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.