further proof this is no longer a game.

But, virtual worlders, fear not. One of the top minds studying the matter is Dan Miller, who, by day, is a senior economist with US Congress’s Joint Economic Committee. He is also an avid World of Warcraft gamer, introducing himself recently as “the night elf priest who works for Congress.” He probably knows where to find ghost mushrooms. Cheap.

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Bernhard Warner, formerly Reuters' internet correspondent in Europe and senior editor for The Industry Standard Europe, writes about technology, the internet and media industries. He can be reached at techscribe@gmail.com

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