How virtual environments could destroy the economy: by being so cheap

While the educators and non-profit people in Second Life are up in arms against the loss of their discount pricing, I’ve been reading an intriguing text about a world characterized by a consumption trap.

Economists are familiar with the notion of a liquidity trap, a situation in which monetary policy is unable to stimulate an economy, either through lowering interest rates or increasing the money supply. So what could be a consumption trap?

Rick Bookstaber explains it all: technology reduces the differences in consumption behavior between the rich and the poor. In 2025, what we’ll all be doing? We’ll have sophisticated, deeply immersive gaming environments, which offer compelling experiences for free or for a low fee. On a personal note, I’d say imagine some virtual world, Second Life maybe, but much more sophisticated and super immersive. You can have the house of your dreams or your office building or whatever for a tiny fraction of the cost of the real thing.

Or imagine social networks such as Facebook, which become such a ubiquitous part of our mobile, ‘always on’ lives. Whether one is extremely rich or rather miserable, who could resist the possibility to be “anyone we want in whatever world we want, accompanied by whomever we want, all with full sensory feedback.”

Not only is this consumption cheap, the production of those services is not very expensive nor very labor intensive. Maybe those games will be primarily just platforms, and the content will be user-generated, by people who create the content for fun.

For some, this vision of the year 2025 would be unsettling, for others highly desirable. Bookstaber however points out that this evolution would be very challenging for the economy. The reason? Economies need consumption, they need us to earn money and also to spend it. But we only have that many hours we can consume, and what if most of that time would go to free or cheap activities?

Bookstaber, a senior policy adviser at the SEC, also mentions Robert Reich’s book Aftershock. You’ll find the main arguments of that book in an op-ed piece in The New York Times.

Reich says that telecom, containers, computers and finally the internet made it easier for American employers to rely on outsourcing or automating the production process. The middle class has a hard time to find jobs and to earn a decent income. In 1970 the 1 percent richest families earned about 9 percent of total income in the US, in 2007 that’s 23,5 percent.

Those very rich consume a much smaller part of their enormous incomes compared to the ordinary citizens, which leads to insufficient consumption to keep the economy going. So technology made this increasingly unequal distribution of income possible, which causes macro economic problems such as insufficient consumption, too much debts by the struggling middle class and asset bubbles.

What Bookstaber says, is that in the future the distribution of wealth and income will matter less, because technology enables people to consume in roughly the same way, whether they are very rich or rather poor.

All of which is not something which makes me feel very happy, but these ideas sure are fascinating.

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0 Responses to How virtual environments could destroy the economy: by being so cheap

  1. this very nice, thank you.

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