The Atari 2600 driving controls work exactly like a mouse/trackball/spinner, but in a more rudimentary way.
The driving controllers have what looks like one of those 1 pole-12 position rotary switches you can get at RadioShack (ala a tuner input select knob from old 1970's radios).
However there are no dentens, so it doesn't click while it's turned. Basically it has a blade that makes contact with 0, 1 or both (tri-state) as it spins. Physically one contact is the LEFT direction, one contact is the RIGHT direction. (Therefore you can simulate this with a taken apart atari 2600 joystick). It works like this: (or is it UP/DOWN??--I forget, been a while since I used them)
LEFT
LEFT+RIGHT
RIGHT
LEFT
LEFT+RIGHT
RIGHT
...
This is very similar to the way an optical encoding wheel works by toggling the state of a couple bits, and watching how they "roll", you can distinguish the direction it is moving. (you can tell at any point by seeing the next position and knowing which way it is going to).
However I think optical encoders do a 4 state (2 bit) signal instead of 3 state (1.5 bit

) signal. But the intent is the same.
This would be much more successful hacking a driving controller than a paddle due to the hard stop (unless you of course break the potentiometer's limiting pieces off)