Did Insecure Property Rights Slow Economic Development? Some Lessons from Economic History

Not long ago, a 43-year-old Wonder Bread deliveryman named John Dugger logged on to eBay and, as people sometimes do these days, bought himself a house. Not a shabby one, either. Nine rooms, three stories, rooftop patio, walls of solid stonework—it wasn't quite a castle, but it put to shame the modest redbrick ranch house Dugger came home to every weeknight after a long day stocking the supermarket shelves of Stillwater, Oklahoma. Excellent location, too; nestled at the foot of a quiet coastal hillside, the house was just a hike away from a quaint seaside village and a quick commute from two bustling cosmopolitan cities. It was perfect, in short, except for one detail: The house was imaginary.¹

Not only was Dugger's house imaginary, but so too was the country in which it was located. Yet Dugger paid 750 very real dollars—more than he earned in a week—for a piece of property that he could enjoy only when he logged onto the Internet role-playing fantasy game, Ultima Online. Nor was Dugger's transaction unusual. Houses in Britannia, the fantasy world in which Ultima Online is played, are auctioned all the time on eBay, as are other accessories associated with the game: swords, suits of armor, magic scrolls, iron ingots, bales of hay, furniture, even potted plants—all imaginary, of course. Moreover, Ultima is only one of about half a dozen such fantasy games played by hundreds of thousands of people on the Internet.² Economist Edward Castronova has studied another online game, Sony's Everquest, and its associated fantasy world, Norrath. Castronova conducted a survey of the game's players and, based on their responses as well as on real-world sales of Norrath assets, estimated as a lower bound that Norrath's per capita gross domestic product (GDP) is at least as large as Bulgaria's and, as an upper bound, that it may even be as high as Russia's. In addition, Castronova discovered that Norrath players accumulated, on average, imaginary assets worth between $1,800 and $3,000—a surprisingly large sum, if one recalls that the median amount of wealth that a family holds in the United States is only about $9,000.³

This willingness of people to invest relatively large sums of money in the assets of what are, after all, fantasy worlds is intriguing—not only because the assets are imaginary but also because the property rights to these imaginary assets are by no means secure. Each game has an owner (the corporation that runs the underlying system of hardware and software), and that owner is an absolute monarch who has the power to alter the rules of the game—and hence the value of the imaginary assets—at will. Indeed, owners have from time to time changed aspects of their games in ways that have affected property rights. For example, some of the most valuable assets in fantasy games are pieces of scenery and other similar items that programmers neglected to fix in place, enabling the players who discovered them to claim them as their property without paying anything for their purchase. These "rares," as they are called, traded for substantial amounts until game owners deliberately deflated the market by creating more items like them. Similarly, Ultima Online's owner decided to sell highly sophisticated avatars (characters whose identities are assumed by players in the game) to anyone who plunked down the modest sum of $29.95, instantly depreciating the assets of players who had painstakingly built up their own avatars or who had purchased them at higher prices from other players.⁴

To anyone interested in the question of how to foster economic development in the world's poorest countries, this willingness of players to invest in online games is intriguing because it calls into question one of the central tenets of what is known as the Washington Consensus—the set of policies and institutions that officials at the World Bank, the International Monetary Fund (IMF), and other similar organizations have been attempting...