There’s been recent enthusiasm about the need for “Game Economists.” I guess good things come in packages!
But economists have had a flirty relationship with games; Edward Castronova’s Virtual Worlds: A First-Hand Account of Market and Society on the Cyberian Frontier remains one the most downloaded papers in SSN history. And well… there’s not much else. I’ll put a stake in the ground and claim Castronova as the world’s first Economist to study video games. He generally gets lost in the discussion to the most talked-about Game Economist, Yanis Varoufakis.
When Valve signed Yanis, and it was at Gabe’s academic behest, news articles sprung up left and right. Despite producing a whooping three blog posts during his tenure, his name resurfaces as a fun fact wherever game economics discussion appears. The Varoufakis story stuck because it brings validation to the industry, “Look, a real economist studying games, isn’t that just wild?” And Varoufakis is certainly as real as they get; he would lead Greece through the Eurozone crisis with a spice that would make citizens of Arrakis jealous. But I think this serves as another reminder that the industry suffers from a strange inferiority complex. From Game Companies are Not Tech Companies:
Games never seem to get the mainstream or broader tech circle legitimacy many think they deserve. Despite operating in the Valley and major tech hubs, game companies do not reach the crazy evaluations of FAANG (ATVI has a market cap of $63B, while Facebook sits at $215B). Furthermore, public intellectuals like Tyler Cowen or Ben Thompson rarely discuss games as a share of their commentary (not the case with Matthew Ball – but maybe he drinks too much kool-aid). Even internally, game firms seem to be chasing subscriptions off the heels of Netflix and Spotify.
We continue to see the same sentiment whenever an MMO has a “real economic problem.” Despite economists and economic problems acting as validation stamps, there’s a genuine utility to economists in games. Hopefully, this blog serves as a small piece of evidence for that utility (it certainly isn’t my Twitter).
Since Varoufakis, there’s been a smaller and much quieter wave of tech Economists who have fully converted to Game Economists. It’s important to point out the evolution from Economist to a Game Economist is distinct and essential, a process I’ve struggled with myself.
Like Castronova and Varoufakis, my imagination nearly imploded at the thought of games meeting economics. Economists crave the ability to run crazy experiments with large sample sizes at low costs. Games seemingly provide the perfect laboratory to test micro and macroeconomic theory; look no further than Levitt’s King paper or World Of Warcraft’s virus outbreak. However, after working in games, my mindset started to shift. Instead of asking what games can do for economics, I started asking what economics can do for games. A sort of discipline puberty, if you will.
So What Can Economics do for Games?
A few years ago, I applied the gaming company I worked for to participate in the University of Chicago’s Field Experiment program. The program links academic economists with companies in the pursuit of running large-scale randomized field trials. The academics hope to get a published paper based on a field experiment, while the companies hope to get top-tier analysis at no charge. It was an absolute blast to visit Chicago and meet the father of field experiments, John List, and Bates Medal winner, Steve Levitt. But the program also reminded me how tunnel-visioned economists and companies could be. Levitt showed absolutely no intellectual curiosity in the breathtaking results of his three million player study. Massive quantity discounts did not only fail to increase revenue but failed to convert non-payers into payers. The implications of such a result are vast and wide-ranging, yet when I talked to Levitt, he considered the experiment a “failure.” He considers it his only “failed” field experiment with a company. It was a soul-crushing exchange, but his incredible partner and paper coauthor carried on the torch the King-side. I tremble with excitement at what the Experimentation team at King has done since, a shining example of Popperian science.
Later on, Levitt mentioned speaking to none other than Valve but felt they were mostly trying to “show off” in conversing with him. Something along the lines of “see how complex and real our economies are?” I guess the industry’s inferiority complex rears its ugly head again.
The explosion in demand for Game Economists and projects of Varoufakis and Castronova have something very particular in common: floating prices. Traditional games operate on a monopoly-monopsony model: one buyer and one seller. But here’s a shocker for readers: Economists like studying prices, but for prices to reflect information accrual, they need to be the result of barter. Hayek famously points this out in his The Use of Knowledge in Society essay:
The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity—or rather that local prices are connected in a manner determined by the cost of transport, etc.—brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.
Studying prices and their relation to specific events provides critical insight into what has happened and how to act. Prices are signals.
And prices are precisely Castronova and Varoufakis’s work: Castronova studying Second Life‘s open economy, and Varoufakis doing the same for Team Fortress 2. If there is anything blockchain games will mainstream its auction houses. They are notoriously hard to manage, but the gains to do so are vast; ask the FIFA Ultimate team developers for evidence of both claims. On the other hand, games are taking their first steps into monetary policy with tokens, and it’s been… rough (more on that later in Sense & Nonsense in Blockchain Games).
Let’s stop here to note anyone can contribute to game economics, but I don’t think everyone who does is a Game Economist, just as a mechanic can make a car better without being a driver. Despite this, the blockchain gaming move to open markets means it’s helpful to delineate between a Game Economy Designer and Game Economist. A Game Economy Designer is generally not a Game Economist, but a Game Economist can be a Game Economy Designer (but isn’t always). Sound confusing? Let’s discuss.
A Game Economist has some shared and unique skills compared to a Game Economy Designer (as does an Economy Designer to an Economist!). A Game Economist should have the usual economic toolkit: marginal analysis, causal inference, econometrics, model building, coding (!!!), etc., but bears the toolkit down on games. They should be masters of vital economic concepts while evangelizing them to a team, both in the game’s design and production.
Economists Rank the Most Important Economic Concepts
The Game Economist marries economic theory, data science, and a game design into polygamous glory. A great Game Economist throws in product management skills for good measure. I’d propose a simple litmus test for a Game Economist: could this individual be employed as an economist outside of games, for example, at Amazon, eBay, or in a university? This isn’t meant to be some sort of elitist creed, but instead, be clarifying. The differentiation matters: opportunity costs make Economists a lot more expensive than game designers due to opportunity costs 1.
We still need to build the foundational economic models of games, just as Becker did for crime or Buchanan for public choice. The dump truck has barely arrived, much yet started to pour the concrete. We’re still mixing at the factory! The most important thing we can do now is recruit, retain, and engage a new wave of Game Economists.