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Source link: http://archive.mises.org/9966/question-about-the-video-game-bust-of-1983/

Question about the video game bust of 1983

May 16, 2009 by

As I think about the below question–and I know nothing about the case in point–video games might have been just the most conspicuous victim of the overall business cycle in the early eighties. The boom bust might have affected this industry more than others simply because it was the fashion, as with dot comes in the late 90s and housing today. However, the timing doesn’t quite work out, since the recession is dated to end November 1982.

See what you think:

I’ve been looking around but can’t seem to find a decent explanation of the North American video game crash of 1983. As I love video games and economics, I simply cannot accept the superficial explanations offered for its occurence. Economists haven’t spent much time with this subject, but since Mises.org recently published a reinterpretation of the Tulipmania, I thought I would ask you what do you think about the crash, or even if you can forward this question to someone more able to answer it.

The conventional story goes like this: Before 1983, the video game market was in its second generation of consoles. Since it wasn’t yet a “mature” industry, producers flooded the market with consoles and games. This saturated the market and led to consumer disorientation, which then led to the bankruptcy of most console manufacturers and game developers.

While it is certainly possible that there was a general cluster of entrepreneurial errors in the industry, I don’t think it is likely. For one thing, the conventional story states that, because of heavy competition, the quality of the games being released then was getting poorer, instead of better. This strikes me as at odds with conventional economoic theory. The only explanation I can see for developers making such cheap cash-ins en masse was that they were responding to some extraneous incentive. Unfortunately, I’m not able to verify this myself.

Anyway, eventually the prices of consoles and games plummeted and this was the end of the “Atari age”. The industry would only rise again with the Nintendo Entertainment System (NES), launched in 1985.

Recently there’s been some talk about another video game crash in games journalism. It is said that, because Nintendo is apealling to a different demographic than the usual gaming enthusiasts and putting out a large number of casual games, this can lead to another situation like that of 1983. But, again, I believe this is nonsense.

So, can you help me find a good, economics-compliant, explanation for the crisis?

Regards, Enviar
Erick Vasconcelos

{ 35 comments }

newson May 16, 2009 at 9:17 pm

while doug french does bring up very interesting points, i’m not convinced that tulipmania is a classic example of the abct. (this has been already been thrashed out in the blogs).

manic behaviour is part of the human condition. i can recall from my youth regular outbreaks of yo-yo mania, hula-hoops, ding-bats etc. more recently, “tickle me elmo”, tamaguchi(?), cabbage-patch dolls, mutant ninja turtles etc.

on the face of it, this seems to fall into the fashion/craze model, rather than the abct.
after all, the interest rates had previously been raised through the roof by volcker, and were still very high by historical norms, and the memories of the recession were still raw. dot-com mania was in a climate of very much lower rates and easy credit, after a prolonged period of well-being. in the game-bubble, clusters of errors did not occur across wide swathes of the economy, otherwise the industry bust would have resulted in an economic slump across the board.

Jeffrey Tucker May 16, 2009 at 9:39 pm

this was apparently the game that ended the bust
http://en.wikipedia.org/wiki/E.T._the_Extra-Terrestrial_(video_game)

note the “lengthy negotiations to secure the rights”

maybe IP played some role in this

John May 16, 2009 at 9:50 pm

Though the Austrian story is inherently one of relative sector allocations, I concur that I wouldn’t necessarily say the video game crash was one explainable by the ABCT. If I were studying this problem I would try to find ROMs that people use to play these old games online and build a library of how long their code is (as a proxy for the complexity of the programming). Obviously the longer a console is available and the more developers are familiar with it, they will try to produce more complex games to take advantage of learning by doing. However, if you could take the data and see if there is an objective deterioration in quality, that would be interesting to document.

A lot of the crash has been blamed on games like ET that were just ridiculously bad. Seems like more can be blamed on the decisions by Atari to authorize all kinds of games, despite quality then on anything else. And for their poor decisions, Atari failed. That being said, one thing Nintendo did when it came in was improve quality by not letting anyone produce a game on it.

Also to correct some dates, NES was available in Japan in 1983, U.S. was 1985. However, I think the video game crash didn’t hit Japan.

Nevertheless, it would make for a great dissertation topic.

Gil May 16, 2009 at 10:30 pm

“So, can you help me find a good, economics-compliant, explanation for the crisis?”

Should that read, “Make every problem a fault of governments, regulations, taxes, etc.”? Why can’t some accept that there was a cluster of errors dye ti too many players with not enough talent to succeed in a particular field?

Jahmai May 16, 2009 at 11:54 pm

I think the flood of bad games theory holds up simply because there wasn’t much games journalism or reviews back then to vet out bad games. Also I believe the ability to rent games before buying was not available. Today we take for granted the ability to check Amazon reviews and Metacritic scores.

Couple that with games costing $35 1982/83 dollars, you can see why people might stop buying games if they get 3 or 4 stinkers in a row.

silvermine May 17, 2009 at 12:25 am

Not all games were on the Atari. I was happily playing Ultima III in 1983, on my commodore 64.

Wikipedia has your answer, BTW:
http://en.wikipedia.org/wiki/Commodore_64

(See the section on the game crash)

Slim934 May 17, 2009 at 12:54 am

This would actually be an extraordinarily interesting topic for a dissertation. There were a very large number of factors in play during it’s market formation.

We have here an instance where a large number of producers entered an extremely experimental market in a manner that does not appear too rational. According to the wiki, even Quaker Oats was considering opening a gaming division.

What I find particularly interesting is Nintendo’s use of monopoly power to increase it’s popularity with consumers after the crash occurred. It seems that by exerting control (through technical and somewhat IP means) on who could produce games for their console, they were much better able to satisfy consumer desires than by the fully open market as it existed before.

Franklin Harris May 17, 2009 at 12:59 am

Actually, I’ve often wondered something similar regarding the comic-book crash of the mid 1990s, which is another case of the timing seeming to be off, as the speculative boom in the comic-book market (outrageous secondary-market prices for brand-new comics, growth of comic-book specialty stores, new publishers, increasing print runs, etc.) didn’t even start until 1991-92, i.e., just as the bust in the rest of the economic was starting.

It’s always seemed to me that speculation in comic books was driven by the perception that it was a safe haven when the rest of the economy was going south, much as the real estate market was perceived during the dot-com bust, when real estate prices continued to climb.

Of course, we know what happened later to both comics (a crash between 1993 and 1997, in the midst of the next boom) and to real estate (a crash so large it led to the current recession).

Gil May 17, 2009 at 1:13 am

Thanks for the info, silvermine! :)

Slim934 May 17, 2009 at 1:27 am

After looking through more of the history it could be that silvermine has a point in mentioning the commodore 64.

In the commodore you had a fairly low priced (in relative terms) computing machines that played comparable games to more expensive rivals AND because it was a general computing device instead of a “gaming system” it could also perform productive tasks outside of gaming.

This sort of dynamic would make it pretty difficult for smaller time rivals who were just building up a game-only-device based operation (timex, TI, sears, etc.) that they simply cut their losses and exit the market.

It probably should not be included in the strict canon of ABCT theory though given the extremely small nature of it’s boom and bust cycle. I’m not saying that there is a real size criterion for a boom-bust in a particular industry to fit in ABCT, but let’s look at the actual loss of wealth which occurred under this cycle compared to something which everyone agrees characterizes ABCT.

For example, the recent housing bubble burst (which I really guess counts as 2 compounded recessions since the 2000-2001 recession was not permitted to run its course) cause the stock market to lose close to half its value from the beginning of the bust to sometime in the december 08 – january 09 time frame. I mean, it seems to me that the game boom-bust was probably just a blip on the total screen of the economy when it occurred. This would lead me to believe that there was a far smaller level of entrepreneurial error clustering than in a general credit/ increase in money supply induced business cycle (ie. standard ABCT conditions).

Thoughts.

Slim934 May 17, 2009 at 1:29 am

Sorry.

“Thought” should have a question mark after it. =\

John May 17, 2009 at 3:03 am

Franklin Harris:
I would add the baseball card phase at the same time.
My dad ended up selling tens of thousands of dollars worth of baseball cards from his childhood over the past fifteen years, so I find it pretty interesting.

Inquisitor May 17, 2009 at 4:03 am

“Should that read, “Make every problem a fault of governments, regulations, taxes, etc.”? Why can’t some accept that there was a cluster of errors dye ti too many players with not enough talent to succeed in a particular field?”

No, it should read ” one that doesn’t assume people are ‘irrational’/idiots/morons/know-nothings which ‘enlightened’ planners must guide lest they destroy themselves.” But I know this must bug people who cannot give up the idea of the state as mommy or daddy providing them with “essential” services they’re too unimaginative to procure otherwise. :) I agree with the author that the explanations given are too ad hoc. Whether it involves “blaming” the “government” or not, surely something more substantial could be offered.

Re the ABCT Mises never said it explained any and all speculative manias &c. Merely those where the conditions he spelled out obtained.

Inquisitor May 17, 2009 at 4:05 am

BTW it might very well be the result of mere entrepreneurial error. I don’t think this seems like an instance of the ABCT.

William H Stoddard May 17, 2009 at 9:51 am

Rothbard’s argument was that it’s not reasonable to anticipate a huge cluster of enterpreneurial errors all through an entire economy, unless some “macro” factor such as government manipulation of the currency or the financial markets is at work. But this case isn’t one of errors all through an entire economy; it’s errors in a single industry. I don’t think that Austrian theory precludes this. Say’s law says you can’t have general overproduction of all commodities and services, but it doesn’t say you can’t have overproduction of any specific thing . . . and it seems as if we’re talking about overproduction of video games, followed by a collapse.

AJ Witoslawski May 17, 2009 at 10:15 am

while doug french does bring up very interesting points, i’m not convinced that tulipmania is a classic example of the abct. (this has been already been thrashed out in the blogs).

manic behaviour is part of the human condition. i can recall from my youth regular outbreaks of yo-yo mania, hula-hoops, ding-bats etc. more recently, “tickle me elmo”, tamaguchi(?), cabbage-patch dolls, mutant ninja turtles etc.

Tulip mania doesn’t compare to trends like yo-yos and hula hoops. Tulip mania was characterized by a huge economic bubble. Ding bats weren’t.

I’m not that familiar with the 1980s game market, but it’s quite possible that there was a couple year trend that stimulated demand, and thus stimulated production of many low quality games, which then plummeted during the recession.

Erick Vasconcelos May 17, 2009 at 11:15 am

John,

“Also to correct some dates, NES was available in Japan in 1983, U.S. was 1985. However, I think the video game crash didn’t hit Japan.”

Yes, the Famicom was out in 83, but the NES only in 85. The bust is commonly called “North American video game crash”.

Gil,

“Should that read, “Make every problem a fault of governments, regulations, taxes, etc.”? Why can’t some accept that there was a cluster of errors dye ti too many players with not enough talent to succeed in a particular field?”

Oh, well. That should read “Give me an explanation with some actual causes for the bust, instead of some ad hoc BS.” And I don’t accept clusters of errors as normal because they aren’t. It’s simply stupid to say that eventually a bunch of companies will go bankrupt at the same time and say “Well, tough luck, they simply didn’t have it in them to stay afloat in the market.”

Larry May 17, 2009 at 11:23 am

Rates were cut in half prior to video game crash

http://research.stlouisfed.org/fred2/series/FF

Secondly, we should consider standardization. Were the companies going bust betting on the wrong standard?

Erick Vasconcelos May 17, 2009 at 11:25 am

I mentioned this in an email to Jeffrey Tucker. I think I read somewhere a quote by George Reisman comparing the economic effects of unregulated and regulated industries side by side. As video gaming was a new industry back in 83, I believe it is accurate to say that it was still fairly unregulated. Being side-by-side with a lot of other regulated industries, investment naturally flows to it. Hence, you get too many videogames and too few of other goods.

If not the whole cause of it, it could’ve been at least a component of the crisis.

Martin OB May 17, 2009 at 12:00 pm

The explanation in Wilipedia looks rather fishy:

Also, the US market was flooded with literally dozens of consoles, giving consumers far too many choices.

Adding to the industry’s woes was a glut of poor titles from hastily financed startup companies. These games, combined with weak high-profile Atari 2600 games, such as the video game version of the hit movie E.T. the Extra-Terrestrial and an infamous port of the popular arcade game Pac-Man, seriously damaged the reputation of the industry.

Unlike Nintendo, Sega, Sony, or Microsoft in later decades, the hardware manufacturers in this era lost exclusive control of their platforms’ supply of games. With it they also lost the ability to make sure that the toy stores were never overloaded with products.

An overabundance of bad products can hurt the firms which produce them, but how can it hurt the entire industry? Just because there is a lot of bad music doesn’t mean you stop listening to music altogether. You choose the one you like. That’s how the market works.

David C May 17, 2009 at 12:58 pm

Well, lo and behold, I did some googling on copyright case law, and there were a bunch of major cases around 82, 83 that found that copyright controls of various forms “protected” video game monopolies, oops I mean innovation, oops no I don’t.

http://www.davis.ca/en/blog/Video-Game-Law/1983/01/02/COPYRIGHT-LAW-PROTECTS-VIDEO-GAMES

http://www.davis.ca/publication/Summary-of-Video-Game-Case-Law.pdf

David C May 17, 2009 at 1:19 pm

Actually, after posting the previous, I realised that this discussion hit upon a major issue. If one believes in liberty and one believes in freedom, then when a presented with a question like this it is only natural to look in areas where liberty might be restricted. Someone who doesn’t give a damn about liberty would never have found a case law summary like that, would have never bothered to look, would have never thought to seek these kinds of causes as a possible reason. They might have spewed out some ignorant dogma like “well, they collapsed because they were too unregulated by the government” , and video games at the time were not very regulated so someone who didn’t know better would just take it at face value.

Tim May 17, 2009 at 2:05 pm

I don’t see what’s so particularly special about this. Even in an ideal free market economy, there’s no reason to believe that industries wouldn’t rise and fall all the time. No system is entirely perfect, there’s room for human error in anything.

Let’s look at it in a different way. After the video game crash, parents sighed a breath of relief over the death of a cultural fad that had children under its grasp for hours every day. Two years after the video game crash, Nintendo releases Mario and Zelda games which skyrocket the sales of its console and make video gaming a permanent feature of modern consumer society. What is truly amazing about all this isn’t the crash, but the rapid recovery afterward.

Theguy May 17, 2009 at 2:24 pm

Remember when it comes to video games- home consoles were not the only choice available. Arcades were very popular at that time- and most video games were simply ports of popular Arcade games like Pac-man. But when people are met with dissapointing ports like atari’s Pac-Man I think they simply decided to spend their money in the Arcade instead of buying garbage ports. Then here comes Nintendo with games that not only look as good as the current Arcade games- they offered a new gaming experience that wasn’t around before with Super Mario Bros., Zelda, etc.

Avram May 17, 2009 at 8:25 pm

I tend to think that this is an example of the free market working. The people who were diverting resources and using it to create unprofitable, poor quality products that consumers had no need for were punished, while those that were not, were rewarded.

Was anyone but Atari really affected by the so called videogame market crash?

It looks to me as if it wasn’t even an error on the part of many entrepreneurs, just the one entity. There were plenty of video game publishers at the time doing well. As for the developers they got the money as soon as they signed with Atari. Heaps of them went on to become very successful on other platforms and remained profitable. Others did not, but that’s normal too.

You have to keep in mind that competition isn’t just with other video game publishers. Its with all other substitute forms of leisure activities and entertainment. Atari was competing with television, board games, sports, you name it.

All that aside I do think it will be very interesting to look at what happens to the video game market this recession. I think part of the false sense of prosperity has created a big boom in consumer products and all this government spending trying to get hot of the printing press money to the labor force is going to be going to more leisure activities. So I think there’s a bubble in the so called recession proof video game industry and I think it’ll burst.

Brent May 17, 2009 at 9:03 pm

If one industry experiences decreasing demand, essentially crashing, I don’t see why that would be considered a “business cycle” as we conventionally use the term. Particularly if you are talking about a smaller industry, such that it doesn’t really make much of an impact in the economy as a whole.

Erick Vasconcelos May 17, 2009 at 9:22 pm

Avram,

“Was anyone but Atari really affected by the so called videogame market crash?”

Yes, most console manufacturers and game developers, few exceptions, went broke.

tehdude May 17, 2009 at 10:50 pm

The crash is exactly what corrects error, the problem comes when you view the correction as unfair and try to mitigate the crash.

Matt May 18, 2009 at 1:31 am

As with most problems, it’s probably not one problem, however given it was a relatively new field, which hadn’t seen a crash, and consistent with imperfect information, many entrepreneurs were not certain of how much work is actually needed in a video game to generate a profit, but there was probably an incorrect assessment of future growth in an industry. The market will tend to find the most efficient amount of consoles out there. A mature market would likely be closer to the most efficient size, and less likely to have higher occurrence of entrepreneurial errors. Still the ABCT can still apply, but it doesn’t seem to be the main effect, given the timing as pointed out by Jeffery Tucker.

Libertas est Veritas May 18, 2009 at 5:23 am

I’m not really sure what the monetary policy in the US was at the time, but the fact that the industry clearly sacrificed quantity over quality is very odd. I’m not very familiar with the US gaming industry at the time either, but the thought occurred to me that maybe investors fled the ’80 and ’82 recessions into the gaming industry? The fact that the main competition to the Atari (Intellivision and ColecoVision) arose in ’82 seems to point to this.

But in any case, it should be remembered that the Atari 2600 was technically inferior to new home computers. Games on the Atari 2600 were mainly about moving a blob of pixels around, while the C64 offered actual details in the graphics. And when you factor in the low cost of the C64 and the usefulness outside of gaming, it’s not hard to see why home computers overran the old consoles.

Also, the idea that consumers can’t discern between good and bad game releases isn’t a very solid one. Bad games are released constantly and they never cause consumers to stop buying products completely. Consumers can share information about the products, after all.

So my uneducated guess would be that investors, under unsure times, fled to one seemingly sound industry. An industry which was surprised by the appearance of cheap and superior home computers and thus suffered a one-two punch which wrecked havoc on the industry.

Ivan May 18, 2009 at 8:03 am

A sector-limited cluster of entrepreneurial errors is not a business cycle. A business cycle happens when there is a general cluster of entrepreneurial errors in all the economy, and not in a given industry. That bust may have been a simple business fluctuation.

Michael A. Clem May 18, 2009 at 2:41 pm

And let’s not forget that the original IBM PC came out in August of 1981, which of course led to the PC clones. This standardization of pc’s led to harder times for non-standard home computers, which were partly sustained by gaming.
So I think we’ve got some reasonable explanations suggested that don’t rely upon “lack of regulation” OR ABCT. An infant industry was just going through its growing pains.

silvermine May 18, 2009 at 9:31 pm

Indeed — the commodore was oodles better than the Ataris, because it didn’t just play games. In 1982 I was teaching myself my first programming language in it’s predecessor (the VIC-20). We had all sorts of fun things back then, including word processors. It was so nice to not have to re-type everything or use white out to correct mistakes!

Ahhh, geekery. :>

Then in 1985, the Amiga came out. A friend had one. It was sweet. (For the time)

Anyway, back to people having problems with games not being quality. Oh yes, that was a problem. My parents always took the games out and tested them (even after that time) because they frequently simply didn’t work, and you’d have to take them back and exchange them. The idea of software QA and QC as it occurs today simply didn’t exist!

(Once they didn’t bother and we ended up with a non-working soccer game on christmas morning. Such a bummer! It just would not load.)

beneficii May 19, 2009 at 12:43 am

I don’t think most game manufacturers went broke though–they simply left the industry for other pursuits. They took a small risk, decided it didn’t work/wasn’t worth the investment, and exited stage right, which doesn’t even seem like much of a bust, but rather the free market’s signals working when they are not interfered with by governments.

Could you imagine if the FedGov bailed out Atari, how the video games market would have been in the ’80s, ’90s, especially if the FedGov took the attitude of, “We need to keep the Japs out of our All-American video game industry”?

(The console video games made by Nintendo in the late ’80s to the ’90s were awesome and even seemed to have a libertarian, anti-statist bent to their storylines, whereas today video games have gotten a lot more statist.)

SirThinkALot March 2, 2010 at 9:34 pm

I have to say up front I dont know a whole lot about this stuff, I’v just recently started reading Mises and Hyack’s works, so if I’m completely wrong on this somebody can correct me on this, but from what I understand the ABCT is about why the economy as a whole goes boom and bust. To that end its not really applicapable to particular industries, except as they directly benefit from the central banks loose monetary policy, especially smaller industries like video games were in the ’80s(or comics in the 90s).

If theres one thing that can be learned from the video game and comic busts, its that a ‘bust’ of an industry, isnt the end of that industry. Both recovered fairly quickly, video games would become an entertainment industry that would surpass hollywood in terms of sales. And the Government didnt put any new regulations on them or ‘bailout’ Atari or Marvel when they went bankrupt(and they are both still around, or at least Marvel was until Disney bought them). And as a free market enthueist who also happens to be a gamer/comic reader/general nerd, I must say: Thank God for that.

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