Want to know how economies really work? Play computer games.
I recently listened to a podcast where Elon Musk discussed his interest in computer games. Interestingly, he plays quite a lot and mentioned that Civilization, in particular, has influenced his understanding of firm-level behavior, especially the path-dependency of innovation on earlier institutions and innovations.
This is a significant insight. Consider the different development paths of China and India. China underwent a comprehensive industrialization process, while India attempted to leap directly into the information technology sector, bypassing traditional manufacturing. Today, China is on the verge of becoming the world's most powerful and possibly richest country, whereas India remains relatively poorer.
Like Elon Musk, we can gain significant insights from computer games. Strategy games like Civilization, Europa Universalis, and Victoria are excellent for learning economics through play. These games are built on economic, scientific, and political models that often provide a more realistic perspective than contemporary economic models dominated by the neoclassical, free-market capitalist approach.
Civilization
Civilization is a turn-based strategy game where players build an empire, create industries, use resources, research technologies, and use diplomacy and warfare to lead their civilization from ancient times to the modern era.
What I appreciate about Civilization is its understanding that the backbone of economies is production driven by innovation. Innovation, in turn, relies on knowledge that cannot simply be imported; it requires educational institutions like libraries and universities.
While this might sound like common sense, it is not what economists today preach. Their conception of economic wealth is built on capital, independent of production and innovation, as well as the institutions necessary to sustain them.
The paradigm of contemporary economics is trade of already available goods (“markets”), not the production of these goods. However, Civ-players know that the generation of industrial capabilities (e.g. by commissioning factories and industrial zones) is what gets things done—not the distribution of “scarce resources”.
Finally, economists preach the not particularly intuitive idea that if a country has a competitive advantage in producing a good, banana planting can be as good for your economy as having advanced high-tech industries.
The theory of competitive advantage was a great recipe for making countries all over the world poor. Many, in particular already underdeveloped countries, gave up on their attempts at broad industrialization that characterized the rise of the European Powers and the US. Instead, they rather specialized in their local competitive advantage, even if that was growing coffee.
The theory of competitive advantage is still one of the first concepts taught in major economics textbooks today. However, games like Civilization demonstrate that this theory is flawed. Broad production capabilities are crucial, rather than relying on trade in a few resources.
Victoria 3
However, in my opinion, the gold standard for understanding economic systems is Victoria 3. Victoria 3 is a grand strategy game that focuses on managing the political, social, and economic aspects of a nation during the 19th and early 20th centuries, emphasizing the complexities of industrialization and societal change. Admittedly, Victoria 3 is a game with a steep learning curve. But it rewards the persistent gamer with a superb understanding of economic processes.
Victoria 3 excels in many aspects. The game uses a qualitative political economy approach, emphasizing historical economic development through government action, social institutions, and government-funded research. It demonstrates that governments often perform best when running large deficits. And, Victoria 3 also illustrates how governments are instrumental in creating markets, as I will discuss further.
Market creation
Market creation—or rather, industry creation—is the process of developing new markets by identifying unmet needs or untapped opportunities, introducing innovative products or services, and establishing a demand where none previously existed.
Consider developing the electronics and automobile industries in Victoria 3. These industries heavily depend on commodities like rubber. Initially, rubber was not in high demand before its use in electronics and automobiles, so there was little incentive to harvest or manufacture it. Without a large rubber supply, however, creating these industries is challenging. This scenario presents a classic chicken-and-egg problem.
Indeed, you require a powerful economic actor who does not have to care about short-term profitability, or, in a certain sense, profitability at all, i.e., governments. Furthermore, you need a big plan that spans several years, if not decades, to bring different puzzle pieces together. Because, eventually, you want to create something for which, in the “market” logic, there is neither supply nor demand yet.
The temporal aspect is crucial. Industries take time to develop for various reasons that contemporary economists often overlook. They tend to assume immediate product availability upon demand, based on the market metaphor, which presupposes that goods and their demand already exist.
Returning to our rubber example, developing a large-scale rubber supply enables the extensive growth of the electronics industry. For the electronics industry to be productive, it needs to operate at an industrial scale, benefiting from "scale effects." Achieving this scale of production requires a substantial supply of resources, in this case, rubber.
This long-term forward thinking—which we could call with Marx “rational planning”—was at the core of industry development (or “market” creation). And as in Victoria 3, this rational planning (also sometimes hidden in the term “industrial policy”) led to unparalleled economic development and innovation in real life.
Rational planning was at the heart of the industrial policies of the most successful countries in the 19th and early 20th centuries, and later at work in South Korea and today China. And as you might have guessed, the only economic actors powerful and centralized enough to rationally plan, organize, and implement market creation are governments.
Innovation stagnation today
Today's innovation stagnation stems from contemporary economic thinking, which suggests that governments should leave market and industry creation to companies and the financial sector. This lack of government planning significantly contributes to our current crises.
For instance, have you ever wondered why so little happens on the industrial level to answer the climate crisis? Why does the shift to electronic mobility happen so slowly and why is nothing significant happening on the “market” for renewable energy?
The issue is that market creation that would answer climate change is not short- or even midterm profitable for individual capitalist agents—the same way in which the development of the tool-making industry was not short- and midterm profitable for capitalists in the 19th century, while it turned out to be the perhaps most central one after it was significantly helped by governments to grow.
Not only is new climate technology not short-term profitable, but market creation also requires massive coordination. It requires, at the same time, over years, if not decades, the coordinated development of seemingly independent industries that are not profitable currently, or perhaps not even profitable as such, if we do not consider their value for other industries that are important to us. Companies and the financial industry have neither this long-term range nor do they possess the centralized coordination capabilities necessary to perform such a task. Rather, this is a task for governments, as Victoria 3 shows us nicely.
Understanding through play
Now, even if you are less convinced than I am that contemporary economics is “wanting” or that the opposite of what it states is reflected in the modeling of the games that I discuss above, it seems intuitive that understanding through play is superior to understanding through text.
That counts in particular for the mathematical representations of economic facts that have become commonplace in economics. As we know from the Wason selection task or the work of cognitive scientists like Gerd Gigerenzer, even people trained in mathematics have problems understanding a phenomenon if it is represented mathematically rather than concretely. This is a significant advantage for computer games such as Civilization or Victoria 3.
Civilization and Victoria 3 are based on complex economic models that help you get a better understanding of economies—be that because Laissez-faire does not make for compelling gameplay, or because their developers have superb economic insight, or because their devs read authors such as Marx, Hamilton, List, Reinert, Polanyi, Mazzucato, or Keynes. What matters in the end is that computer games can be a very insightful and fun experience that may grant you more profound insights than many economics textbooks.
So, what keeps you from gaming?
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© 2024 Alexander Jeuk for the text. For image see caption.