Theory of economics and application to Civ IV

[ShadowWarrior]

Post 1:

The real nature of money, gold, silver, and wealth:

If one unit of food cost one gold, then X units of food cost X gold. A society that produce X units of food will have a wealth of X gold pieces.

If the food cost of the unit is the same, and we introduce another commodity, called silk into the economy with a cost of three gold peices, then each unit of silk produced cost three gold pieces to purchase. A society that produce X units of food and three units of silk will have a total wealth of X+9 gold pieces.

If a gold mine is discovered suddenly, and the country is flooded with gold, does that mean that the country's wealth have suddenly increased if nothing else in the economy changed? Of course not. Why?

Gold, or more generally, money, is simply a convenient measure of the total volume of the real, actual, tangible output that a society produces. A sudden increase in a country's gold supply does not increase the country's wealth if the gold increase is not accompanied by a proportional increase in output of real tangible output. In the example in the previous paragraph, unless the gold increase is accompanied by increase in production of food and silk, the country can not said to be more wealthy.

Let me illustrate with another example using modern day context. Assuming that under the condition in which the economy is already at a healthy level of employment, the Fed chooses to suddenly flood the economy with more money supplies. What will happen? Will the country's economy suddenly benefit as a result? Will, as a result of the increase in money supply, the economy suddenly be producing A LOT more goods and services than it was producing prior to the increase in money supply? Of course not. Why?

Having more money supply means that everyone in the economy all have more money. This means that demand for goods and services increase. The only way for producers to increase their supply to meet the increasing demand is to hire more people to work. But as we have already assumed, the economy was already at a healthy level of employment, which means that further hiring is going to be very difficult. If there is no further hiring of new workers, producers will not be able to effectively increase output to bridge supply with demand.

Therefore with a lot of demand and not enough supply, price of the supplied goods will rise. It will rise so much that demand will soon begin to decrease until demand and supply are equal again. Notice that while all this is happening, no new production or expansion in capacity has happened. The only change in the economy is the nominal variable of price and money supply.

The moral of the story is this. Wealth is not determined by supply of gold, money supply, or whatsoever. Wealth is measured by the amount of what is ACTUALLY produced in the economy. Toward making measurement of the actually produced goods and services easier, we used gold or money or whatever as a convenient unit of measurement.

 

[ShadowWarrior]

Post 2:

On specialization and trade:

Assume two societies are employing all of their members to produce goods and services. Assume also that these two societies are isolated from each other.

Under these two assumptions, what can we do to further increase the wealth (as defined in the last post) of these two societies. Simple. We bring these two societies out of isolation, and make them trade with each other.

As a result of trading, these two societies will specialize in whatever they are best at producing, allowing production to increase. This will lead to creation of more wealth than was formerly possible under a regime of isolation.

In another word, specialization and trade produces wealth by allowing for the increase in production of goods and services.

In context of Civ III, building of roads generate commercial revenues. That this commercial revenue is engendered is due to road's ability to enhance trading between these cities, which will increase production that is the result of specialization. In another word, the increase in production is captured by the commercial revenues generated by roads.

 

[ShadowWarrior]

Post 3:

On public sector in Civ III:

Public sectors can be loosely defined as economic activities that directly involves the government. All the costs incurred by government programs such as courts, education, welfare programs are vital components of economic activities. How do the government pay for these costs? The answer is through raising money through taxations and bond.

In the context of Civ III, public sector economy can be seen as building and maintainence of wonders, improvements and units. Taxations will go toward paying for these activities.

More about private sectors in later posts

 

[PeteAtoms]

But as we have already assumed, the economy was already at a healthy level of employment, which means that further hiring is going to be very difficult. If there is no further hiring of new workers, producers will not be able to effectively increase output to bridge supply with demand.

But if everyone in society had more money, than couldn't the producer raise the salary of "potential" workers making it more desirable for workers to work there? and when the workers get more money, they spend the money on goods, raising the demand of those goods, going into a cycle...

 

[ShadowWarrior]

Post 4:

In Civ IV, as in Civ III, each unit of population will work on a tile of land and produce certain amount of food and shields.

The similarity ends here. I propose that in Civ IV, the food and shields produced by the population will be taxed by a certain percentage which is determined by us players.

These taxed shields and food will enter our treasury in the form of gold peices. (The exact mathematical formula for conversion is a task I leave to designers, who should make sure that the formula is simple enough for us to understand and compute)

These gold pieces that go into our treasury will go to build and maintain units, improvements, and wonders. In another word, we no longer use shields to build units, wonders and improvements. Instead, we use our treasury.

We are allowed to allocate our treasury to each city in whatever ways we like and we are free to change the allocation anytime we want. If we want, we can give all our treasury to one city for building of whatever we want built at the expense of economic development of all other cities in the empire. Of course, we should make sure to leave enough treasury to cover the maintainence cost of whatever improvements and units we already have.

As discussed in the previous post, trade increase wealth by allowing for specialization which will help to increase total output production. In context of Civ IV, I propose that the bulding of roads will have the impact of increasing the actual amount of food and shields produced instead of generating commercial revenues. The increase in output of food and shields will be reflected in the increase in the tax revenues we get.

When we build marketplaces, stockexchange and other similar city improvements that enhance trading and commercial and financial activities, the effect will be the same as building roads, which is to increase output. This increase in output will again be reflected in the form of increase in our tax revenues, which will be converted from food and shields to gold pieces.

 

[ShadowWarrior]

But if everyone in society had more money, than couldn't the producer raise the salary of "potential" workers making it more desirable for workers to work there? and when the workers get more money, they spend the money on goods, raising the demand of those goods, going into a cycle...

I see things this way. Lets say the government increase money supply, then everyone, including the producers, in the society have more moeny.

So, like u said, producers will be able to increase the salary of potential workers, which will induce more workers to come work.

However, like I said, we assume healthy level of employment, which means that no matter how much the salary is increased, there is simply no more available workers left to work.

Lets say that the producers will raise the salary to an incredibly high level such that those who were not in the job markets decided to give up education or retirement and join the workforce, then yes, producers will be able to produce more goods now.

But guess what. The salary is so high that the producers will find it hard to find their business profitable unless they raise the price of their product. But by raising the price of their product, less and less consumers will want to buy those product. As a result, the economy will again go back to the original equilibrium when the Fed didn't increase money supply.

Under this scenario, the economy may enjoy a temporary increase in output. Such increase will however be short lived.

 

[ShadowWarrior]

Post 5:

How I view marketplace, stock exchange and other economic city improvements:

I view the building of market place and stock exchange and these other city improvements that enhance the economy not as the literal building of market place and stock exchange.

In another word, I view building of marketplace as establishing those legal frameworks needed for merchants to trade and sell the product without worrying about theft or whatever. The cost of legal framework and maintaining them will be covered by tax revenues.

The building of stock exchange requires also legal frameworks in order for financialiers to thrive. When we use treasury to build stock exchange, I view it as simply the cost of setting up such a legal framework.

Courthouses will establish rule of law. This rule of law will enable the legal framework we built for market activities as well as financial activities to work even more efficiently. In another word, without courthouse, our building of markets and stockexchanges will still improve the economy, but not by as much as would be possible if we do have courthouse.

Some current players of Civ III complain the lack of distinction between public sector and private sector economy. I say that we simply view the building of marketplace, stock exchange and other economic city improvement as helping for a private sector to flourish. The impact of a thriving private sector should be increase in tax revenues. This is already captured by the increase output production that results from building of market place and stock exchange. Read my previous post if u can't make the conceptual link.

 

[PeteAtoms]

Thanks for clarifying that.