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What Greece's new finance minister learned from studying video games

Greek finance minister Yanis Varoufakis
Greek finance minister Yanis Varoufakis
Milos Bicanski/Getty Images

Greece's new finance minister is well-known heterodox economist Yannis Varoufakis. Before he got into Greek politics, though, Varoufakis was standing out from the pack by working as an in-house economist for the video game company, Valve.

This may seem odd, but the video-game work is actually extremely relevant to his new gig. Indeed, Varoufakis was originally hired by Valve because of his work on the economics of European monetary union. Valve operates several different games that have their own in-game economies, and the company wanted to link them and provide a unified medium of exchange — essentially a virtual equivalent of the creation of the euro. Europe basically botched this, so Valve brought in an economist to try to manage it better.

But once at Valve, Varoufakis also studied the in-game economies in ways that are relevant to Greece's several economic recession. As Brad Plumer explained back in 2012:

Consider, for example, the concept of arbitrage. Economic theory suggests that markets will usually tend toward equilibrium — if there’s an opportunity for someone to buy low and sell high, enough people will do it that these imbalances will disappear. This is difficult to track in real life. Yet this summer, while working for Valve, Varoufakis used data from the game Team Fortress 2 to measure how often this actually happened. As it turned out, the economy can veer far from equilibrium surprisingly often.

Interesting, but so what?

Well, Europe is in the midst of an economic malaise that's actually worse than the Great Depression by some measures. And the question of equilibrium is one of the driving forces in thinking about how to fix it.

In the 1930s, John Maynard Keynes argued that the Great Depression proved that economies aren't governed by powerful forces of equilibrium. The slump went on and on with no sign of self-correction until countries delivered massive jolts in the form of abandoning the gold standard and arming to fight World War II.

After World War II, however, mainstream economics — such as "New Keynesian" economics — developed a different view on the matter, influenced by sophisticated equilibrium-based mathematical models. These approaches see recessions as temporary short-term deviations from the underlying trend. On this view, a downturn that lasts as long as Europe's must simply imply that the prosperity of the mid-aughts was all an illusion. And that means that only biting "structural reforms" can improve things by forcing people to adjust to a new, poorer reality with lower wages.

Yet some economists don't buy this newer view.

And Varoufakis thinks his video-game research provides empirical reason to doubt it. Actual economies don't have a natural tendency toward equilibrium, and the fact that Europe's slump is really deep and long-lasting simply proves that Europe is in a really deep and long-lasting slump. But it's not, in his view, something Europeans need to suffer through. It reflects blunders made by leaders at the top — blunders that could conceivably be reversed.

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