The SL economy, explained

I've seen a few people call the SL economy a pyramid scheme, and I have to admit I've begun thinking about it in those terms, but I think there's a better way to explain it.

It has some features that a pyramid scheme would also have:

1) The top tier (LL) earns the most
2) The top tier publishes factual but incomplete information about the prospects of earning money
3) There are people near the top who got there early and likely couldn't get there if they started now

But I'm reluctant to call it a pyramid scheme because it doesn't operate like a pyramid scheme (lower tiers paying upper tiers), and it's still possible for someone entering now to be successful.

I think it's better to think of the SL economy as a round-robin. It works like this:

Imagine six residents sitting in a circle. Resident one takes $10 out of his pocket and buys Linden Dollars (say, 2600 of them). He could hand it to resident six to his right, and resident six could then cash out, but instead resident one gives it to resident two, to his left, who passes it to resident three, who passes it...you get the idea. Resident six still ends up with it, but it passes through everybody's hands. Resident six cashes out, receiving $10.

LL would say there was 13,000L worth of resident-to-resident transactions, and that one of those residents had a 2600L positive cash flow.

A better explanation would be that $10 was put into the system and $10 was cashed out. One resident saw a $10 loss and one resident saw a $10 gain. The size of the economy, as reported by LL, is $50 only in an abstract sense. There was only $10 in the system.

Now let's suppose that two of those residents paid $5 tier in Linden Dollars (1300L) to other residents, one paid $5 tier in dollars to another resident and two of them (including resident six) paid $5 tier in dollars to LL. Further, suppose the resident landlords pay $4 tier to LL in another round-robin, keeping $1 of the $5 they charged the tenants.

Now $20 is being put into the system (two more residents are spending more linden dollars than they are earning), and $15 is being spent outside the system. LL gets $22 of this (3 times $4 plus 2 times $5).

LL would say there was 15,600L worth of resident-to-resident transactions, and that one of those residents had a 2600L positive cash flow, and two of them had a 1300L positive cash flow.

What actually happened was $13 was cashed out and $35 was spent, for a net loss to residents of $22.

Of course it's more complicated than that, but this is basically how I see the SL economy. Worse, of the $35 spent, $30 was likely spent chasing the myth that there's money to be earned. I wrote about that here:

http://nwn.blogs.com/nwn/2009/07/derezzed.html?cid=6a00d8341bf74053ef011570e3d3d7970c#comment-6a00d8341bf74053ef011570e3d3d7970c

life is just one big dissapointment

The pyramid scheme complaint comes, not from the structure of the economy, but from the perception that the majority of US$ coming into the economy (ie, used for L$, not for tier) comes from new users. If true, this would be dangerous because the supply will dry up at some point.

The fear that a lot of that money is spent on failed endeavors is another aspect of this. The question is, does SL have a definition of success that includes regularly paying in money from your own pocket for L$ (not for tier or rent)? If not, it needs one!

The thing is, that's exactly the way the physical economy works. Consider the parable of the $20 bill.

A man comes to a town and stays in a hotel, and tips the porter with a $20 bill, the porter buys a pizza, and gives the pizza delivery guy the $20 bill... after several rounds, the original guy gets the $20 back in a game of poker, and goes up to his hotel room, looks closer at it and burns it... because it was a forgery. But that forged $20 bill was worth, during the day, a couple of hundred dollars in real goods and services.

If the residents got what they paid for, there was no loss by any resident.

Damnit, Chris, now you're saying stuff I agree with.

I will agree with the OP that LL's methods for reporting how much money flows through the SL economy is dubious at best, and fraudulent at worst. The only real measures that can be taken are:

On the inflowing side, cash injection. This is people buying L$, paying Mainland tier, Buying Premium memberships, AND paying others directly (not in-world with L$) for in-world products or services, such as making a PayPal payment to a landlord for rent, or paying with VISA to buy something on XStreet-SL.

On the outflowing side, cash withdrawl, we have people cashing out L$ earned in-world (including stipend payments received for members), LL receiving Tier payments, AND the deposit into a bank account of funds received from external sources for in-world products or services, such as cashing out PayPal payments received by a landlord for rent, or USD funds paid with VISA to buy something on XStreet-SL.

Note that LL's economic measurements do NOT reflect these inflows and outflows accurately.

But I disagree that it resembles any sort of pyramid scheme.

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LL's direct part in this is no pyramid. It's a straightforward service providing business. How they MARKET that service, and the claims they make to lure people to buy more, are questionable, but the service itself is not.

LL gets land tier and Premuim Membership dues as their means of collecting fees for server space rental and services provided. This is NO diferent than people paying monthly or annual fees to a website hosting service, or any other on-line server-based service. What you do with the space is up to you - run it as a profitable business, or write it off as an entertainment expense, like the cost of running a fan website for your favorite TV show. LL's interest here is as a server space provider. Or a landlord renting multi-use zoned space in downtown, that can be a business or an apartment or whatever the renter wants to use it for.

LL also gets a cut of certain transactions: They collect a fee when L% are purchased, and when L$ are cashed out. They collect a small fee for each xstreet-SL transaction.

So, any funds that go to LL directly as mainland tier, or that filter through private sim owners to pay that sim owner's monthly maintenance fees on their sim, or to pay transaction fees for services provided in-world, are basic service provider transactions. The service provider provides servers and simulators and a method for adding funds to the economy, taking funds out, and making purchases, and gets paid for that service.

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When someone runs a business in SL, weather they intend to make a net profit or not, they have the same issues as most real-world businesses:

They need a location to sell from. This may be as simple as XStreet-SL listings, or as complex as multi-sim purchases. Either way, the small fees taken by LL for transactions on XStreet, or the larger fees charged for land tier, are part of the operating overhead expenses fo that business endeavor. No different than rent paid on a store front and utilities bills and banking fees paid in RL.

They usually need someplace to make their merchandise. This may be a free public sandbox (which someone else is paying the cost for), or may be a small parcel of land where you stand while you concentrate on scripting, or may be a client-owned parcel where you're building for someone else, or may be part of your residential parcel, where you stand while you make things. As with the store location, this is a cost of doing business.

The merchant needs to advertise their product in some way. Maybe just by being prsent in a mall and having signs up, or by being searchable in XStreet-SL. Maybe by taking out ads. Again, it's a cost of business.

You usually have only minimal materials costs. Texture uploads, for the most part, and maybe uploads of sounds and animations. Again, it's a cost of business.

You spend effort doing whatever it is that you're selling. Weather that is making clothes, or making textures, or coding scripts, or being an escort, or being a sim manager, or a club bouncer... You hopefully add value with your effort.

People then hopefully buy what you offer for sale. If you have decent quality goods or services, make them findable, and price them right, you hopefully make a profit. If the market for left-handed widgets is already swamped, and yours is no better than anyone else's, you either need to make a better widget, or find a better thing to sell.

There is no magic money machine here, where with no skills, little up-front costs, and little effort, you can rake in the bucks.

I still see no pyramid here...

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One can argue that buying whole sims at auction, carving them up, and reselling the land at a small (or extortionate) profit is a racket. Or that buying parcels from others at low prices and selling higher is... But is that any different than real-world Real Estate investments? There can certainly be crooked operations, such as an investor using bots or other means to scoop up land cheaper than normal, and then pricing it extortionately high. But that is a matter of a lack of regulation, and not a flaw in the concept of "virtual land" itself. When a private sim owner buys a sim or two from LL, incurring startup costs that they pay, and then rents parcels to others who can't afford a whole sim themselves, that is no different than an investor building an apartment complex and renting the apartments.

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If anything is "wrong" in the LL economy, it is that LL hypes it with bogus figures, trying to make it look bette than it is, and that LL refuses to regulate and mediate resident-to-resident disputes. In the real world, if a landlord evicts you, the tenant has certain rights, in terms of advance notice, refund of advance-paid rents and fees, etc.. LL offers no such protections if a sim owner pulls out, leaving their tenants homeless.

It can also be argued that changing the rules on how land can be used, and forcing people to relocate, as has happened with the Openspaces sims and now the Adult Content forced moves, is a disreputable business practice. But not a pyramid scheme.

The problem with the real world analogies is that they tend to conflate L$ with US$ too much. In both SL and the real world, the rich and successful consume services which keep money flowing around the economy. But in the real world, they do so using the same money as everyone else. In SL, the rich and successful generally don't buy L$, and do want to sell them, because the services they consume demand US$ payment. That affects the equilibrium greatly.

SL economy is a system with an expandable reservoir... what goes in will eventually come out if squeezed enough... lol

Adding together LL's gross income and the combined resident "cash out" in any given time frame should yield a respective value for "economic" flow. There will always be that "reservoir" which is unpredictable and volatile and should not be equated in to any formulae.

Just my $1L's worth of thought.

The whole Pyramid scheme is really a flawed idea in the first place....

Any major corporation, company...business....enterprise...government is, in reality, a pyramid......the word 'scheme' throws it off. If you want to call the guy at the top....the owner...CEO...President...... a deceiver, well then, it becomes a 'scheme'. But if you're looking at the financial structure/dynamic of a successful business you're going to find the same elements. Not everything is divulged to the lowest workers.

Take any company you choose.....do you really think the guy that instals your cable...or the girl that answers the phone at the help desk, has any real idea what the financial strategies are or what's really on the books? Hell no. And it's not very likely either that the cable installer or the call center gum chewing parttimer is going to rise thru the ranks to sit on the Board. It's called a pyramid.....every business is structured that way.

LL is no different.......sure, they have a unique product, and they manage the funds running thru it from their customers in a unique way......but the basic principle is the same as any other business. LL's goal is to stay open and make money. They offer a product/service.....we pay for it.......we have an opportunity to actually profit from it.....But that's if we're willing and able to invest our own time and $$$ into it and make it work. It's not any different then anything else we might endeavor to do. If I want to become a professional IRL.....I'm going to have to put forth the blood sweat and tears to make it happen. If I want to climb the corporate ladder...I'm going to have to begin at the bottom and work my way up (with the exception of those who pull favors or sleep with the boss....but those little shortcuts are not what we're talking about....nor are they the norm) The scale might be a bit different in what one can expect to realistically obtain in SL....but the principle is the same.

We can whine all we want about how unfair we think LL's structure is.....we can bitch about land tiers and the idea that there's a class structure and those at the bottom can never get ahead. But look around you......it's not any different then the real world we're living in. LL obviously had a very very good business plan when they set this ball rolling and if you or I were the one's who'd thought of it first.....and we were sitting on the top of that pyramid...we sure as sh** wouldn't be complaining about it.

Carl got banned when he did that.

As I mentioned, a "Pyramid scheme" isn't a company organized in a pyramid structure; it's a synonym for "Ponzi scheme" and means any system where the profit to existing investors is paid by the starting stakes of new investors. It's called "Pyramid scheme" because one of the most well known ones is the "send money to the last five people on this list, then add your name at the bottom and send it to other people", because the idea is that by doing so you create a "pyramid" of people sending you money (you are at the top, then the 'layer' of people you contacted, then the wider 'layer' of people all of THEM contacted, etc..)

If General Motors got what it paid for, they didn't really lose money. Try selling that to its shareholders.

My assumption is that a large percentage of money spent is spent with the expectation of earning money. That 1200L DJ booth may be worth every spacebuck, but if you bought it expecting your club would earn money, or at least pay tier, then you will probably consider it a 1200L loss.

No, it's not. If I fail to earn an income in the physical economy, or if I run a deficit, my failure is measured in the same currency that my potential success is measured. Not so in SL. My SL deficit is measured in US dollars, and M Linden does not brag about the US dollars that will come from my bank account to pay for my SL financial failure. He'll only brag that I paid nothing in and took something out (I am cash flow positive, as far as LL is concerned). This is dishonest at best. I did, in fact, pay in. He's just not counting US dollars, the real currency that pays his salary.

There's quite a few assumptions in that statement. The first and most obvious to me is that you're depending on Linden Labs definition of success to judge my argument, but you seem at the same time to consider Linden Labs definition of success inadequate. I would agree with that, which is why I'm dismissing it from consideration and looking at the economy itself.

Now me, I define success in terms of the goods and services I'm able to buy with my money. The money is just a token for keeping track of goods and services without having to deal with the complexities of barter... bit it IS just a token that only has value because people agree to trade it for goods and services, which is the point of the parable of the $20 bill.

In Second Life, I'm buying those with Linden dollars. The land I own, that I pay for with US$ converted from L$ (at a pretty much flat rate), is secondary... and a good deal of it is just a business expense. It's the Linden dollars that let me buy the in-world goods and services that matter for me, and I haven't had to spend US dollars to buy those for, well, about three years now.

The money I earn, within the Linden economy, stays in the Linden economy, and buys me goods and services with Linden dollars. That's a working economy, as far as I'm concerned.

Obviously they didn't get what they paid for.

Yeh, there's a lot of goods in SL that are ineffective and overpriced or even kind of dangerous. Just like the physical economy. L$1200 won't buy many lottery tickets or cigarettes.

I think you may be operating on a faulty assumption. Although I have a shop, I'm in SL to have fun, not to make money. I spend money in SL as an entertainment cost with the expectation that I will enjoy myself, rather like going to the movies. I believe that a lot more money is spent in SL for fun rather than spent with the expectation that it will ever earn a profit. There are people who expect to earn money, but they seem to be in the minority. Look through the items for sale on X-Street--DJ booths, texture packs, and the like are vastly outnumbered by consumer items.

I would agree with that statement. I did not enter into my SL experience with any expectation of earning a profit from being in-world. I entered into it as a form of entertainment.....it's a luxury expenditure for me. If I generate anything out of that, it's simply icing on the cyber cake. I realize fully that there IS potential to make back much of what I invest in the way of entertainment....but I have not really put 110% of of energy and efforts into making that happen. Could I?.....Sure I could....I could focus a lot more on marketing what I create....I could peddle my bony ass all over the grid...place ads in every corner and shower everyone I meet with goodies in hopes of getting new loyal fans. I do all of that on a very minimal level. I do NOT expect it to make me money. SL is a source of pleasure.....a fun thing I do......that I spend money on.....and what I get for my money is a type of entertainment and creative exploration that I find very satisfying.

So....to me....what I put into it....is well spent. What I get out of it in the way of profit...is just sort of a bonus. I can't say that about aything elese I do purely for entertainmnet. If I spend money on a night out ....dinner and a movie...that's money gone for good. If I spend moeny on box seats at a ball game.....that's another chunk gone for good. There's no real chance of those situations possibly earning me a return on my investment.

The misconception for many in SL (I gather fropm so many conversations and threads I've read) is that we're SUPPOSED to earn money. No....we're NOT. We CAN...yes indeed we can.....but that isn't really the fundamental goal of the metaverse. It's a social venue designed by those who participate in it. And certainly it is open ended in potential if one is seriously business minded. If one person is making a good profit in SL.....that means it's possible....and that also means that anyone who isn't......and wants to.....has the same opportunity, but hasn't invested the same kind of energy in making it happen. After all...we don't need a resume or a degree to become a success in SL.......we DO need an imagination and a lot of determination. But, like anything else people do with the hopes of making a profit.....NOT everyone is going to make it.

Life shows us that over and over. And I do still stand by my pyramid analogy. The one on the top makes the most money. It is only a scheme, if it is designed absolutely so that the guy who just walked in the dorr....can NEVER profit from it. This is simply not true in SL.....people DO profit. But, it still, as far as I can see, is not 'intended' to be a money making venue for all involved. I guess that sort of makes all of us accountable for our own experience, and limitations with-in the machanism.

GM's business model and consumer spending are apples and oranges.


Your assumption is wrong. SL is first and foremost an entertainment platform.

Anna's description is pretty accurate, and as Argent points out, the RL economy works in the same way.

One important fact to keep in mind is that "money", whether $US or $L, *has no value of its own*. It's only a means of keeping score.

The SL economy has one major source of income: People who buy $L. It has one major and many minor sinks...LL and the people who cash out $L.

From source to sink, a $L, like any piece of money, can pass through many hands, in exchange for various goods and services.

What do people buy with $L?

In a RL economy, people take raw materials, add labor, and produce something of greater value. We do the same in SL. We take land and terraform it, build on it, and make it more desirable. We take some prims, shape them, add textures, add scripts, and make all sorts of things with them.

Or you can simply say, it's all pixels. What people are buying is entertainment.

Either way, it works.

That's like saying the US economy has one major source of income: international monetary trades. As an income source for Linden Labs, or for people who want to cash out, yes... but it's the money passing through people's hands that's income *in* the economy.

That's the attitude you have to have because owning a business in SL is a huge time investment. After the exorbitant tier fee was paid, I cleared a few dollars back when I was a landlord of a Mainland estate, but when you averaged it out per hour it came to a lot less than minimum wage. I did it because it was fun.

SL is basically the Matrix. We only exist to feed the LL gods that have us plugged in and are sucking out our life essence via tier fees.

Yup. It's entertainment and a hobby even for creators. Except for landbot runners. Over the last few years, some of them have made a killing.

You should consider offering your cute rodent ass up to higher life forms first!

I did, but Richard Gere's agent won't return my calls.

Congratulations OP, you now know how the Real World Economy works.

*sends the black choppers after you*