What are virtual economies for? In their new book, [amazon_link id=”0262027259″ target=”_blank” ]Virtual Economies: Design and Analysis[/amazon_link], Vili Lehdonvirta and Edward Castronova focus on the answer: providing a viable business model for the operators of digital games. “Digital publishers are usually for-profit companies that aim to make money. Their specific approach to making money is providing digital content to consumers. On a very abstract level, their business consists of three processes: creating content, attracting users, and monetizing. Virtual economy design, like every other function in the company, must somehow contribute to these processes.” So the economy-design principles they set out in the rest of the book are intended to serve this profit-making aim.

[amazon_image id=”0262027259″ link=”true” target=”_blank” size=”medium” ]Virtual Economies: Design and Analysis (Information Policy): Design and Anaysis[/amazon_image]

But of course, as that quotation makes it clear, the same processes applies to digital companies other than those providing online games – they are also the main processes for music, books, newspapers, films, education providers. So the ‘games design’ principles described in the book have some interesting applications to other kinds of business, and it makes this an interesting complement to one of my all-time favourite digital business books, [amazon_link id=”087584863X” target=”_blank” ]Information Rules[/amazon_link] by Carl Shapiro and Hal Varian. There is more exchange and macroeconomics here than in [amazon_link id=”087584863X” target=”_blank” ]Information Rules[/amazon_link] because of the gaming context, but there is a lot of food for thought in this book for anybody in any ‘content’ business.

[amazon_link id=”0262027259″ target=”_blank” ]Virtual Economies[/amazon_link] serves a third function too: it is a terrific introduction to economics. In a clear and straightforward way it covers everything from consumer choice theory to macroeconomic demand management and money; and it combines both the conventional approach as it would be taught today and informed critique of the standard assumptions and approaches. For example, the chapter on consumer choice includes both rational choice and alternatives – bounded rationality, behavioural biases, social psychology. There is a whole chapter on institutions and non-market allocation. The final chapter touches on the role of economic institutions as ends in themselves as well as instruments. It concludes with some thoughts on ‘the end of materialism’: not only are large parts of the economy already virtual, but perhaps future growth will be increasingly virtual? This certainly appeals to me as the author of The Weightless World (pdf)!

Anyway, I could see using this as a textbook for an introductory economics course with the term’s collective task for the students being to set up an online economy. It would be unconventional but I can see it equipping students with a terrific basic understanding of trends in economics and business.

Edward Castronova has almost cornered the market in the economics of games – his previous book was [amazon_link id=”0226096270″ target=”_blank” ]Synthetic Worlds: The Business and Culture of Online Games[/amazon_link]. Vili Lehdonvirta is at the Oxford Internet Institute and has written some fascinating papers. Yannis Varoufakis is the economist for Valve but writes far more about the EU – here is one interesting paper he wrote on digital economies though. Hal Varian is of course at Google now. But this is a subject on which most conventional economists are strangely silent – I guess they think it’s a frivolous subject and haven’t noticed that the real world and the virtual worlds are converging. So hooray for this very interesting new book on the subject, highly recommended.