With fist fights and muggings breaking out after the release of Sony's PlayStation III, it's clear that video games aren't just for kids any more. But even the PlayStation is child's play for the 1.4 million players in "Second Life," a virtual-reality universe that is fast becoming one of the hottest places online.

Clay Risen is managing editor of "Democracy: A Journal of Ideas" and a former assistant editor of The New Republic, where this article originally appeared.

Not only do they spend the bulk of their free time logged onto it (one-third spend more hours a day in it than out), but a large subset even turns a sizable profit, in some cases enough to live on. One "Second Life" entrepreneur, a German-Chinese woman named Ailin Graf, makes an estimated $150,000 a year buying and developing "Second Life" real estate -- virtual land that is in reality nothing more than ones and zeroes.

Real-world companies are getting involved, as well: For a price, players can outfit their virtual selves (called "avatars") in American Apparel clothing, buy tricked-out Toyota Scions, and slip on a pair of digital Reeboks.

Where does the money come from? Each month players get a stipend in Linden dollars (named after Linden Lab, the game's creator), the currency of the realm and the basis of "Second Life's" economy. They also can earn money by working, either as freelancers or as employees, at a virtual company.

But, unlike many other so-called massive multiplayer universes (games like "World of Warcraft" and "Everquest"), Linden dollars are fully exchangeable into real dollars, approximately 250 to one. And, because players get the intellectual property rights to their creations -- design a building in "Second Life," and you own it in real life -- wealth creation, and thus economic growth, within the game is every bit as real as it is in the players' "first life."

All of this has won the interest of economists, behavioral scientists and even tax officials. For some, games like "Second Life" are near-perfect tools for economic modeling and labor-psychology studies. Why, they ask, would someone work at a real-world accounting firm all day, only to come home and sell clothes in "Second Life"? For others, it is a test case for laissez-faire markets -- no taxes, no entitlements, no business regulations, no unions. But, as "Second Life" grows in size and popularity, and as the links between "first" and "second life" strengthen, another question looms: At what point does it truly stop being a game and become an extension of the real world -- and thus subject to real world government intervention?

It may seem silly even to ask such a question. After all, no matter how serious people take them, these are just games, right? Perhaps. But lots of games are regulated -- gambling, most notably. It may be more instructive to look at games like "Second Life" not as a parallel of dragon-slaying epics like "World of Warcraft," but as the next iteration in the Web itself.

Stripped to its essence, "Second Life" is just a different way of portraying online interaction. Ten years ago, someone like Ms. Graf would be developing static Web sites for personal or commercial use; today, she is developing three-dimensional houses and stores. In the conventional Web, you move between sites by clicking on links or typing in a URL; in "Second Life," you can wander around on foot (you view your avatar from behind and slightly above) or teleport between locations. The interface is more advanced, but the basic idea is the same.

Just as the mid-1990s saw a flurry of legislative activity around the growing economy and social sphere of the Internet, in all likelihood the same will begin to occur around "Second Life" and other games (though, given its monetary interchangeability with the real-world economy, "Second Life" seems the most likely to come under scrutiny).

Indeed, the congressional Joint Economic Committee is already investigating whether profits made in virtual reality are subject to taxation. Similar questions revolve around workplace rules: If someone is employed within the game but earning a real paycheck (or at least one that's exchangeable into real cash), should they be governed by real-world regulations, such as child labor laws?

While Linden Labs does have some policing powers, for the most part the game operates in near-Wild West lawlessness. For a while, when it was mostly a cult-like hobby of a few thousands first-adopters, this wasn't an issue. But, today, with more than one million people registered, 70,000 people logging in daily (according to an article last year), and a $2.5 million economy, the game is increasingly beset by all the social ills of the real world. Lewd behavior, sexual harassment, fraud. Even terrorism is a potential problem.

A group of players recently developed a virus, represented as a block of plastic explosive in the game's virtual-reality interface; when detonated, it shut down several of Linden Lab's servers, denying access to large swaths of virtual territory. Because such "denial-of-service" attacks are a violation of federal law, the FBI was brought in to investigate. The question that went unanswered, for now, is whether such attackers could also be subject to civil suits -- after all, they likely impeded players' business operations, from which they likely realize a real-world profit.

For now, the rules of "Second Life" are laid out by Linden Lab and its 28-year-old creator, Philip Rosedale. Punishments for everything from violence and lewd behavior to hacking and fraud include suspension, banishment and "the cornfield," in which players must pilot a virtual tractor and watch an educational video. Like automobile drivers, players earn points for bad behavior, and the more points, the more severe the punishment.

But Linden Lab is a company, not a government. While it is in the interest of Linden Lab to grow the game's economy, ultimately the company is beholden to its real-world investors, many of whom have little experience or interest in the game's daily goings-on. How long will players -- especially players with an economic stake in the game -- allow Linden Lab to dictate what constitutes punishable activity, and what constitutes an appropriate punishment? Even the extremely successful Ms. Graf has complained, in an interview with the Financial Times, that the conditions in which she operates "are comparable to a business operating in any non-democratic country."

For now, of course, thinking about the real-world implications of "Second Life" and other games is mostly a futurists' exercise. And there's no guarantee that such games will, in fact, become the next iteration of the Web. But relative popularity doesn't moot questions of where to draw the line between game and reality.

What constitutes property rights? In a game like "World of Warcraft," where the economy is closed, the answer is simple: There are no property rights. But what if someone pays real money for land, and plans to turn a real profit? Can Linden Lab summarily shut down their development?

That question may soon be answered in a Pennsylvania court, where a player, Marc Bragg, is suing Linden Lab for seizing land on which he was building a virtual nightclub, putting him out $2,000. Linden claims that Mr. Bragg cheated to get the land on the cheap, while Mr. Bragg claims that the punishment was overly severe and violated his property rights. If the court rules in his favor, it could set a powerful precedent for future claims against the company -- and a powerful justification for an expansion of the legal system over its operations.

Whether such an extension could actually work is a different question. Ms. Graf lives in Germany, owns "property" housed on servers in California and works with clients from around the world. Who has jurisdiction over her business?

Some observers speculate that a legal doctrine that treats virtual space as real space, analogous to the way corporations are considered "persons," will eventually emerge. Such a doctrine would mean giving games like "Second Life" quasi-sovereign status, perhaps as a national or international protectorate. Of course, whether or not anyone will want to play a "game" that so closely approximates real life -- even real life with teleportation -- is another can of worms.