It started with epic poetry, I think. Yeah. Using fiction to escape reality. No matter how bad things got, you could always escape to the accounts of Gilgamesh or Odysseus. From there, it spread to plays (why imagine what happened when you can see it?) After plays come movies. With movies, you can see the exact same play multiple times. And the dawning of VHS, DVD, and downloads allow you to see it whenever you want to.
Somewhere along the history of fiction comes the game. Little kids heard a story or saw a play and decided to make it their own (every kid has been there at some point). These games advanced, slowly at first, with role playing games, where you got to build the character up over time, making your own little world with your friends. These eventually gave way to computer games (the first games were RPGs where you typed in commands). These led to Sim City, which, like plays, kept the player from having to imagine the setting. And then the game the very quickly swept the nation: The Sims. You could create a character, give him a job, let him go on dates, or anything you imagined. After a few years, the game became available online, so that you could play with people across the globe.
And now: the final stage. A simulation so far removed from the original, from real life, that it has become the original, that it actually affects real life. Second Life. It is The Sims, only it is played with real money. You exchange US dollars for virtual money and with that, you can open a virtual business, sell virtual realty, or buy virtual clothing. There are over one million players. People make six digit salaries playing this game. Congress is even debating whether or not to tax income made playing it.
So we have gone from reality, through a complete cycle of simulacra (a copy of a copy), to a hyperreality ("The simulation of something which never really existed." - Baudrillard) so real that it has an impact on the economy and the government.
We are now faced with a question. Not "Where is the line?", as I think we noticed the line when we crossed it (when people started waiting in lines a week long and getting in fights for the latest gaming systems). The real question is "How do we get back over the line?" Or are we so far gone as a nation that our culture will move from Hollywood (itself a simulation of the royalty of Europe, sans bloodlines) to online?