In Second Life,the economy is based on Linden dollars (named after Linden Labs, thecompany that created it). This isn't unusual in itself, but thedifference here is that there is an actual exchange rate from Linden$to US dollars, about 300 to 1. Thus, if you sell something in the game,you can make money. Right now it's small change, but what is happeningis that there are enough players that are interested in there where youcould technically make real income from it.
The way it works is that every player by default earns a certain amounta week. A first basic level membership is free for anyone and gainsthem L$50 a week. A premium player paying US$9.95 a month getsL$500/wk. With this ingame dollars, you can buy things from otherplayers or the game itself. You can also create prims and sell those toothers for L$. It's market-driven based on what others really wouldbother to pay for your creation.
These creations really come from two types of labor: visual creation,and/or programming effort. The former is what the object looks likeusing the 3D basic shapes. There are some cute works of art, but itcould also be a house, a park, a toy, etc. The latter is what you cando with the object based on its programming. Most prims are somecombination of both. Even those that don't really do anything have somedefault code.
It takes time, effort and brainpower to build anything since the mostbasic shapes you have are cubes, spheres, pyramids, cones, and otherpolygons. You can grow, squeeze, extrude and combine multiple shapes tomake more complicated ones, then apply colors or textures to it. Usingsuch building blocks, you can make more and more complex objects. Thus,any developer working on a prim would need some level of drawing skilltoo. Any object you create is yours alone, but you could allow othersto copy it, or if you really want to risk it, edit it. More on thislater...
This is a pseudo-real currency (like the Reward points etc fromAmerican Express or other credit cards, or airline mileage cards)because of the tie to real-world currencies. You can extract some ofyour L$ to real currency via Paypal or credit cards, that Linden Labspays you. Thus, if you have earned L$3 million, you have just made$10,000. (Not that that's trivial to do). If the BusinessWeek articleis correct, some of the top players have made hundreds of thousands ofUS dollars from things they have created and sold in the game.
The economy is smart enough and the world is well-managed enough thatthings don't go awry easily. E.g., you can't kill anyone and take theirprims and/or money. It doesn't work that way, and in fact, just bumpingpeople can start raising eyebrows until you get banished.
First thing to note: Linden Labs gives you $50/wk or about $200 amonth. That's about US$1 a month that they have to put into the game(since that dollar could get extracted from the game by the player).That's quite trivial in real dollars but what it really does is incentyou to play the game. You can think of it as a customer-acquisitioncost which at just $1 is really low. A premium player gets more like$10/mo, which is about what they pay in real dollars for their accounteach month.
Technically with the ability to create and sell a prim, it is possibleto mint your own money. The practicality however is that with asufficient number of players, you have a large number of producers, andthe consumers have a lot of choice on what they want to spend theirmoney on. Also it takes time and effort, thus, nothing is really free.Still, the amount of currency in the game is based on two factors: howmany premium players are in the game and how many active basic playersexist. The total wealth increases every month in proportion to this.Not all players are active, and leave after a while (you have to appearon the game each week to gain your L$ stipend).
However, when it becomes really successful, and Linden has a millionactive basic players, they'd have to pay a million dollars into thegame each month, which can be quite expensive. However, the truth isthat more of the active players would likely go towards premiummembership.
So far, I haven't talked about how Linden Labs itself makes money.... in the meantime, you might want to read this article on Virtual Worlds, Virtual Economies.