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In a similar manner, virtual economy (organisation) provides two views of the economy. One is the real value of commodities and services in a given economy which corresponds to the real economic growth and production. The second view of the economy represents the imaginary value of stock prices and the accumulation of interest (usury) in the banks. A virtual economy system, similar to a virtual memory systems, is bound to crash (thrash) at any point when the instant demand for finance at any given time exceeds the real value of the real economy. The current financial crisis in the US and the world at large is a striking example of a virtual economy crashing (or thrashing).
The phenomenon of a virtual economy, where the money in transactions appears much larger than the real money, began to surface at the level of state economies at the end of the 19th century when financial markets began to take shape in New York. This phenomenon grew to be an integral part of capitalist economies, especially in the US and in Europe due to three major reasons, namely: stock markets, interest based economy, and the removal of gold as a basis for the monetary systems. At the political front, the cold war between the capitalist and socialist camps in the 2nd half of the 20th century further strengthened the virtual economies in the west. We will examine these three factors in some detail in the next few sections.
1. Stock Markets and the Virtual Economy
Stock market activities at the start of the 20th century created a new phenomenon in the economy, where the wealth associated with stock values grew at a much higher rate than the wealth associated with the real economy. When the stock market collapsed in New York in 1929, economists attributed the crash to the great difference between the inflated values of stocks and the values of the real assets of the economy.
The Economist magazine reported on 2/11/1929 that “there is warrant for hoping that the deflation of the exaggerated balloon of American stock values will be for the good of the world.” To understand this aspect it has been found that the prices of financial market increased during the preceding period from 1925 to 1929 by 120%, while economic growth for the same period did not exceed 17%. And when the market collapsed, it lost over 93% from its value, which means that the market returned to its real value which was obviously much lower than what the stock market indicated. The same scenario repeated itself in 1987 when the market collapsed again, and as observers again noted financial market had been grossly inflated compared with the real size of the economy, such that the difference between the virtual economy and the real economy was more than 200%. And by the end of the twentieth century the virtual economy was again three times the size of the real market value and this scenario came to be known as the Internet (or DOT COM) Bubble.
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