Valve's economist, mr Varoufakis, wrote an article about a month ago
about his experiences working at the company. This is, to my knowledge, the only full english translation of that article. I translated it myself, so please excuse any errors in grammar or syntax. The article contains quite a few stuff of interest to gamers, the most important of which I've highlighted. I skipped the last two paragraphs as they don't contain any gaming-related info. Enjoy!
It was late at night, about one year ago, when I saw this weird email in my inbox. It was of the kind that I delete without reading. Purely by error I pressed “open” instead of “delete” and my eyes fell upon the first phrase: “I’m the president of a video gaming company based in Seattle…” Immediately I thought: “Yet another scummy salesman that’s trying to con people on the internet. But curiosity got the better of me and I continued reading.
“We’re experiencing some problems as we’re upgrading our virtual economies and consolidating different economies on a common platform. Would you be interested in working with us?”
Although I didn’t have a clue about what he meant, the very idea of “consolidating different economies”, and virtual ones at that, got me even more curious. So I kept reading.
“I’ve been following your blog for quite a while… In my company we’ve been thinking about how to connect two different virtual environments (creating a single currency) and all of a sudden we found ourselves wondering about the serious problems that it would cause in the payment equilibrium between them. Immediately it came to my mind that “one environment is Germany, the other is Greece” - a thought that wouldn’t hav crossed my mind had I not been following your blog. Instead of going on with my thoughts and trying to emulate what you would think, I thought I’d write to you in case I could make the real you to develop an interest in our affairs.
At that point I felt more than curious: I felt interested! And this despite the fact that first, I have absolutely no interest in videogames and second, the email’s signature meant nothing to me: Gabe Newell, Valve, Seattle, WA, USA. But the idea that a software company had created communities of people who it thought constituted “virtual economies”, ones that it was afraid to unite in fear of creating another problematic Eurozone on the internet, was enough for me to decide, that night, that next month (last November, I had a trip planned to the USA anyway) I would visit Seattle to check out what Gabe and his partners were up to.
A few days later I asked my 14-year-old nephew (who I knew was into videogames) if he knew Valve. “Of course” he answered me with a level of derision that only a teenager could feel. “Godly company”, he added. When I told him that some guy named Gabe wrote to me and invited me to go to Seattle, his eyes lit up. All of a sudden I got a new “audience” without really deserving it, just because I didn’t delete an email on an autumn night.
Anyway, in the end of November, after I had concluded my academic obligations in America and Canada, we went to Seattle with Danae [Alexandros’ note: his wife]. There I locked myself with Gabe and his partners for two days in their offices in Belleveue, located right next to Microsoft’s (I learned later that Gabe was a prominent member there up until 1996, when he left and created Valve).
I will always remember the conversations from those two days. For starters, I was struggling to keep up with them. Their minds were racing at a thousand miles per second. Although they had no knowledge of economic theory, they were able to grasp difficult concepts before I even had the chance to finish my sentence and move them even further along in seconds. Very soon I realized that these people have created not one but several virtual economies. In total, 90 million people worldwide took part in them. Those millions of real people didn’t just play videogames (killing zombies and fighting) but also took part in transactions and item exchanges of digital products whose value exceeded $1,4 billion annually – not virtual dollars, real dollars! The interesting part, at least to me, was Valve hadn’t tried to create those economies. No, these economies appeared spontaneously, without a plan, by themselves.
Many of you will be wondering what kind of economies these are, so allow me a short introduction. We’ re talking about videogames where you don’t play against the machine (like in the days of old with Space Invaders of Tetris). In these modern internet games you create an avatar of yourself, that you customize and dress as you see fit, and in that form you enter the virtual world and find other players like you. Then the game begins. You may fight, become friends and fight others, or plan the domination of that virtual world (as warlords or as leaders that create rules for others). [Alexandros’ note: It’s obvious he’s talking about MMOs here]
And the economies? How do they get created? During the course of the game, its designers reward players with random gift “drops”. As you walk in the digital forest, or climb the ladder of a digital tower, you find a sword, a hat (which your avatar can wear, if he likes, or put it in his backpack), a useful or decorative item. In time the company creates new “items” (to keep the players interested) and stops “producing” older ones. But, some of these old items become collectibles – they gain value like paintings or antiques precisely because their production has ended. It wasn’t long before players started trading between them and, eventually, exited the game, went to ebay and sold these virtual items for cold, hard cash. (Gabe told me he noticed this spontaneous economy creation when he saw a hat being sold for $2500 at an online auction). [Alexandros’ note: Well now we know how Valve’s hat fetish came to be :)).
Today, as we speak, one million people make a living off of Valve’s games. And I don’t mean the 400 employees of the company. For example, in China at least 200,000 players earn from 40 to 80 thousand dollars annually – which is more than enough to ensure a comfortable living, without even having to leave their house and with a PC and an internet connection as their only means of “production”. You will ask: Is this really an economy? Can you have an economy without real production? I agree. So far what I’ve described is an economy based on exchange of goods. Yet there is also production. 400,000 people are the independent producers that make a living off of these games, worldwide. How?
Let’s say that you design a nice hat or a weird sword in your computer that players like. Valve gives you the ability to sell it to gamers at a price that you choose and Valve gets a cut (similar to what Apple does with apps that you buy from iTunes which have been produced by independent developers). Given the zero cost of production and distribution (excluding of course the time spent creating that virtual item), good, independent designers have access to a huge market from which they can earn a sizable income.
To cut a long story short, the reason I was interested in working with Valve at studying these spontaneously created international economies was twofold.
First, the ability that Gabe offered me, to examine the financial relationships of millions of people, is an economist’s dream. Consider this: The financial “data” that we economists work on, are not… data at all. We never know the market’s real prices but we are forced to work with price indexes that are old and inaccurate. We can never observe real transactions but we have to imagine the transactions that happened through the prism of incomplete information on a database. Even things like unemployment and inflation are based on statistical methods that are heavily flawed (and frequently influenced by politics). However, for Valve’s economies we have accurate data for every transaction for every price and for every quantity at any time. To put it in layman’s terms: we don’t need statistical methods (because we have all the data, as if we were all-knowing)!That’s why I’m talking about “the economist’s dream”. If you add the fact that I have the chance to experiment (for instance, to try different pricing policies in different subsets of the participants’ population – something that no economist could ever do in the real economy), you can understand the allure.
Second, because Valve itself is structured in a way that contradicts all our prejudices about what a modern, successful high-tech business means and how it should be structured. It’s a bossless company, with no managers, with complete autonomy for every individual working there or working with it as I am now), with a system of value distribution that is based on the principle that they all vote on other people’s salary. I’ve written elsewhere on Valve’s structure so I won’t go deeper here. I’ll just say that it is an experiment that gives hope on how technological evolution could in the future a) be decoupled from the traditional hierarchical organization of a company (in a way that combines horizontal participatory management with high technology and efficiency) and b) lead to the radical separation of the capitalist connection of property rights over the means of production from the withholding of profits. A big discussion for another day.
At the time period between March till June I went back to Valve and we begun a research program of systematic study of their economies. Within a few days we had the first results that shed light on the way prices are determined and how arbitrage is fluctuating. At the same time, I got the chance to “see the future”. You see, in addition to their game software, Valve has started developing hardware. Worried by Microsoft’s and Apple’s tendency to claim a bigger and bigger cut of its profits (in order to allow users access to Valve games through the computers that run their software), Valve has started experimenting with its own machines that give you the ability to run these games without a (Microsoft or Apple-controlled) computer. I’ve signed an NDA so I can’t reveal much more. I’ll just say that I really saw the future. (it’s not a small deal to see a virtual but highly realistic alien stand beside a real human in the same room with you, walk around the room and wink at you. And all that without a screen, a projector or even a computer near you…)