Economist explains move to virtual world

Michael Boskin, a newly appointed adviser to Gaia Online, says he was drawn to the teen-oriented site by its realistic economies.

The publisher of the teen-oriented virtual world Gaia Online announced Monday that it is bringing on celebrated economist Michael Boskin to lead its new Council of Economic Advisors.

Boskin, under the first President George Bush, and a current senior fellow at the Hoover Institution, seemed an odd choice given the nature of the Gaia economy and Boskin's breadth of experience--he currently advises several sovereign governments and serves on the boards of companies like Exxon Mobil and Oracle.

But like the economies of other virtual worlds, such as Linden Lab's Second Life, Sony Online Entertainment's EverQuest II, Blizzard Entertainment's World of Warcraft, the one in Gaia has many real-world elements. Even if players can't directly convert their in-world gold to U.S. dollars, that doesn't mean they're not making economic decisions when they play. And that is one of the main reasons Boskin decided to take the part-time position.

Boskin sat down for an interview with CNET in advance of the announcement of his new role with . He shared his thoughts on the health of the virtual world's economy, the level of his involvement and much more.

Q: How did you get involved with Gaia Online?
Boskin: I got involved with Gaia through Craig Sherman, the CEO, and one of the original investors. They came to see me and described what they were doing at Gaia and their desire to make the site richer and more interesting as the site grew and as the economy grew more interesting.

How much background and understanding of these virtual economies did you already have?
Boskin: Some. I was aware of them and I've visited them briefly to look at them and I have friends that are involved with them or investors in them. I know something of their growth and of the people in and around these sites and these businesses and what they're trying to do with them. I find the general space quite interesting. As an economist, I find it very interesting how many people are willing to spend so much of their time at Gaia. People are spending on average over two hours per day on the site and that's a real economic investment.

What was it that attracted you to taking on this role?
Boskin: Well, what really attracted me was how the economy of these sites and in particular of Gaia, evolves. How people are making decisions on it about how to spend their time, how much time to spend, and how to accumulate various (things). There are businesses starting up, there are people with banks, there are people who are lending virtual money and so on.

So, a variety of things of this sort interested me as to how these decisions were being made, what it means, how sensible they were, and how this economy would grow over time. There's real economics inside this. (And) that's very similar to, or analogous to, a lot of what goes on in the real economy in the offline world. We have an opportunity to get real data on what they're doing and understand it and an opportunity to suggest various mechanisms that will encourage the growth while keeping it fun and interesting for them.

As an economist, I find it very interesting how many people are willing to spend so much of their time at Gaia. People are spending on average over two hours per day on the site and that's a real economic investment.

Can you talk about the similarities between the Gaia economy and that of the United States?
Boskin: I think the fundamental similarity is that you have people making decisions on how to allocate their time and use their skills. That is at the core what is similar about them and that has a lot of consequences for Gaia. And there are some things we can learn from what's going on in the real economy that may be useful as we grow Gaia. But this is not designed to replicate a real economy.

Is there a way to estimate the total size of the Gaia economy?
Boskin: We're working on a variety of measures and indicators. Not being able to translate it into dollars or euros is an obstacle to giving us that simple metric, but we'll have a variety of other metrics we'll come up with which will enable us to see how it grows and how things are valued internally. Then we'll work on the more difficult task of getting some overall measure that relates to something outside the virtual world.

What kind of metrics do you think those would be?
Boskin: For example, what's happening in the prices and auctions of similar items. Are they going up? Are they coming down? How much Gaia gold is being accumulated by people in investing their time and energy and talent and skills in gaming and sharing and things of that sort. So, there's kind of a rate of accumulation, which would be similar to the capital formation rate and what the rate of growth is of the money supply. (We're also going to work on) something like a consumer price index inside Gaia. For example, something that enables us to get some metrics to understand what's actually going on, and how to help to have kind of a seamless and frictionless growth of the experience while keeping it fun and not slowing it down with a lot of restrictions.

What changes to the Gaia economy do you anticipate?
Boskin: I think we have to analyze it first and take a look at what would make sense. But the supply and demand inside the economy, any high-quality economist would analyze that quite similarly.

How hands-on are you going to be?
Boskin: We have a graduate student now who's working on the detailed data who'll be doing some of that. So, I will be giving some overall advice and guidance and overseeing some analysis. It's not meant to be a role that takes a large fraction of my time but there will be times when I'm spending a fair amount of time on it.

You'll be continuing on the Hoover Institution and at Stanford?
Boskin: Yeah. This is not a full-time job.

Can you talk a little bit about the kinds of activity that go on and some of the more popular things people do in Gaia?
Boskin: Well there are a variety of auctions. People create items and auction them. There are people creating banks and lending. People are coming to borrow money from the banks to start a restaurant, things of that sort.

There are a variety of games people are playing and they are buying and selling various things and there is clothing and accessories for their avatars, furnishings for their virtual homes. So there are a lot of analogues to what goes on in real-world economic activity going on inside Gaia.

Why is it important to have someone with your background come and take over this economy?
Boskin: I think take over the economy is not quite the right word. I think that I'm going be providing analysis, guidance to the management team and some of the creative people at times, and I think the idea is to anticipate things that may come up that could improve and enrich the site rather than to be running the economy.

Is the thought that with your experience, you can make a better experience for the end users?
Boskin: That's the desire. This is, above all, supposed to be a fun, interesting, entertaining, valuable, virtual experience for people. The economy is part of that. It's not the whole thing. People are on this for lots of reasons, the social networking obviously, and we want to make sure that the economy part is the best experience it can be, that it grows appropriately and that we anticipate problems and head them off. And that we develop new things that people will find interesting and valuable.

What do you anticipate will be the biggest challenges?
Boskin: I think the economy is basically doing OK. The site is growing so rapidly, the number of transactions is growing so rapidly, the number of things people are doing is growing so rapidly, that we've got to take a look at this array and try to anticipate some of the issues that come up. For example, there are something like seven banks that people have opened up to loan people virtual money, and interest rates are not all the same. In the real world, interest rates across banks tend to be only slightly different, so do we develop some mechanism to provide greater transparency about prices? That will be valuable for our consumers and borrowers in this economy. It would be useful to know they can get something for less.

What do you say to people who don't really understand this whole idea of a virtual economy? How do you explain it to them when someone asks, "You're going to be doing what?"
Boskin: Well, there is a very real phenomenon going on here. It happens to be in the virtual world, but it's a real phenomenon. Millions of people are spending their valuable time and using their skill to inhabit these places.

That is economically fascinating in many dimensions and, you know, if I can help them understand it a little better and help them constructively build it and make it even more interesting and fun for their users, then that'll be great.