The L$ falls, and there is nothing we can do about it
Readers of these pages know that I have no formal training in economics, and a one-semester-course in macro-economics definitely does not qualify me to talk about the economy of Second Life. Thus, I’m no Castronova wannabe 🙂
But it’s hard to escape the reality of the times. When I joined Second Life, you could get US$5 for L$1000. Since a Premium account costed US$9.95 per month, you would actually receive in stipends the same amount that you spent in monthly fees, so this was a great encouragement to upgrade to a Premium account. I have used that argument in the past quite often for people who were reluctant to sign in.
The day I write these lines, the ratio has dropped to US$3 for L$1000, and naturally, the old argument is not valid any more. And every week, it seems, Linden Lab announces further measures to cut the amount of L$ in circulation (thus hopefully reducing inflation, and keeping a better US$-to-L$ ratio) ? first, by abolishing extra stipends from ratings, then abolishing dwell/traffic, then giving basic accounts no stipends at all, and so on. There has been some serious effort going on to staunch the flow of “minted money” into the resident’s pockets, and one can only assume that this will continue. In fact, for the past few days, the L$ has been remarkably stable ? until something else hits Second Life, and it’ll drop further, no doubt.
Why was the L$ so high in 2004, and why has it dropped over time? The answer is rather simple, and was hinted somewhere (I apologise in advance if I can’t remember the origin of that quote). Around 2004, the ratio of consumers-to-producers (ie. content creators, vs. people that only buy content but not produce it) was 1:1. This mostly meant that consumers did want a L$ as low as possible, while producers would like it high enough to earn the most revenue from their own products (creating amazing things take dozens, sometimes hundreds, of hours!). Since the number on each side was about the same, the Linden dollar held for a long while at a stable value.
What happened since then? The advent of hosts of new users has definitely brought large numbers of very talented individuals to SL, some of them actually quite excellent creative designers, coming from other virtual worlds, having a professional background in design, and so on. But many of the new users are pure consumers, unable to achieve the high degree of mastery and skill that makes a successful producer of creative content. Thus, while in a sense the quality of offered content has increased (to an almost unbelievable degree!), as the number of content creators has gone up by the tens of thousands, the simple truth is that the number of consumers has increased even more. There is now an estimate of just 25% producers to 75% of consumers.
This should not come to many as a surprise. As more and more people come to Second Life, the ratio of content producers to consumers is supposed to go down. Henrik Linden, the author of a blog on SL Creativity, refers that in Wikipedia, only 1% of the regular users have ever produced any content, and contrasts it to Second Life, where 75% of all users have created something in the past 30 days. What this means is that, while Second Life is unusually filled with content producers, compared to other communities (even such a rich one as Wikipedia!), the absolute number of people regularly producing high quality content must diminish over time, as more and more people join SL.
The direct impact of this very simple growth curve has benefitted producers in the short term: it means many more customers, and, to a degree, slightly lesser competition. At some point in time (50 million users? I don’t know…), we will reach a plateaux, where no new producers will enter the market ? and from there on, only consumers will flock to Second Life. More consumers, and the same amount of producers, should be good for the content creators… or not?
Well, in this virtual economy, both actively participate in the setting of the exchange value of the L$. So, as said, the producers will want more US$ per L$; the consumers, by contrast, will want as many L$ per US$ as possible. Since the ratio now favours the consumers, they will devaluate the L$ as much as possible (ie. only limited by the total amount of L$ for sale!), since that’s what they want; and producers will not be able to invert this trend, as they dwindle in number.
… but despite an undervalued L$, there is no inflation in SL
So, why don’t we have true inflation, and prices roughly stay about the same?
There are many reasons for it. One is that more competition is active. For instance, primmed hair, a novelty that earned the first creators offering this item for sale, could “get away” with low-grade products for L$500 a piece. Now you have the highest possible quality (as far as prim torture allows it!) of top-designer hair for as little as L$150. The difference is that now thousands are offering this item for sale, and thus the creators have to raise the quality of their products, while lowering the prices, to stay “afloat” in this difficult market. The consumer benefits ? it gets far better products for a much lower cost.