That's not the Second Life economy!

This week Linden Lab published a set of economic data for Q4 2009, and for 2009 as a whole. After going through the data in detail, and discovering at least one important typo and one important calculation error, it looked like we were going to have to recheck every figure before presenting them.

That's a lot of work, especially as the data published in the quarterly/annual reports doesn't follow the same definitions as the ongoing statistical feeds or is not represented in them.

So we thought, well sod that for a game of soldiers. Instead, let's talk about the report's claim that the Second Life economy has grown 65% in 2009 over 2008, and why that's just rubbish.

Let's look at what Second Life user-to-user transactions represent. Any time one or more Linden Dollars are transferred from one user to another, that's a transaction. That includes putting money into your Xstreet account (or changing your mind and taking it back out), giving change if someone has overpaid, and so on.

Imagine you and your partner are tasked with each selling a box of 50 candy bars for a dollar each for fund-raising. You pay him a dollar, he gives you one of his candy-bars. He pays you the same dollar, and you give him one of yours. Rinse and repeat.

At the end of the process, you still have two full candy containers, and the total economic contribution of the process is one dollar (which can be written off). However, in Second Life's user-to-user transaction figures, that would appear as one hundred dollars of activity, even though nothing has been gained.

You can see that principle at work on television in the 2006 cartoon My Gym Partner's A Monkey (episode: Grub Drive), or in the 1972 Mexican television series El chavo del ocho. Never let it be said that an education in the classics is a waste.

It's uncertain as to what percentage of existing transactions represents zero-sum activity. Probably most of the Xstreet sales figures for starters, since money has to be moved backwards and forwards between accounts for that.

For myself, about L$120,000 per week on two of my accounts, for the same reason that corporations and organizations have multiple internal accounts for tracking money, or that you have a separate cheque and savings account that you move money between occasionally.

Under Second Life's user-to-user transactions, those internal movements of money would all be counted as well. Moved some money from under your mattress and into the biscuit tin? That counts too. Even Linden Lab used to insist that user-to-user transactions were worthless as a measure of the economy.

Now, Second Life has some unique economic conditions. Assorted nations all scramble around trying to calculate the total value of goods and services within their economy for a given financial period, so that the currency supply can be adjusted - a fraught process of calculation, divination and guesswork. The growth or decline of the Second Life economy, however, can actually be determined from one particular metric alone: The total amount of currency that is freshly-minted in any economic period.

This is because users and the wealth belonging to users exists primarily outside of the Second Life economy. Value-interactions are on a foreign-exchange footing, rather than a domestic-market footing. Currency is supplied to meet a demand for new currency to pay for goods and services.

Linden Lab creates currency in a few ways. One is paying users for goods and services for itself, another involves they payment of premium-account stipends, and the third is through Supply Linden which is a piece of software that creates currency on the Lindex exchange if (and only if) a purchase order cannot be satisfied with an existing sell order.

Sum those up, and you have a dollar value for the growth in value of available goods and services in Second Life for the period. Now that's the Second Life economy.

Compare this with user-to-user transactions: In my user-accounts (including trust accounts), I've got just about one million Linden Dollars. Now, for accounting purposes I'll move them around. Bam. User-to-user transactions jumps by one million Linden dollars. Bam. There it goes again.

Did I purchase any goods or services or in any way contribute to the SL economy? No. I just juggled some money around so I could keep better track of certain budget items that may or may not actually eventuate (and will themselves be counted among user-to-user transactions should they come to fruition).

That's not the Second Life economy; That's me being a lazy bookkeeper!

The data we actually need to figure the growth or decline of the Second Life economy is not really readily available. The data used to be, but Linden Lab stopped publishing it.

Over time, we're looking forward to seeing some meaningful quarterly and annual economic metrics being used to measure growth or decline, rather than whatever just happens to have gone numerically upwards at the time.

[Consider checking out Hiro Pendragon's take on the "65% growth"]


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This article was originally published on Massively.