I have designed and built a joystick that contains no electronic parts -- only fiberoptics. The motion is sensed via quadrature encoding, and the signal processing is handled by an arduino microcontroller.
Here is a similar project for linear position tracking:
This joystick is designed for use in MEG and MRI scanners where the electronics may interfere with the scanner's operation.
Fiber transmitter and receivers:
Avago HFBR-2412TZ (mouser)
Avago HCTL-2032-SC (mouser)
62.5 um glass fiber custom cables from http://www.ecablemart.com/
Code wheel from http://usdigital.com/