In October 2011, the Greek economist Yanis Varoufakis received
an unusual email. "I'm the president of a videogame company," it
began. The message was from the head of Valve Software, the
influential video game design firm behind such industry-defining
titles as the sci-fi shooter
Half-Life and the first-person puzzle adventure
Portal.
Varoufakis, who teaches economic theory at the University of
Athens and also has a post at the University of Texas at Austin,
had spent years working on game theory—the strategic and decision
making processes that economists study, not the theory behind
computer games. He also examined the complexities of linking
multiple distinct economies. During the height of the Euro crisis
in Greece, Varoufakis was often seen in the media explaining the
meltdown and describing what might happen next in the
currency-integrated Eurozone. Now Valve Software chief Gabe Newell
was asking him to apply the same insights to the interlinked
virtual economies of Valve Software's games.
After meeting Newell and other Valve staffers in Seattle,
Varoufakis agreed to become the company's first official in-house
economist. From early 2012 through the middle of 2013, he studied
Valve's games, occasionally sharing his insights on the company
blog in lengthy posts with wonky titles. (Sample: "Arbitrage and
Equilibrium in the
Team Fortress 2 Economy.") His work for Valve led to more
media attention, including articles and interviews in The
Washington Post, The Financial Times, and National
Public Radio.
In February, Varoufakis spoke with Senior Editor Peter Suderman
about what he learned as a video game economist, the failings of
his chosen academic profession, and how computer games and virtual
online worlds might be the future of macroeconomics.
reason: What does a video game company want
with an economist?
Yanis Varoufakis: The moment that video game
companies shifted from single-player to multiplayer games, without
realizing it, they created a social economy. People interacting
through the game have the opportunity not only to kill one another,
but also to exchange stuff. Stuff that was valuable-or scarce, as
an economist would say-within the virtual world.
In almost no time that sort of economy started creating, within
the game, a lot of value, and also distributing it. If you have a
kind of community involving millions of people who trade with one
another, who engage with one another, and who can even create value
through production processes-for instance, designing some shield or
some garden and sending it through the store of the community to
other players-all of a sudden, these video game companies realized
that they have an economy in their hands.
reason: So the interest for economists is that
you have a confined space to learn about how people behave within
economies. And the interest from gaming companies is that they
inadvertently created economies that they needed some expertise
on.
Varoufakis: A multiplayer game environment is a
dream come true for an economist. Because here you have an economy
where you don't need statistics. And elaborate statistics is what
you use when you don't know everything, you're not omniscient, and
you need to use something in order to gain feeling as to what is
happening to prices, what is happening to quantities, what's
happening to investments, and so on and so forth. But in a video
game world, all the data are there. It's like being God, who has
access to everything and to what every member of the social economy
is doing.
reason: You have the perfect knowledge that
every central banker wishes he or she had.
Varoufakis: Indeed. Every congressman, every
senator, every regulator, every banker, every Treasury official.
It's equivalent to being omniscient, being able to see and know
everything that goes on in the economy. And that's amazing.
reason: You've said that you were not really a
gamer before working with Valve. What did you learn about video
game worlds? What surprised you?
Varoufakis: The most poignant observation was
the speed with which these economies evolve. Within a year, you
have an evolutionary process that can replicate what happened out
there in the outlying economies, in terms of creating a complex web
of exchanges and sound economic systems. And the outlying economy
took centuries. I didn't expect to see institutions spontaneously
generating within these social economies so fast and so furiously,
and therefore creating a growth rate that the real world would love
to replicate.
I also learned something else which I'm very grateful for. We
economists are very much disposed toward our models, and our models
assume that economic choices converge very quickly toward some kind
of equilibrium where demand equals supply and where prices tend to
their natural level and so on and so forth. Well, that's not how
the real world works. We should have known that.
In the video game world it's quite astonishing to watch.
Quickly, collective aggregate behavior converges at equilibrium and
then disequilibrates itself. Then some other equilibrium comes and
then goes away. It's the speed and the irregularity of behavior
around some equilibrium and the speed with which new equilibria are
being formed.
reason: So is there a real world lesson that
you can draw out from having seen this irregularity pop up in
virtual economies?
Varoufakis: Absolutely. Let me put it very
brutally and very bluntly: Our best economic models-from the
Federal Reserve or the U.S. Treasury or the International Monetary
Fund or the Organization for Economic Development-are really not
worth the trouble of putting together. Because they are presuming a
kind of equilibrium stability and convergence toward equilibrium,
because it makes our models look better. It is not something that
is replicated in the real world.
reason: You once wrote that because of its
heavy reliance on statistics and on this sort of simple modeling,
economics can resemble "computerized astrology." That's pretty
harsh. Could you talk a little bit more about that judgment and
whether you think that studying economics in a virtual world-where
you're not just looking at a model, you're looking at real
behaviors and real interactions amongst thousands or millions of
people-offers a way out of an economics stuck in a model-bound
world?
Varoufakis: If we think of ourselves as
empiricists who judge the value of the theory on the basis of how
well it predicts, then we should have ditched economic models years
ago. Never have our models managed with data to predict the major
turning points, ever, in the history of capitalism. So if we were
honest, we should simply accept that and rethink our approach.
But actually, I think they're even worse. We can't even predict
the past very well using our models. Economic models are failing to
model the past in a way that can explain the past. So what we end
up doing with our economic models is retrofitting the data and our
own prejudices about how the economy works.
This is why I'm saying that this profession of mine is not
really anywhere near astronomy. It's much closer to mathematized
superstition, organized superstition, which has a priesthood to
replicate on the basis of how well we learn the rituals.
Video game communities, social economies, give us something that
we never had as economists before. That's something of an
opportunity, a chance to experiment with a macroeconomy. We can
experiment in economics with individuals. We can put someone behind
a screen and experiment on the subject, and ask him or her to make
choices and see how they behave.
That has nothing to do with macroeconomics. Macroeconomics
requires a different scenario. You conduct controlled experiments
with a large economy. We are not allowed to do this in the real
world. But in the video game world, we economists have a smidgen of
an opportunity to conduct controlled experiments on a real,
functioning macroeconomy. And that may be a scientific window into
economic reality that we've never had access to before.
reason: What a lot of these discussions come
down to is that you can never in macroeconomics have a real
counterfactual. Do you think that video games offer a meaningful
solution to that problem, where we might actually be able to solve,
or if not solve, get useful knowledge, about macroeconomic policy,
whether it's stimulus, whether it's other spending and taxation
policy, whether it's Fed policy?
Varoufakis: In one word: potentially. I don't
think we can yet.
In order to be able to run these controlled experiments within
the video game world in a manner that will result in meaningful
conclusions regarding depression economics, recession economics,
and so on and so forth, we need to wait for people to engineer the
creation of labor markets and financial markets within these video
game communities. But I have no doubt that it's going to
happen.
These video game communities are evolving so fast that there
will be markets for credit, and very soon, production. I think in
EVE Online and other games, there are already
such labor markets. Once video game communities have developed
full-fledged financial and labor markets, then quite simply the
answer will be yes.
reason: In the last few decades we've started
to see a shift in economic research toward experiments, with
economists designing little cooperation games that can be played in
labs in short rounds and that sort of thing. A lot of that still
seems to be pretty small-scale. I'm wondering how these big,
persistent commercial game worlds can inform or interact with that
sort of research.
Varoufakis: Well, they give us an opportunity
to liberate ourselves from the smallness as you posit. There was
one experiment that took me 10 years to complete from inception to
execution to collecting the data to writing up the paper. A decade
for one little paper!
reason: That's a long time.
Varoufakis: My sample size was 650 subjects.
When I looked at some of the games, I had millions and millions of
deviations per hour, and it was all in real time. I didn't even
need to collate it. Watch it in front of your eyes; you'll be
liberated from smallness.
But in the experimental economics that we've been carrying out
as academics outside the video game world, we have a lot more
control. Even though we have a small sample size, and it took ages
to get the whole thing going, at least we control precisely the
conditions. No commercial video game companies are going to give
the economists complete free rein of allowing him or her to control
the environment.
This is a trade-off. The challenge for academic economists who
are working with video game economies is how to maximize the degree
of control they have over the experiment that they conduct without
damaging the enjoyment that players get from playing the
game.