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.