The Economics of Bioshock

Would you kindly find out what video games can teach us about markets?

May 31, 2022

BioShock' tendrá su propia película en Netflix — Following tradition, I also forgot where I got this one.

Bioshock is a 2007 game by 2K Games, and is widely considered one of the best games of the decade - if not all time. Just like with Fallout New Vegas, I’m a huge fan.

In it, the main character survives a plane crash and arrives in the underwater city of Rapture, which used to be a splendid art deco metropolis but is now a decrepit wreck. Under its founder, the uber-libertarian entrepreneur Andrew Ryan, the city became a highly advanced location in medicine, technology, and art, having discovered a drug named “ADAM” that can be used to modify the human genome. One of its uses are substances known as “plasmids”, which give the user seemingly superhuman abilities, such as conjuring flames or telekinesis.

The post contains some spoilers for the game, but it mainly focuses on backstory and lore, so it doesn’t reveal any major twists.

Lore galore

(Note: the video above mostly concerns the game’s plot, rather than backstory. It’s still fairly entertaining and illuminating in case you want a more detailed outlook)

I am Andrew Ryan, and I'm here to ask you a question. Is a man not entitled to the sweat of his brow? 'No!' says the man in Washington, 'It belongs to the poor.' 'No!' says the man in the Vatican, 'It belongs to God.' 'No!' says the man in Moscow, 'It belongs to everyone.' I rejected those answers; instead, I chose something different. I chose the impossible. I chose... Rapture, a city where the artist would not fear the censor, where the scientist would not be bound by petty morality, Where the great would not be constrained by the small! And with the sweat of your brow, Rapture can become your city as well. (Andrew Ryan)

As mentioned above, Bioshock takes place in the city of Rapture, an underwater “utopia” conceived through hardline libertarian principles. Its founder, Andrew Ryan, decided to start the city in the 1940s to escape government overreach in both his native Soviet Union and in FDR’s United States, his adoptive home. Believing that society should be structured so that the mediocre masses could not constrain great men and women, he chose to build Rapture as a haven for the exceptional, so the greatest minds of humanity would abandon “oppressive” societies that placed limits on their genius and creativity.

Initially, Ryan’s plan worked, and Rapture made rapid progress in science, technology, and the arts. The economy remained virtually unregulated, and basically all services were privately provided. Market competition reigned supreme and ruled all aspects of life. The city seemingly thrived on private industry, and Ryan’s vision seemed to come true - especially after something that wouldn’t be discovered until nearly 80 years later, the capacity to modify human DNA, was adapted in Rapture.

But not all was well. A large segment of the population became increasingly discontented with the lack of public services or adequate welfare, and “collectivist” visions that opposed Ryan’s minimal state libertarianism became widespread and popular. Ryan decided to ban all contact with the outside world, fostering a black market of imported goods, and became increasingly restrictive on the freedoms and rights of his political opponents, imprisoning many who disagreed with Rapture not having a government - and even going as far as developing technologies that allowed him to control people’s wills directly.

Eventually, tensions between Ryan and both the hungry, drug-addicted masses on one hand, and the busisnessmen who wanted to trade freely with the outside world on the other, reached a breaking point in New Year’s Eve, 1958, when a mob of revolutionaries (and ADAM addicts) attacked a party being held for the city’s elites, which caused a rapid breakdown of society into anarchic violence and ended with the complete destruction of the city.

Essays in negative economics

What is the greatest lie every created? What is the most vicious obscenity ever perpetrated on mankind? Slavery? The Holocaust? Dictatorship? No. It's the tool with which all that wickedness is built: altruism. Whenever anyone wants others to do their work, they call upon their altruism. Never mind your own needs, they say, think of the needs of... of whoever. The state. The poor. Of the army, of the king, of God! The list goes on and on. How many catastrophes were launched with the words "think of yourself"? It's the "king and country" crowd who light the torch of destruction. It is this great inversion, this ancient lie, which has chained humanity to an endless cycle of guilt and failure. (Andrew Ryan)

Andrew Ryan has one set of economic views (laissez-faire minimal state libertarianism, basically) which can, as all views, be defended on two kinds of grounds: normative and positive. To recap a previous post, normative economics concerns itself with the “oughts” - the social objectives to fulfill (for example, “is poverty bad”). Positive economics, on the other hand, is mainly related to the “hows” - the specific consequences of actions (for example, “would policy X reduce poverty” or “why are people poor”). Both are very similar, but a very common mistake is to criticize normative claims on positive grounds, and vice versa.

Andrew Ryan’s normative agenda is simple: society is divided between parasites and useful members of society. The useful members want to create; the parasites want their cut. His normative position is that it is ontologically good to create a society where the parasites get nothing and the great men and women can create wealth via the “great chain of industry” (basically, the invisible hand). Are these views correct? Well, to quote the Big Lebowski, “that’s just, your opinion, man” - Ryan’s views are primarily about political philosophy, and their main issue is that they are self-contradictory. His political system based on personal freedom and choice necessarily had to become a totalitarian police state because, if people ever stopped liking it, there was no stabilizing factor that kept it from disappearing.

His positive views are probably more complicated, and cannot really be directly inferred from his incendiary political statements. Normally, the role of government is assumed to be correcting market failures - especially by providing public goods. A public good, in brief, is something (most) everyone can use but without the possibility of not letting people who don’t pay use it. In this sense, an externality is a special kind of public good: a “public bad” that only affects people who don’t participate in a given transaction. Traditional public goods are things such as roads, sewage, national defense, or the police. Things like education or healthcare aren’t really public goods in the technical sense, and are mostly provided due to social customs and not really because the market couldn’t deal with educating children. Because the whole point of a market failure is that it’s not solved by the market, then it has to be solved by the government, because failure is bad.

In contrast, Ryan might not necessarily think that the market is perfect, but rather, that the solutions to market failures might be worse than the failures themselves. This theory, known as government failure theory, states that while market failures might be necessarily bad, they might also be better than the government trying to step in and fixing them - because the government’s solution might not do anything, at best, and make the problem worse at worst. For example, while low wages might be a problem, the government setting a minimum wage that’s too high might render a lot of people unemployed, which would make the problem even worse. Government failure theory is a positive belief (in the technical term) because, at its core, it states that under certain circumstances it is better for the government to not try to fix a market failure. Exactly what these circumstances are are the quid of the question, and the biggest examples come from economic development: many economists thought that the only way to solve underdevelopment in many countries was by the government virtually planning the economy to allocate resources “better” than the market. They were very wrong, and millions of people suffered through very bad outcomes as a result. But the specific designs of each policy matter, and the models used to specify which interventions are welfare-improving are very complicated to say anything useful whatsoever.

But because both “market failure theory” and “government failure theory” are, at their core, positive theories with baked in models and assumptions that can therefore be empirically verified, they are both valid interpretations of reality in principle and can both be tested empirically by staking out their claims in each particular context. For instance, would helping ADAM addicts recover with state-provided therapy and/or cash vouchers be effective? Both sides assume addiction is bad; the market failurists would claim that the answer is yes; the government failurists would often be against. But their claims can be verified, and it seems that (in this narrow context), market failure theory has the better claims - whereas for something like import substitution, they have the worse ones.

The marketplace of market ideas

We have no obligation to make history. We have no obligation to make art. We have no obligation to make a statement. To make money is our only objective. (…) In order to make money, we must always make entertaining movies, and if we make entertaining movies, at times we will reliably make history, art, a statement, or all three. (Michael Eisner, CEO of the Disney Company)

Let’s take a step back: what even is a market? Normally, by “the market economy”, we mean an economic system where allocation of resources is done by “spontaneous order” through individual actions and not through, say, state-directed planning committee. Why and how they exist is a whole other thing, but why there is a private economy in general, and how property rights work, is a very interesting question.

Let’s start with private property. What is it? A favorite example of economists is Robinson Crusoe, the shipwreck survivor. In Robinson’s island, there are no property rights, since he’s the only inhabitants. Property rights are what links a person, their property, and another person - owning something implies an externality on someone else. If I own a house, you not being able to live in it is an externality on you; the role of property rights, therefore, is correctly internalizing the externalities present on any given interaction involving property. The externalities are resolved because one of the rights involved is the right to sell, meaning that a mutually beneficial transaction is possible - if you want my house, you can buy it from me, and be secure in that I’m not just going to take your money and continue living in it.

But private property existing and the right to sell it doesn’t entail that their allocation is conflict-free. There will always be conflcit over property because needs are unlimited and resources are scarce. You might want to buy my house to live in it, but another buyer could want to turn it into an apartment building, and another into a golf course - and, by definition, only one can have their way. The way this conflict is resolved is through competition over it, by offering an amount in accordance with their own valuation, and then I select whichever one is closest to my own. But here’s a a catch: sometimes desired outcomes are not allowed. Zoning regulations might prevent me from selling to the developer or the golfer, even though they might offer me a fairer deal.

Property rights is a system for allocating resources in non-prohibited uses, where who can allow something and why a use is prohibited or allowed are key distinctions. Blood plasma, alcohol, and human beings have all been subject to different property rights structures throughout time and between countries - I would only be allowed to sell my house to the person who wants to live in it in San Francisco, but to whoever I wanted in Buenos Aires. Property rights being a social construction mean that society can demand more or less of them in different regards - the demand comes before the implementation. It’s important to know that property being protected means the owner is the sole individual allowed to make non-prohibited decisions, but not that the value of their property has to be protected - the fundamental aspect of property rights is that everything non-prohibited that does not infringe on the fundamental aspects of another’s property rights is allowed.

But why private and not public property? I’ll go over this in the next section, but the key reason is fairly simple: information and cost. The main difference between public and private property is that the people who own private property can sell (their share of) it, but those who own public property cannot. That private property is transferrable means that the costs and benefits of ownership are much more clearly delineated than if it weren’t, which also implies that the costs and benefits within the property itself (this applies to firms) are also clearer. A business owner whose employees don’t do their assigned work can simply fire them; a citizen who sees that a state-owned business is wasting their tax money can’t do as much.

Going from public to private allocation of property can, and sometimes does, result in more informed decision-making, different levels of talent, and differing abilities to incentivize employers to actually do work. Under a public ownership structure, the costs of making decisions are much worse assigned than in a private structure, since there is a clear mechanism in the first one (firing the CEO) than in the latter. Obviously there are (many) cases where the ownership of something is judged better in public than private hands, and most of the time it involves either solving a market failure or looking after the general public interest versus the specific desires of “the shareholders”. For example, a privatized police force or army could have very bad incentive structures, so it would be better for the relevant property rights to be held by everyone.

The Rapture example here is fairly simple: absolutely everything was granted property rights under the belief that they would result in a correct allocation of resources. Competition over everything was stated to be the best way to assign resources, and non-allowed uses of property were very few. The idea was that people would be able to maximize their own wellbeing by choosing their own police or fire service, if any, with costs and benefits within the service determined by competition. Police officers in a privatized service would work harder because the margins would be smaller, so each customer mattered more - resulting in more individual effort. Of course, this wasn’t the case, and “the police” is widely considered one of the services the private economy is not especially well suited for providing.

The use of “the use of knowledge in society” in society

Look at this lead pencil. There’s not a single person in the world who could make this pencil. Remarkable statement? Not at all. (…) Literally thousands of people co-operated to make this pencil. People who don’t speak the same language, who practice different religions, who might hate one another if they ever met! (…) What brought them together and induced them to cooperate to make this pencil? There was no commissar sending … out orders from some central office. It was the magic of the price system: the impersonal operation of prices that brought them together and got them to cooperate, to make this pencil, so you could have it for a trifling sum. (Milton Friedman, I, Pencil)

A first step to fully grasping the implications of Andrew Ryan’s uber-libertarian principles is very elementary: why does “the market” exist? Society, as a whole, knows a lot of things - for instance, how to make a pencil. But individuals don’t, and nobody told them how to make it. When each part of the pencil was made, thousands of people from across the world did a single thing, and they were all brought together by a simple, single rule: making money. Much like firms decide whether or not an action is good by judging it as profitable, based on rules of thumb and trial and error, so do individuals from across the world. Their interactions, based on this simple idea, can lead to the most complicated phenomena - just like puppies eating from a tray and forming a pinwheel. Nobody told either how to do it, it wasn’t designed by anyone, and yet it exists - because of individual uncoordinated actions taking place at one and reacting to various phenomena.

Friedrich Hayek’s (1945) “The Use of Knowledge in Society” is mainly about this problem. In a world where firms operate under private information that they have, and where a lot of information is generated by interactions that aren’t led by anyone, how is it possible to best use this knowledge that was not given to anyone but is held by everyone? Each firm plans under a specific amount of knowledge it holds - the baker how to make bread, the brewer how to make beer, etc. The only things that brings them all together under one roof, when you go to the market, is their desire to make profit. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner - greed, for lack of a better word, is good. The interactions of the firms under their desire to make profits, therefore, generate a sort of knowledge that nobody has, yet everybody has - like how to make a pencil.

But the problem is this: if firms hold specific knowledge that only they themselves have, and the whole of society has knowledge that nobody in particular has, how to make optimal economic decisions? A lot of people, especially in the mid 20th century, believe(d) that the answer is “the government”. But the problem is, the government neither has the specific knowledge certain people have, because it’s not staffed by professional farmers, and it doesn’t have the knowledge that nobody in particular has either - nobody in particular has it, after all, and it’s “up in the air”. And even if it had the first kind of knowledge, techniques and best practices are always changing, and government involvement can only make them change even more.

Therefore, if firms are exposed to rapid changes in circumstances, and if these changes cannot be foreseen by anyone, and if the knowledge of how to respond to them is held by both everyone and nobody in particular, it seems that a centralized solution is not an answer. The problems that create a change of circumstances, say from a shortage here or a factory fire there, don’t matter - it only matters how much to change behavior, and how long these changes are reflected. If factories suddenly have a need for more screws of one kind, it doesn’t really matter why - what matters is how many more screws they want. The relative importance of each item is the signal that any given interaction has to provide, regardless of context.

The best solution for this coordination is the price system, states Hayek. Absent any market distortions or macroeconomic issues, prices always reflect the relative scarcity of any good to its demand: goods in more demand are more expensive, and the opposite for unwanted products. This also provides signals for companies on which products are successful and which ones aren’t - letting them either adapt their behavior or go under (as explained in the paragraph above). Therefore, the main role of prices is to synthesize information on the relative abundance of a product, regardless of any of the conditions that led to its abundance. Of course, market failures and phenomena like inflation exist, but the former signal the artificial scarcity of a good caused by too few firms, or an externality, while the latter actually derives most of its costs from the “noise” it introduces to economic transactions.

So it makes sense for Andrew Ryan to be for a minimum of government, on principle and in the abstract, since government intervention only muddies up the price system and puts interference between what the buyers say and what the sellers hear. Splicers getting addicted to plasmids was only a signal for producers to make more plasmids, or even for them to come up with non-addictive ones. Ryan’s position, at least initially, was that nobody knew as much about the plasmid market, or the police service, or plastic surgery, as the people involved, and that individuals would be able to judge the information available through the price mechanism. Of course, this was not successful, since it’s not especially clear if a plastic surgeon that charges less is more efficient or simply less talented, and the lack of a judicial system meant that (for instance) medical malpractice was simply a matter of life.

Make us a king

When Samuel grew old, he appointed his sons as judges for Israel. (…) But his sons did not walk in his ways. They turned aside after dishonest gain and accepted bribes and perverted justice. So all the elders of Israel gathered together and (…) said to him, "You are old, and your sons do not walk in your ways; now make a king to lead us, such as all the other nations have." (…)
He said “These will be the ways of the king who will reign over you: (…) He will take the best of your fields and vineyards and olive orchards and give them to his servants. He will take the tenth of your grain and of your vineyards and give it to his officers and to his servants. (…) And in that day you will cry out because of your king, whom you have chosen for yourselves…”.
The Bible, Book of Samuel 8:1

Now, there is a fundamental problem here concerning the allocation of property rights: what happens when people cannot be trusted? If it’s possible to profit from, basically, stealing from others, then it’s possible that anarchy is an economically inefficient scenario - because the costs of guarding property through the market are way too high compared as their cost through taxation, especially considering that “protector” services might be predatory as well. So, for instance, acquiring information about doctors that behave unethically or police and fire services that charge unethical rates might prove too costly for most people - having a single centralized institution to do so would be a net good for them. The state, then, arises as a protection of the community’s property rights if it’s possible to gain them through predation.

The distinction between economic communities where reputation can be used effectively, and those where it cannot, is very hard, but generally it relies on a handful of conditions. A business transaction in this lawless world is a prisoner’s dilemma: either everyone cheats, and gets the equilibrium outcome, or everyone plays nice, and gets the optimal one. If you do transactions often, the optimal outcome is more likely because you lose out on a lot of potential business; if you don’t, then you have very little to lose. It’s why, for instance, a plastic surgeon in Rapture would be less ethical than a pediatrician - how often is someone getting their face reconstructed. Generally speaking, there’s four basic conditions for a reputation-based system to work: it can encourage traders to behave honestly, it is able to impose sanctions on violators, it’s possible to gain information on others’ past behavior, it is possible to provide evidence in favor or against of alleged violators, and it’s possible to redress any harms allegedly done. Each of these behaviors is costly, but the system can work in a descentralized manner if the benefits are large enough. If they aren’t, then a rules-based, centralized system (that follows the same laws) is necessary, and a minimal state composed of just judges and the police is thus born.

Naturally there is a complex evolution from “judges and cops” to “modern bureaucracy” but for all intents and purposes we can stop there, at least as far as Rapture is involved. Evidently, it didn’t meet the standards for avoiding reputation-based systems of enforcement against predation, since the city was full of drug addicts with superpowers, thus preventing basically all aspects of the required “checklist” to be fulfilled.

Now, having a state does not preclude predation - firstly by friends of the ruler, who might develop agreements allowing them to plunder as they plase, but also by the ruler itself. The government’s predation is, by all intents and purposes, the lack of going through on promises - for example, by confiscating wealth or by defaulting on mandatory loans. Having a predatory state ultimately means that no property is safe and no transactions are certain - eroding the fundamental building stones of markets themselves. You can clearly see how fear of this, directly or indirectly, influenced Ryan’s thinking - but also how an excessive concern for state-level predation resulted in an economy fundamentally incapable of preventing predatory behavior of any kind. This is especially problematic because it is actually possible to prevent predatory state actions, primarily through mechanisms that enforce commitments by the ruler.

Conclusions

So what can we learn through Bioshock? There are a handful of main lessons here

Government solutions to market failures need to be weighed on their merits. Even if a market is functioning incorrectly, it is not necessarily true ex-ante that government intervention can solve the failure, let alone improve welfare. It is possible that government failure is a major consideration.
The market exists to allocate private property through competition. Private property grants sole power of decision over something to an owner. Others may compete to receive ownership, which is reallocated at the owner’s discretion depending on socially allowed uses.
Private property (generally) assigns the costs and benefits of actions most efficiently. Since it very difficult to directly influence decisionmaking in publicly owned property, private property allows for a more efficient use of resources, as costs and benefits are more directly perceived. In many cases, however, the market in question might function too poorly for this mechanism to work.
The role of prices is to convey information. Given that many people have specific knowledge not shared by anyone else, and that much knowledge is held by nobody in particular, then the relative prices of different goods convey how abundant they are relative to demand and therefore information involving changes in their use and in their production.
If agents cannot trust each other to respect contracts, a “minimal state” will emerge to maintain them - yet there is a risk the state itself will become the untrustworthy agent.