To avoid getting bogged down in loaded terminology, let's take a moment to peel away some of Second Life's marketing, their romance, and their dream to examine exactly what Second Life really is. Second Life is software and an array of databases owned by Linden Lab that store and retrieve 3D geometry, textures, and other kinds of data to be accessed via a 3D user interface by multiple users on the internet. Like any data storage and retrieval system, users can store whatever they want on this database including 3D pie charts, graphical representations of live data, or surreal streams of swirling color and light. The possibilities are endless.
But what Second Life residents mostly enjoy creating on this platform are virtual representations of the real world, or a slight fictional variation of it. Residents create cities, suburbs, farms, oceans, airplanes, automobiles, cottages, furniture, firearms, sex toys, pets, and many other things we would find in the real world. But they don't stop at simulated property as they also use Second Life as a medium through which to they can express themselves, socialize, debate, or even fall in love.
The more SL residents make this platform appear "real" the more we may fall into the trap of using incorrect models and analogies comparing Second Life to the real world. After all, an explorer in Second Life will immediately notice simulated land masses with different regional areas that host different SL cultures such as furries, goths, or Gor. These communities band together to achieve common goals and repel opposing interests (did somebody say war?) Groups are formed where informal or even occasionally formal rules dictate their behavior lest they are asked to leave. The land, the social interaction, the governance ... it really does remind us of our everyday lives.
So why then doesn't this world have a government? Well, I guess it depends on your definition of "government." In informal terms, pretty much any organization that imposes rules over any group is, in a matter of speaking, a government including your own group of friends. On a slightly more formal level, the famed Neualtenburg project founded by Ulrika Zugzwang and Kendra Bancroft featured three governmental branches including an Artist's Guild, a Representative Assembly, and a Supreme Court. But Neualtenburg was never Second Life's government.
These highly localized notions of government just don't get to the crux of the Nation Party's ideals. To the Nation Party, SL government goes all the way to the top, right to Linden Lab itself. Rather than seeing Linden Lab as a corporation, this party believes LL should be viewed as a ruling body with all the responsibilities of a government "by the people, for the people." For example, a failed 2005 effort by Jarhyn Wilde to submit a user "Bill of Rights" included demands such as Freedom of Speech, Expression, Press and other mainstays of a free society that are beyond what a corporation would be required to offer. Many others wish to dictate Linden Lab's hiring practices, how they promote people, with whom they contract, and their employee policies. Others have gone so far as to propose a completely democratic rule over Linden policy that would essentially amount to allowing Linden Lab's customers to make corporate decisions.
I see this as a confusion in scope, where "governments" (and I'm using this term very informally) are contained by other governments, like a set of Russian matryoshka dolls. In the Real World we could start an analysis of governmental levels with the laws of physics ... by far the highest authority there is. Beneath that we have International law, which (more or less) presides over the governments of sovereign nations, which go on to oversee state and local government which contain mini-informal governing bodies such as corporations and clubs.
Given this model Nation party members see Linden Lab as a sovereign nation, but I think this view is flawed. As real world colonists arrive upon an unoccupied patch of land it's understood that no single human created that land. It is therefore out of fairness that governments are formed to determine how they will live and allocate resources in this newly discovered country. A sovereign nation is born.
But in Second Life we do have a creator and owner; it's a corporation ... Linden Lab. Linden Lab designed the software, implemented the framework, spent the (considerable) capital, hired the employees, and owns servers. Second Life residents did not happen across Linden Lab's servers as if they were some kind of natural resource which they must now determine how to allocate. They set up their home within Linden Lab's realm. It would perhaps be a better analogy to think of resident-driven governments like Neualtenburg as the nation, and the policies of Linden Lab as the universe's laws of physics. Your avatars can meet, discuss, vote, and legislate all they like, it's not going to change anything.
If this seems oppressive or unfair, then it may be because you're still staring at Second Life's compelling 3D user interface and seeing something other than a privately owned database. Users of IRC, Facebook, Myspace, and other online social environments never get around to demanding a government. These applications just don't LOOK like something that should have a government. But at the core the systems are identical to Linden Lab when it comes to government responsibilities ... they have none, only corporate responsibilities.
Don't get me wrong. I'm not trying to tell you to shut up and take whatever Linden Lab shoves your throat! Residents have real power to change things. But it won't happen by treating Linden Lab as a government but rather as a corporation vitally interested in staying profitable. Feature and policy requests by residents will be taken very seriously if they fit in with Linden Lab grand scheme and if they perceive the changes to be potentially profitable. Under more hostile conditions, a boycott and an appeal to the press could shake LL into corporate action. Finally, residents always have the option to take Linden Lab to court if the company's policies may be considered unlawful. None of this makes Linden Lab a government, but it is a real way users can influence their virtual world.
So folks can play government if it pleases them. At best the exercise will be fun but ineffective. At worst the faux governmental airs will add a cumbersome and unnecessary layer of formality that will distract from the free-market relationships that exists between Linden Lab and residents ... company and customers.