What if there was a way to live a life without meaningful consequences? What if individuals could participate in a virtual economy largely separate from the one surrounding us in the real world? What if policies could be applied to real people, but with laboratorial consequences? Second Life, an internet-based virtual world often compared to a computer game, and its derivatives may offer answers to those questions.

Launched by Linden Research, Inc. (Linden Lab) in 2003, Second Life came to international attention a little over a year ago. It enables people to interact online via an advanced social network. Participants can communicate, play, and do business using Linden Dollars, or $L, which can be exchanged to real U.S. dollars. With time, a virtual economy developed. Some features include forbidden online gambling, a flourishing imaginary real estate market, online financial institutions, and… there is no government.

Such an environment may offer a great case study for policy makers and economists. While largely unregulated and chaotic, a virtual economy could potentially develop into a useful laboratory for social scientists. The debate between choosing public vs. private health care, a progressive vs. a flat tax, or a managed vs. free market wouldn’t be entirely resolved, but piling evidence would provide people living in the real world some indication about what works, and what doesn’t.

Excessive virtual money supply, caused by generous Linden Dollar grants from Linden Lab to new gamers, already created virtual inflationary pressures. As a result, money supply has been tightened pushing Linden Lab into becoming something of a virtual central bank. The Ludwig von Mises Institute critically characterized the Linden Dollar-U.S. dollar relationship as a deficit creating currency peg, meaning that the amount of virtual Linden Dollars is not offset by the mother company’s real dollar revenues. However, American dollars are no longer backed by government-held gold reserves either.

There would be imperfections. Second Life’s participants, with computer and internet access, are at least moderately well-to-do by default. Any conclusions drawn from online observations would exclude most of those with a low income. Another good argument can be made that a life without real consequences doesn’t force people to act rationally. If that’s the case, then comparing a virtual economy to that existing in real life would be like comparing oranges to apples.

Do mainstream economic models offer a better alternative though? That’s a tough sell. With all their assumptions, inclusions, exclusions, and oversimplifications, they offer a mere image of what might happen in the real market. In the meantime, global brands like Coke, Adidas, and Mazda make inroads into the online world. Other real organizations and individuals are likely going to follow. Policy-makers and economists would be wrong to ignore that.