How Sound Economics Birthed the Video Game Era

In 1962, the first version of Spacewar! was completed. Technically, this wasn’t the first video game ever created, but it was probably the first one that really mattered, as it serves as the beginning of the long line of advances in video game technology that continues into the present day.

The invention of the game is generally credited to Steve Russell, who was the primary programmer. But the development of the game was the product of a handful of programmers working with an early computer known as the PDP-1. The original version of the game employed two “ships”—really just shapes on a screen—that could shoot a missile (a dot) at the other ship. It was a two-player game, and the goal was to destroy your opponent.

But the programmers made their code available to anybody who asked for it, and innovation in the game flourished. A gravity simulation was developed by another programmer who added a sun that would pull on the ships, creating a new obstacle for players to contend with. Another programmer altered the randomly placed dots on the screen that represented stars so that they actually reflected the real-world constellations and even mirrored each star’s respective brightness. A hyperspace option was added by yet another programmer, providing a new strategic element to the game.

But perhaps the most important innovation came from another techy named Nolan Bushnell. While he attended college at the University of Utah, he was employed by an amusement park to work their arcade room. In the days prior to electronic games, this meant mechanical pinball games, rather than the modern arcade games that Bushnell was about to invent.

Like any computer geek in the 1960s, Bushnell was enthralled by Spacewar! which he was able to play on the PDP-1 owned by the University of Utah, and he wanted to bring the game to the arcade so non-computer geeks could play for a quarter. The problem was that the PDP-1 that the game ran on did not come cheap. “I realized you could make a whole lot of quarters if you could put a computer with a game in an arcade,” Bushnell said, in reflecting on the idea in 2013,1. “And then I did the division and realized that even a whole lot of quarters coming in every day would never add up to the million-dollar cost of a computer.”

In other words, informed by the price system, the resources required to make the game widely available were too costly. As Walter Isaacson writes when telling the history of the event, Bushnell and his colleague Ted Dabney “continued to concoct schemes for turning a computer into an arcade video game. … But no matter how they juggled the numbers, it was neither cheap nor powerful enough.”2

Technical knowledge alone, of course, was entirely inadequate in determining the profitability of an arcade game in the 1960s, and it was this fallacious assumption that would allow another arcade-entrepreneur to fail before Bushnell would succeed. Bill Pitts and Hugh Tuck had a similar idea to Bushnell, but unlike him, they failed to take advantage of the price-and-profit system that could inform them of the profitability of their venture.

Pitts and Tuck made an investment of $20,000 into a miniature version of the PDP-1 – the PDP-11 –, and they planned to set it up in a separate room from the customers. Then, they ran cables into a separate room to connect to a console and controllers that customers could use, charging ten cents per game when they made their debut at Stanford’s Tresidder student union in 1971. They believed the game would be a smash hit, and it was. Stanford students flocked in every evening to take their turn at the console. There was high demand, but all the dimes they earned failed to come close to their $20,000 investment, and the pair went under.

Nolan Bushnell was unsurprised. He was already working on his more economical version of the game when Pitts and Tuck unveiled their own. “I was surprised at how clueless they were about the business model,” Bushnell said of them. “As soon as I saw what they were doing, I knew they’d be no competition.”

Pitts and Tuck were brilliant at making technical calculations, but they lacked the insight of economic calculation that Bushnell understood.

To make his version of the game profitable, he first had to strip away a lot of the nice additions that other programmers had added, such as the gravity simulator and the hyperspace option. Pitts and Tuck were incensed at this heresy. They called it a “bastardized” version of the game. But they still missed the point – the technology wasn’t yet capable of incorporating those programming innovations into a machine that could be made affordable to the general public.

Bushnell’s innovation, which was driven not by his interest in science as much as his understanding of cost-benefit analysis informed by the price system, was to do away with the program itself and recreate the game by designing hardware circuits that could perform the task that was currently being performed by the program on the multi-function PDP-1. In many ways, this may have seemed like a regress in technology, as the innovation of programming and universal hardware is part of what makes modern computers what they are.

But technology is never valued for its own sake; it’s valued for its application to the real world and its accessibility. The computer engineers and programmers that drove computer innovation in the 1960s could imagine all the great things they could build with unlimited resources, but reality does not supply unlimited resources, and Bushnell was one of the few among them who seemed to realize that – all because he was thinking about profits and prices.

So he designed a fully hardware, simplified arcade version of Spacewar! that he called Computer Space. It sold to arcade owners for only $1,000 – meaning that it would pay for itself after only 4,000 games (an easy number to hit for an innovation as popular as the video game). Bushnell sold 1,500 units – not enough to make him rich, but it was a profit, and it served as enough of an incentive to get him to form his own video game company: Atari.

Computers have been undergoing waves of innovation since the 1940s, and it is important to recognize the value of the technical innovations conjured up by men and women who were motivated by their own personal curiosity. Spacewar! enjoyed innovation driven by a handful of geeks at MIT working only for their own personal satisfaction for many years. But there is no telling how long this amazing advance in computers would have lain stagnant in universities – inaccessible to the average person – had it not been for Nolan Bushnell’s profit-seeking motivation and singular understanding of the importance of the price mechanism. Video games could not have been founded on technical advances alone.

This article was originally featured on Mises.org. You can read the original here. 

• 1. As quoted in Walter Isaacson, The Innovators: How a Group of Hackers, Geniuses, and Geeks Created the Digital Revolution (New York: Simon & Schuster, 2014), 208.
• 2. Ibid., 209.