Modeling a Skyrim Shock to the US Economy

I don’t think Dave Banks seriously believes that the release of The Elder Scrolls V: Skyrim has been a disaster for the American economy, but if we pretend to take him seriously for a moment I think it has some interesting consequences:

I know what you’re thinking: it’s the second-best selling game in the world right now. In the first 48 hours that Skyrim was available, 3.5 million copies were sold, a number that has continued to grow. How can a game that will generate millions possibly be bad for the economy?

The answer is quite simple: Skyrim is incredible. The game’s world is so big and there are so many quests to complete that those millions of dollars in sales are being nullified by players’ lost productivity and lack of economic participation in the real world.

How should we understand this? I see two possibilities:

— One is of Skyrim as a kind of severe demand shock. “This weekend alone,” he writes “I forgot about two obligations, blew off a dinner and a concert, and purchased no goods or services.” Normally people do a lot of different stuff to keep themselves amused. But if a single $56 purchase can keep you fully entertained for a long time, that might result in dramastically reduced demand for goods and services.

— The other is of Skyrim as a supply shock. Maybe the possibility of spending your time playing Skyrim has massively increased the value of leisure time, and people will start retiring early, downshifting to part-time jobs, declining freelance assignments, and otherwise avoiding active participation in the labor market in order to play Skyrim.

The appropriate policy responses are rather different. In the first, what we want to do is use expansionary monetary and fiscal policy to re-boost overall spending flows throughout the economy. Ultimately, it’s not possible for the existence of a video game to permanently alter our level of demand. What it’s really doing is reshaping the pattern of the demand throughout the economy. Demand for rival entertainments is crashing, which could push the economy into a downward spiral of deflationary expectations, but ought to simply cause production to be redirected into goods that are complementary to Skyrim. More comfortable chairs, say, or surgery to correct vision problems associated with excessive Skyrim-playing.

In the second case, however, expansionary policy will have a different impact. If people simply don’t want to spend their time doing market labor anymore, then efforts to increase nominal spending flows are just going to produce inflation. More dollars will be chasing the exact same pool of laborers, so each person will get paid more. Good for them (initially) but since their productivity hasn’t magically increased, their higher wages will have to pass through into higher prices for goods and services.

Correction, Dec. 14, 2011: This blog post originally misspelled Skyrim.