Following my previous post on the calculation of arbitrage opportunities and relative prices in the TF2 economy, I received many messages making more or less the same, terribly apt, point: Countless exchanges on Steam, Valve’s trading platform, did not meet the criteria of a market exchange. What does this mean? And why is it important for our research into the size and nature of the Steam economy? Finally, what does this debate have to do with Adam Smith’s relevance to digital economies?
One reader, for example, wrote to say that more often than not she used Steam in order to ‘give away’ to fellow players items that she had in her backpack (and which were surplus to requirements). Or to indulge in gift exchanges with them. The point of those communications was that, if people are prone to effect ‘trades’ that are, in reality, ‘give aways’ or some form of ‘gift exchanges’, the computation of relative prices utilising the observed exchange ratios from such ‘trades’ will be badly compromised (as these exchange ratios are, despite their social significance, economically meaningless and, therefore, perfectly capable of skewing our computed relative prices).
My immediate answer is to acknowledge their point and to answer that we are doing our best to leave out of our computations exchange ratios that are clearly economically senseless. Of course, this also means that we, as analysts, exercise a great deal of arbitrary discretionary power (in deciding which ‘trades’ to ignore) while formulating our estimates of relative prices. Nevertheless, my main rejoinder here is that, while I acknowledge the point, …such is (economic) life! Even in ‘real’, or analogue, economies, many agreed prices between buyers and sellers reflect factors beyond supply, demand and bargaining power. Why would, or should, digital economies be any different?
These thoughts led me to a more general, almost philosophical, consideration. Adam Smith, the ‘patron saint’ of economists, believed that the foundation of all economic activity was none other than the human “…propensity to truck, barter, and exchange one thing for another.” (See Book 1, Chapter 2 of his Wealth of Nations, 1776). Was he right?
It depends on what he meant by ‘exchange’. If he meant the sort of exchanges that occur in a stock exchange or in some anonymous marketplace (including your local supermarket), then Smith was profoundly wrong: Multi-person (as opposed to Robinson Crusoe-like) economic activity began life, both among animals and humans, on the basis of fully socialised reciprocity. As I argue in Section 1 below, the history of human economies is built on cooperative non-market interactions – even money was not ‘invented’ as a mere lubricant of market exchanges (despite what most economists think). Exchanges are never of the purely market sort envisioned by economic theorists and free market enthusiasts (see Section 2). Thus, the idea that our economic history can be understood in terms of some natural instinct for pure market trades is, at least for me, false.
Setting aside, for the moment, the pertinence of Smith’s hypothesis about the foundations of our ‘analogue’ social economies, could it be that Smith’s theory is spot on in the case of digital economies? Surely, when people trade on Steam, or within other video game communities, they are propelled by an instinct to “truck, barter and exchange” motivated purely by self-interest. In this blog post I present my tentative conclusions on this question. But first, let us look carefully at both sides of the argument about the nature of economic activity and the meaning of exchange.
1. If not barter and exchanges, what was the essence of human economic activity (before, that is, multiplayer computer games came along)?
Smith presupposed that humans, from a very early stage, based their economic activity on trade. He imagined that pre-historic hunters, gatherers and shepherds would gather together, or meet in pairs, and indulge in exchanges of arrowheads for tanned leather or of rabbits for chunks of stag meat. That, at some point, tired of being at the mercy of the double coincidence of want, they homed in on some numéraire–asset (e.g. salt, cowries or some precious metal) which they began to treat as a universally accepted currency for the purposes of greasing the wheels of trade.
While this story is nicely satisfying, it is most probably factually wrong. Anthropologists of note have demonstrated that the evidence points to another evolutionary process that yielded money. One that was based not on money’s utility as a lubricant of trade but, rather, as a unit of accounting for debt! Take for instance the first archaeological evidence of accounting books, dating to 3500BC and unearthed in Mesopotamia (contemporary Iraq). They come in the form of tablets on which ancient accountants had painstakingly carved a log of who owed what to whom, of how much grain each resident within some temple jurisdiction had stored at the communal warehouse, of how much barley was owed to those working in the temple. What is beguiling is that the unit of account often took the form of silver coins that, in fact, did not even circulate (or had not even been minted). Indeed, everyday use of coins as a means of exchange was not witnessed for several thousands of years after it was used to record debt obligations…
If I am right, the abundant archaeological and anthropological sources at our disposal suggest that pure exchange was not civilisation’s foundation, despite Adam Smith’s conviction. No, what set us on a course to modern societies were social conventions of production and distribution based on hierarchies, obligations, social norms that determined individual and caste entitlements and, of course, organised violence. Even though we developed money very early on, it did not buy much.
2. Regardless of the origins of money, have pure exchanges taken over all economic activities?
Even in today’s highly monetised society (where almost everything is for sale), it is not hard to see remnants of the older societies, in which money did not buy much. Consider the following scene: It is Thanksgiving. Mum has slaved over a hot stove all day to produce the turkey for everyone and, at the end of the day, it is expected that each ‘recipient’ of her ‘gift’ will help with the washing up. One family member declares that he will not be participating in the clean up and asks: “How much should I pay you to get out of my washing up duties?” The answer, most probably, is: “Get lost!” I use this example to illustrate that it is perfectly possible to be utterly familiar with money, to use it all the time, but to refrain basing decisions on what to produce and for whom exclusively on monetary transactions. Indeed, my argument above has been that civilisation was built on a division of labour that had little to do with pure exchanges. It is only in the past two or three centuries that impersonal pure exchanges have taken over. And even now, it has not done so fully.
3. Pure and impure (or contested) exchanges
What is a pure exchange? It is an impersonal market exchange where the relationship between the buyer and the seller is fully reducible to the objects exchanged (e.g. apples and oranges) and to the exchange ratio (e.g. two apples for one orange). Moreover, it is a relationship that expires the moment the transaction is completed.[i]
Impure exchanges, in contrast, involve social obligations and thoughts such as “I shall do X for Jill not because of what I expect Jill to do in return for me but of what she would do if she were in my place.” In impure exchanges there is no expectation of equivalence of that which is being exchanged (e.g. your mother does not need to feel that her labour, to produce the turkey, is somehow equivalent to that you will be putting into the washing up later). In pure exchanges, by contrast, traders worry about little else than being ‘short-changed’. The market rules supreme when ‘equivalence’ in values traded is the name of the game.
Of course part and parcel of impure exchanges is hierarchy. At Thanksgiving, mum pulls rank and everyone else does as they are told. Hierarchy involves exchanges between unequals which are more often than not supported by social norms and (unequal) gift exchanges reflecting the ‘givers’ social status. In many societies, for instance, a ruler would often bestow a precious gift upon one as a means of deepening their recipient’s subservience.
For centuries, if not millennia, the pure and the impure coincided in the exchanges that kept the world going. Even though money was often involved, fully monetised, pure, exchanges did not ‘arrive’ until fairly recently. When exactly? Around three centuries ago and, in particular, after land and labour were commodified (following, e.g., the conversion of bonded peasant labour into free labourers working for a wage).
Today, we have come as close as possible to creating a realm of pure exchanges. When you walk out of the supermarket checkout, your social relationship with the ‘seller’ (who is not, of course, the checkout employee) is non-existent. It is as close to a pure exchange as it can be. The financial markets are the ultimate realm of pure exchanges, especially when trading is done not even by humans but by algorithms (or algos) trading with one another on our behalf. And yet this is not to say that we have a social economy predicated entirely on pure exchange.
Take for instance the employment contract through which employees ‘sell’ their labour to employers. By definition, this is an impure transaction. Think about it: the employee cannot simply ‘leave’ after selling her ‘asset’ (i.e. her labour) to the employer. She must stay on the premises while her labour is ‘diffused’ through the company’s network. So, as long as people are hired by employers, our analogue economy can never be a realm of pure exchanges. Something other than “trucking, bartering and exchanging” must be going on.
4. Steam trading: A realm of pure exchanges?
Digital economies, like Steam’s exchange platform, come closer to Adam Smith’s concept of an economy that sprang from a penchant for pure exchanges. People meet up online, enter into mutually beneficial trades with minimal other social obligations to one another, bear no debts (monetary or social), and walk off with whatever item they managed to acquire (via bartering) without any need to maintain a ‘relation’ with the person they bartered with. An economy created as if in the image of Adam Smith?
Not quite. The exchanges that we observe on Steam are not exactly pure. As readers have perceptively remarked, many exchanges are highly impure. People simply use Steam in order to unload onto others items from their backpack that are surplus to requirements. Often, they will accept remarkably low ‘value’ in return. Value equivalence, a prerequisite for trading-proper, is simply absent. But then again, this is how trade began and continued to be practised for thousands of years: People sold goods that they produced, or gathered, over and above their ‘planned’ (i.e. needed) volumes. It is not that they produced these goods in order to exchange them (the very definition of a commodity being a good produced in order to be traded) but, rather, they sold the quantities that ended up being surplus to requirements. It is no exaggeration to suggest that, until the rise of industrialisation and market societies, less than 5% of goods produced were commodities. So, until a couple of centuries ago, most trade happened because of unexpected, or unplanned, surpluses: very much like those in the TF2 economy!
In short, Steam trades are not always pure exchanges happening in some moral-free zone where social obligations are perceived to be non-existent. An unspecified (and impossible to compute accurately) number of trades take place at exchange rates that do not reflect the relative bargaining of buyer and seller but, instead, are determined by other social and gaming factors. In technical terms, this means that, while our arbitrage data is not affected (since the volume of arbitrage opportunities is independent of the reasons for which some items are sold cheaply and resold expensively), our relative price estimates are. Ideally, we would like to have some ‘gift exchange’ radar that alerts us to all instances of Steam ‘trading’ where people are far from trying to get the best possible ‘bargain’ for themselves. If we possessed such a radar, we would use it to decide which trades to turn a blind eye to when computing relative prices. Of course, that ‘radar’ is missing. So far we are utilising crude methods of ‘visual’ inspection, leaving out of our calculations those relative prices that seem, economically, silly. Clearly, we need to work on coming up with such a radar. Any suggestions from you will be most welcome…
An interesting twist to this debate is added by the opportunity that TF2 players have to buy gifts for anonymous strangers by purchasing a Secret Saxton from Steam. (See here for information on gifting, for those unfamiliar with it. In brief, purchasing a Secret Saxton immediately sends an item to some random player within the digital vicinity of the ‘giver’, followed by a public statement of who was the ‘giver’). The popularity of these Secret Saxtons provides ample evidence that TF2 players are replete with motives that go well beyond the urge to “truck, barter and exchange”.
As the following diagram reveals, random gifts to fellow ‘strangers’ are frequent and peak heavily around a two-day period during which we have ‘learnt to believe’ that we ought to give presents to people with whom we have some form of social relationship with. Hardly evidence that those trading on Steam are only indulging in ‘pure’ exchanges, i.e. that they are guided by nothing more than the pursuit of value equivalence.
Recapping, gifts are an important part of the TF2 economy and this, on its own, casts doubt on the purity of all other exchanges and, by association, on our relative price estimates. Our technical difficulty regarding the latter is that, unlike the case of gifting via purchases of the Secret Saxton item (for which we have perfect data), gift exchanges on Steam (as confirmed by readers’ messages) must be prevalent and truly capable of spoiling our data on relative prices.
You may recall that in my previous post, I made a big deal out of our finding that no item emerges as a common currency, a numéraire. Our close study of the TF2 economy revealed that there are times when different items are traded most frequently in different periods. If one item had ‘evolved’ into currency status, that item would have been the most traded all the time. Confounding my expectations that keys would play that role in TF2, Steam trading data shows that there are five or six items which alternate as currencies. How come? Why does one item within the TF2 economy not evolve into a currency given that everyone’s (trading) experience would improve (in terms of ease of ‘closing’ a mutually beneficial trade)? One possible explanation that the preceding discussion is pointing to is this: Because Steam trading, at least of TF2 items, are instances of impure exchanges; that is, trades that are not fully guided by the principle of trading items of equivalent subjective values. Norms of the social valuation of one item relative to another, beliefs of what one is ‘entitled’ to expect to receive for some valuable item (as opposed to what one actually would be happy to receive in exchange for that hat), expectations of a continued social relationship between buyer and seller – all these ‘impurities’ would, if indeed present, prevent the evolution of one item into the role of common currency.
Last, but not least, the impossibility of using a potential item in order to account for debts on Steam trading (unlike in Mesopotamia), offers another clue as to why no item dominates as the game’s currency unit.
5. Conclusion
Many economists believe that philosophising over the nature of exchanges is a luxury they do not need in order to analyse and understand an economy. They are wrong. The nature of exchanges, whether they are pure (i.e. asocial) or impure (replete with social norms and part of intertemporal social relations), makes a difference when it comes to predicting economic activity. Thus, to understand the exchanges we observe on Steam, it is crucial that we grasp the network of social relations within which they are embedded. The prevalence of gifting and the fact that no specific item has emerged as a form of money in trades of TF2 items should alert us to the intriguing social conventions that are part and parcel of our community’s trading decisions. How will these conventions change or mutate when participants are given the capacity to buy and sell, among one another, using real dollars? Would it make a difference if any dollar profit made through such trades can be taken out of Steam (i.e. monetised)? I suspect the answer to these questions are in the affirmative. But we must wait and see.
[i] Another definition of a pure exchange is that of an exchange where the parties involved could, potentially, draft a complete contract in which all relevant aspects of the exchange may be included in a manner that leaves no room for legitimate contest of its terms ex post.