Category Archives: Economics

Uncertainty and Value

29 Sunday Jan 2023

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In the middle of a discussion about the laws of damages, the Babylonian Talmud (Bava Kamma 7b) comments in passing that during that period (roughly 200-500 C.E.), the sale price of land in Israel varied considerably by time of year—by as much as half. This is a startling passage, and for our purposes it helps illuminate some key concepts in economics.

What could be the explanation for such dramatic differences in price? The rabbinic commentator Rashi understands this to mean that between planting and harvest, the expected value of the anticipated harvest was baked into the land’s sale price. By contrast, once the crop had been harvested, the land was reduced to itself, so to speak. So the sale price of the land would rise as we got closer to the harvest, and fall dramatically once the harvest was over.

This explanation has some difficulties. First of all, that would mean that the land itself was only valued at roughly its yield for a single year’s harvest—or even less, if there were multiple harvest seasons over the course of the year. Why would land be so cheap?

The later Tosafists also note that the talmudic passage doesn’t distinguish between farmland and housing. It’s possible that the passage assumed that we would know that it was discussing farmland; but if not, similar price dynamics would be at work in housing as in farmland, even though there is no crop to plant or harvest. So then what would cause the variation? The Tosafists tentatively suggest that demand for housing followed cyclical patterns, rising during the fall and falling at other times of the year. But that is just a way of restating the original question. What drove these patterns? And whatever the cause, why would the price swings be so dramatic?

I have no insight into why housing might exhibit seasonal patterns; but I think I can add a suggestion for why the price variation was so large. If we assume that the “intrinsic” value of the land was not small—and the Talmud makes clear in many places that land ownership was valued and valuable—there must be something at work that changed the expected value of land, meaning the expectation that the land’s owner would be able to benefit from owning the land.

“Expected value” is basically the value of a good, times the chance that you will gain the value. For example, if I say that I will give you a dollar, the expected value of the dollar is $1. But if I give you a dollar only if you win a coin flip, then the expected value of the dollar is only fifty cents. It’s the same dollar; but because you’re less likely to get it, it is worth less to you in advance, while you are still uncertain of the outcome. If Bob wanted to buy from you the chance to do the coin flip, he would only be willing to pay fifty cents, not a dollar. The uncertainty of the asset depresses its price.

And in fact, at the time of the Talmud, land ownership was very insecure. There are many references in the Talmud (for example, Gittin 58b) to people having their land stripped from them by “extortionists,” who apparently took advantage of the weak governmental authority of the occupying power to take people’s lands by force. This would have the effect of depressing land values, because the expected value of the land would be less than if landownership were secure. However, as you got closer to harvest, the likelihood that an extortionist would suddenly take your land before harvest became vanishingly small, increasing the expected value of the land and the harvest, for the moment.

This is related to the argument of Peruvian economist (and sometime politician) Hernando de Soto that informal communities without legal land tenure were poorer as a result (partly because their land or houses could not serve as collateral for secured loans). While that says nothing about whether poor people would actually benefit from getting legal title, instead of whatever informal arrangements they themselves developed in the meantime (in Peru, formalization of title did not lead to significant decreases in poverty, though it was useful in kneecapping the violent insurgency of the Sendero Luminoso), it does highlight the role of certainty and uncertainty in economic value.

So what can worldbuilders get out of this? Most importantly, the insight that changes in likelihood lead to changes in price. Uncertainty causes loss. Certainty is valuable, and people are willing to pay for it. (Which is why the insurance industry exists.) And with some thought, you can use this concept to drive some pretty interesting plot conflicts.

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(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth [Commerce?] for Worldbuilders. No idea when it will be finished, but it should be fun!)

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Taxation and Conflict

17 Saturday Dec 2022

Posted by in Economics, Politics, Politics for Worldbuilders, State Formation, Writing

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Worldbuilders often have settings in which tax policies are key drivers of conflict. This is as it should be, given that taxes often drive conflict in the real world, for very good reasons. But typically, the decisions that a fictional ruler face are boiled down to “Do I want money? If so, tax everything that moves.” In the real world, things are more complex. And introducing a bit of carefully chosen complexity into your stories can make the conflicts a lot more interesting.

Our current discussion is based on the seminal model of Margaret Levi. Based on a deep review of the history of governments, Levi starts from the assumption that in general, sovereigns want to maximize their tax revenue. (You can read a nice summary of the model here.) But this does not simply mean jacking taxes up as high as they can go.

First of all, the more you tax, the more opposition you get from those being taxed. This is obvious, but it has some notable consequences. A weaker regime will be able to tax less, because serious opposition could bring it down. Additionally, taxes will tend to fall more heavily on social groups that are less able to resist the government (often because they are poor!), or who depend on the government more, or who would benefit directly from the additional government projects that the tax revenues would fund and are thus more willing to bear the burden. In any event, the rulers will have to limit their taxation if they don’t want to antagonize the people.

Second, the higher the tax rate, the more that economic activity becomes depressed as many businesses simply become unprofitable. Moreover, it becomes worth it for people to rearrange their businesses to pay less tax, or even cheat on their taxes altogether. As a result, if you increase taxes by ten percent, say, your tax revenue will rise by somewhat less than ten percent. And at a certain point, tax collection actually goes down with higher taxes. (This concept is popularly known as the Laffer Curve.)

So a ruler will have to figure out the optimal tax policy for generating revenue. This is a difficult problem, especially if you don’t have a lot of data about the economy. Often, rulers get it wrong and set the tax rate too high for the amount of revenue they want to collect. (It is much less common to set the tax rate too low!)

This basic issue also functions across time periods; collecting lots of taxes this year will often mean that the economy’s growth will slow down in the future, reducing tax collection later. As a result, Levi notes that a major factor in the taxation decisions of sovereigns was their discount rate—that is, how willing they are to forego money today in exchange for more money tomorrow. 

(A quick example: suppose you have an opportunity to invest $100 today, and in a month you’ll get back $110 guaranteed. If you have money in the bank and won’t miss $100, you’ll happily invest the money for a good return. If you only have $100, on the other hand, and you need to spend it on food, it’s another matter entirely. Still, you might be willing to invest the hundred dollars if you would get back a thousand; for that much money, you’ll find some way to last the month. In the first case, you have a relatively low discount rate; you can afford to be patient. In the second case, you have a relatively high discount rate; you need money today, and it would take a massive amount of money in the future to get you to give up what you have.)

Levi notes that sovereigns facing a crisis—particularly a war—needed lots of money today, and were more willing to raise taxes for current revenue even if it harmed future growth, and even if it provoked domestic opposition (to a point). In other words, these rulers had a very high discount rate.

Next, certain types of taxes take different types of bureaucratic infrastructure; if you don’t have the infrastructure, you can’t levy the tax. For example, to tax incomes, you need a way to monitor how much money people make. This is tremendously hard, which is why direct income taxes across all of society were nearly unknown until the early 1900s. And some kinds of taxes would cost more to administer than you would actually raise!

A sovereign will then want to invest in new bureaucracy, to be able to collect more taxes in the future. But such investment takes money and time, and it usually provokes opposition from society—people resent intrusions into their privacy, and know that higher taxes are going to result in the future.

Levi’s model thus has a number of moving parts, including:

  • the discount rate of the sovereign;
  • the capability of the tax-collection apparatus;
  • transaction costs for commerce, and for tax collection (which include information/monitoring costs, and fees, operating expenses, and other forms of friction); and
  • the relative bargaining power of the state versus different classes in society.

Levi’s entire discussion includes many other complex facets, including the concept of quasi-voluntary compliance which I already touched upon in Beyond Kings and Princesses in the discussion of bureaucracy; I hope to write about more from Levi in future posts. But even this starting overview provides some useful tools for worldbuilders looking to juice up their political conflicts.

*****

(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth [Commerce?] for Worldbuilders. No idea when it will be finished, but it should be fun!)

Pirate Ships

20 Sunday Nov 2022

Posted by in Economics, Politics for Worldbuilders, State Formation, Writing

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We briefly mentioned Peter Leeson’s work on the economics of pirate ships already; now, let’s take a closer look. (Because honestly, who doesn’t like pirate ships?)

In his study of pirate ships between 1682 and 1726, Leeson identified several remarkable features of how pirate ships were run, especially when compared to civilian merchant ships or naval vessels. While the latter vessels were run autocratically, with an all-powerful captain who could not be gainsaid, pirate ships were typically run along democratic lines:

  • they were governed by written articles of association, which had to be adopted unanimously;
  • they featured separation of powers between the captain, who controlled duty assignments and tactical authority, and a popularly elected quartermaster, who controlled the money and administered discipline—and the crews could replace either of these figures if they were abusing their power; and
  • crew members were typically paid in equal shares of the plunder (the captain and quartermaster typically got two shares), net of costs for repairing the ship or medical care and bonuses for the wounded.

Why? Leeson argues that pirate crews had to solve several problems in order to function well. First and most pressing was the risk that the captain could abuse his position. A frequent scourge of civilian ships was that the captain, nominally the omnipotent representative of the ship’s investor-owners back on shore, would exploit his power to harm the crew members, or enrich himself at the owners’ expense. This is an example of a principal-agent problem. (Indeed, many sailors turned to piracy in order to escape such exploitative captains.) But on a pirate ship, usually the sailors were the “owners” of the ship; and they would not tolerate a captain who would abuse them or divert “their” plunder.

Second, pirate crews were fairly large—the average pirate ship had some 80 crewmen (and some had many more, or even fleets of ships such as the expedition of Captain Morgan), as opposed to merchant ships which carried 13-17 men. (By contrast, naval ships often carried hundreds of sailors.)  With such large crews, it became harder to monitor individual sailors’ behavior. Yet harmony aboard ship needed to be maintained if the crews were to fight well. Disputes needed to be prevented, or resolved peacefully.

In response, pirate crews (which often shared ideas between them) soon developed a system of formal governance, with strong democratic features, well before any national governments adopted separation of powers or democratic voting. Ships’ crews drew up written articles of association (and so did pirate fleets, when several ships joined together for particular expeditions), which had to be approved unanimously. These articles laid down rules for the ship, and assigned different authorities to the captain, the quartermaster, and the other officers. They also specified how officers could be removed by popular vote.

The captain had total control over decisions during battle, and the assignment of ship’s duties. But he had no control over discipline, or over the plunder. That was the job of the quartermaster. Yet the quartermaster too was constrained; he was typically not allowed to store the plunder under lock and key, and many crews had a system of random searches to detect if a quartermaster (or any other crewman) was stealing plunder. Theft was punished severely, usually with marooning or execution.

Interestingly, Leeson finds that privateers—“legal” pirates whose activities were sanctioned by their governments—shared some of these features. They too paid out plunder in equal or nearly equal shares, and also used written constitutions. Leeson concludes that profit sharing and written constitutions must have been an efficient solution to the problem of keeping order among large crews, far from home.

But few privateers had the checks-and-balances system of captain and quartermaster, or democratic governance. (At least, not officially; Leeson doesn’t discuss how many privateers would engage in unsanctioned piracy on the side.) This was likely due to the need to enforce the authority of the ship’s government, just as merchant ships needed to enforce the authority of the absent owners. Pirates, lacking fealty to a distant authority, didn’t have this problem.

Leeson and other academics such as David Skarbek look at several other forms of organization, such as stateless societies in Africa, or prison gangs; and I hope to write more about these. But the basic takeaway for worldbuilders is that certain kinds of settings, like a pirate ship, present certain kinds of problems that the people have to solve. And the way that they solve those problems can make for fascinating stories.

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(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth for Worldbuilders. No idea when it will be finished, but it should be fun!)

Trading with Bandits

13 Sunday Nov 2022

Posted by in Credit, Economics, Politics, Politics for Worldbuilders, Writing

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Suppose you were a merchant going into the mountains, seeking to trade for rare spices. The local clans know where the spices are; but they would much rather kill you and take all of your trade goods than part with their own valuable spices, even in a profitable exchange. You know this, and they know you know this. Is there any way that you can trade with the locals anyway, and escape with your life and a good profit?

There are a few ways to entice the locals to trade peacefully. One is to invest in military strength to deter attack—hiring bodyguards or improving your own martial skill. Another is to offer the possibility of repeated interactions, meaning that you will keep coming back with more trade goods if each trip goes well. Therefore, if the locals behave peacefully they will end up making far more profit over time than if they simply plunder your caravan. (This strategy only works if the locals trust you to come back, and if their time preference isn’t heavily weighted to short-term gains rather than long-term gains. If they need lots of money today, they might be willing to plunder you and sacrifice the long-term profit.)

Another method was to threaten the bandits with retribution from your allies, even if they are not present at the time. Your own weakness could be counterbalanced by the strength of your allies. This was one of the perks of being a Roman citizen, for example—everyone knew that a Roman was inviolate. If you harmed a Roman, you could expect legionnaires to be knocking on your door in short order. This did not prevent banditry entirely, but it certainly kept it to a much lower level.

All well and good; but let’s spice things up a bit. What if the merchant were the bandit, and the local clan were too weak to resist? And what if the clan had a permanent village, so they couldn’t simply escape from the traveling merchants until they had passed by? The merchants have powerful weapons, and while they wouldn’t mind striking a fair bargain if they needed to, they would cheerfully sack the village and take all of its valuables and people as booty if they thought it worthwhile.

If the weaker party is immobile and cannot escape, the above methods to induce peaceful trade no longer work. By assumption, the village is unable to invest in greater strength. And since the merchants are mobile, the village cannot easily threaten it with retribution from its allies. Repeated interactions are trickier too; merchant expeditions are expensive, and the merchants would want a high enough profit margin to be worth the bother.

So what is there to do?

I shamelessly stole the title of this post from the journal article it is based on, by Peter Leeson. Leeson, who would later enjoy some fame for his work on the economics of pirate ships, investigated our second case with the dangerous merchants and weak village, and gained some insights by looking at trading patterns in Central Africa. There, trade networks would connect producer villages deep in the interior with the European trade outposts on the coasts. The producer villages were at constant risk of being attacked by the merchant caravans, so they developed two major strategies to protect themselves.

The first strategy, paradoxically enough, was to demand that the merchants paid their side of the bargain upfront, and extend credit to the village. The village would then provide its own goods to the merchants the next time they came by. This allowed the village to reduce its stores of plunderable goods during the merchants’ first visit, since they wouldn’t need to pay right away. That way, the merchants would have less reason to plunder the village, since there would be little booty to plunder. And when the merchants came back, they had already paid for their goods and would have little incentive to use violence—unless the village tried to cheat them and withhold payment.

Since the merchants were stronger than the village, they could safely extend credit and know that they could punish the village for cheating if they needed to. (The reverse would not have been true; the village could not dare pay goods up front—that is, lend money—to the merchants, because they could not possibly enforce the bargain.) And the merchants had an incentive to play along: if the village didn’t think it was safe to stockpile its trade goods, it would simply produce no goods for trade and only enough to subsist on. That would make it unprofitable for traveling merchants to come all the way out and plunder them, discouraging violence.

But there was still a problem: what if the village makes a bargain with one set of merchants, then produces the trade goods that it owes, only to be attacked by another set of merchants?

To mitigate this risk, the village would expect the merchants that it bargained with to protect the village from other merchants. That is, part of what the village was trading for was protection. It was worth it for the merchants; they would lose out if their precious trade goods were stolen by some other group of merchants.

Still, the whole business was touch and go. For the system to work as described, the merchants had to be sufficiently patient to prefer long-term riches to short-term plunder, and be able to protect the village and enforce exclusivity against other merchants—and the village had to be able to reduce its stock of trade goods to unprofitable levels for the merchant, to make plundering a poor proposition and induce the merchant to offer credit. If the village’s trade goods were of the sort that was difficult to deplete or hide (such as livestock, or slaves or people who might be enslaved), then the village would have a difficult time indeed avoiding attack.

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In your own worldbuilding, you might not necessarily have these specific situations. But the concepts involved are delicious for generating story conflict. Stakes are high, incentives can balance on the edge of a knife, and much will depend on the characters involved. A good deal can be messed up by an impatient character, or implacable enemies might recognize an alignment of interests that can encourage the first tentative steps toward peace.

*****

(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth for Worldbuilders. No idea when it will be finished, but it should be fun!)

Different Kinds of Finance

01 Tuesday Nov 2022

Posted by in Credit, Finance, Politics for Worldbuilders

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Some fictional stories involve finance, of the high or low varieties. Other stories really ought to mention finance of some kind, due to the way that the setting is constructed, but the author never does—perhaps because the author is not comfortable with the subject. Finance is something that everyone is affected by, but few people understand deeply. Fortunately, the basic concepts are not difficult; and you might find them useful in your writing.

It often happens that someone wants to launch a business venture or some other project needing a lot of money; and other people who have money want to put it to work profitably, but have other people handle the details of executing. When the person with the money (“the investor,” let’s say) funds the person with the venture (“the founder”), hoping to earn a profit, that is what we call “finance.”

The two basic types of investment finance are debt and equity. (There are a few more exotic varieties, but they are fairly marginal and we can safely skip them.) Equity can take a few forms, but essentially, the investor and the founder are joint partners, and the investor is entitled to some fraction of the profits from the business. Exactly how much profit will depend on many factors—not least of which, how easy is it for the founder to find investment capital, and how much risk does either party want to take?

In a pure equity investment, the fortunes of the investor rise and fall with those of the venture. The investor can lose the entire investment if the venture fails, or make incredible amounts of money if the venture takes off. The investor’s interests are therefore closely aligned with those of the founder (at least in broad terms).

Debt, on the other hand, is more adversarial. If the founder borrows money from the investor, he is promising to return the money and the finance charge whether or not the business is profitable. And the investor maximum return is limited by the agreed-upon finance charge; the investor will make the same amount of money if the business is a modest success, spectacularly profitable, or even mildly unprofitable (as long as there is enough to cover the loan payments). Obviously, the investor would prefer that the business succeed, so that the founder has enough money to repay the loan. But a lender’s main interest will be safety, and he will not necessarily pursue the chance of high returns if it means taking high risks. He will also try to get his money back even if it means sucking the venture dry.

Lenders are happier when they can lend against some kind of collateral—some valuable good which can be seized if the loan is not repaid. This could be many things: a house, a car, a horse, family jewelry, or the rights to future royalties from sales of Harry Potter. The better the collateral, the less risk the lender is taking. In a well-functioning society, the lender will therefore charge less interest on a secured loan than an unsecured loan, because the chance of losses is smaller. (That is why you can still get a mortgage in America for less than 10% interest, while credit cards typically charge 15% and up.)

This also means that if you don’t have collateral—for example, if you are starting some sort of business venture and have nothing to show for it yet—it is very hard to get debt financing. Equity finance is better at handling business ventures without tangible assets.

But equity finance poses special problems: how do you keep track of how much money the business made, and the investors are entitled to? It is very easy for the management of a venture to hide profits from the investors, without a very complex infrastructure of laws, public data, and accountants to try and keep people honest. It took centuries of slow accumulated experience and trial-and-error before we arrived at the system for securities markets that we have today, and it is by no means perfect. But in previous times, equity investment was typically limited to partners who knew, and trusted, each other. Equity was thus on a relatively small scale, businesses were very hard to start, economies were relatively stagnant, and economic growth was slow.

Debt, on the other hand, is fairly easy to deal with. How much you owe is fixed by agreement; and the lender doesn’t need to know anything about how you made the money, only that you are able to repay on time. Debt was therefore the most common form of finance by far throughout history; and it is only recently that equity investments have been possible on a large scale.

However, even in ancient times it was possible to combine the two methods of investing. For example, the Babylonian Talmud records a common form of partnership in which half of an investment was considered equity, and half was debt. The founder thus had to repay half (but only half) of the investment regardless of the venture’s success or failure, along with a portion of the profits if there were any. Interests were better aligned between the partners, and the investor still had some degree of safety.

To summarize, when thinking about some sort of business venture that needs investor capital, like a caravan to the Far East, or a merchant ship, or a band of mercenaries sent to plunder the fabled City of Gems, you can think about useful investment structures with the following questions:

  • Who is taking the risk of irregular profits, and how much risk?
  • How well can the investor monitor the founder?
  • What kind of collateral is there?
  • Does the legal system or other external structures provide protections for either side, or make one kind of investing more attractive than the other?

*****

(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth for Worldbuilders. No idea when it will be finished, but it should be fun!)

Economies Dependent on Outside Investment

26 Wednesday Oct 2022

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One of the most trafficked posts on this blog is a brief discussion of “Varieties of Capitalism” theory, pointing out how some capitalist economies feature a set of institutions that foster a more dynamic economy and radical innovation, and others have institutions that foster a more sedate, “managed” economy featuring more incremental innovation. (As far as I can surmise from web traffic stats, some comparative-politics professor at San Francisco State University must have noticed the post and included it in a course syllabus. I’m flattered!)

But in the years since I left grad school, the field has marched on. Apparently, scholars have identified at least one other “variety” of capitalism that fills in a bunch of empirical gaps of prior theory. This is the dependent market economy (DME), whose distinguishing feature is that it relies heavily on the foreign investment of outsiders for capital—typically transnational corporations. In this post, I’ll briefly discuss the key features of the DME that would be useful for worldbuilders.

The first economies to be designated as DMEs were found in Eastern and Central Europe, countries that had formerly been dominated by the Soviet Union. They featured an unusual combination of factors: a populace that was reasonably well educated and technically skilled, yet still had low wages, and where the countries’ economic institutions had been totally wiped away and could be built afresh according to the preferences of anyone with enough clout. These were the transnational corporations, who are always on the lookout for skilled, cheap labor. They used the lure of their massive investment to induce the former Warsaw Pact countries to establish institutions that were favorable to company interests—and turned these countries into favored sites for the assembly of “semistandardized industrial goods.”

What are the features of the DME, and the institutions that develop there?

  • A population that had reasonable technical skill—but not too much, or they could develop their own indigenous industries and not be dependent on outside investment.
  • Low wages.
  • A massively disproportionate level of foreign direct investment that dominates the economy, usually because of the lack of domestic capital. (For example, in 2007 Hungary and the Czech Republic both had FDI equal roughly half of their entire gross domestic product.)
  • Governance that is largely controlled by transnational corporate hierarchies, so local company subsidiaries take orders from the parent companies back home. (They also receive funding from back home, rather than relying on local banks or the stock market.)
  • Weak labor laws and no national labor unions.
  • On the other hand, individual companies typically treat their workers well in relative terms, because they don’t want their supply chains disrupted; so management and labor tend to work closely together, company by company. (But companies try to avoid simply paying higher wages, which defeats the point of the exercise!)
  • Little investment in worker training or a public education system, and the education system’s reorientation to the specific skill needs of the transnational companies, because companies don’t want to spend a lot of money or make it easy for their workers to leave, and because the DME is not meant to develop new technology—only to implement the technologies developed elsewhere.
  • Sectors of the economy where the country has a clear comparative advantage, such as the assembly of automobiles or electronics, are dominated by foreign ownership. The same is often true of the banking system, which needs a lot of capital. Meanwhile, less competitive segments of the economy remain in domestic hands, but languish. If left unchecked, this division could lead to tensions between wealthier and poorer worker groups in society.

We thus have another model for what an economy could look like, and why it would look that way. True, few worldbuilders will be working with a direct analogue to something like the collapse of the Iron Curtain; but if you’re thoughtful, you can extract useful principles from the foregoing for use in your work.

There are additional types of economies—chiefly the typical “dependency” economy (or supply region) that is exploited for basic commodities; the “patrimonialist” society with high corruption, patron-client networks, informal arrangements, and pervasive insecurity; and the incoherent mishmash that borrows features from several other economies which don’t necessarily work well in combination. I hope to explore some of these more in later writing.

******

(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth for Worldbuilders. No idea when it will be finished, but it should be fun!)

Moral Economies

02 Sunday Oct 2022

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If a sharecropper grows food on a landlord’s land, how are the profits split between them? How should they be split? And what is the effect of those moral expectations when things go wrong, and there’s not enough food to go around? (And how can we exploit such conflicts in our fiction?)

I’ve mentioned James C. Scott before, and will probably mention him many times to come. His early book The Moral Economy of the Peasant discussed this issue in detail, in the context of the peasant societies of Southeast Asia. In these societies, peasants could be roughly divided into three groups: those who had their own farmland, those who were impelled to sell their land to landlords and become sharecroppers, and those who were pushed out of even this position and were reduced to landless laborers.

Over time, more and more peasants lost their land and became sharecroppers, as the ups and downs of agricultural life caught farmers in dire straits and allowed those with surplus capital to benefit. But for our immediate purposes, the interesting action occurred with the sharecroppers. The “traditional” system was to sell your land to some magnate in your own village or a village nearby, who would take a large chunk of the harvest—say, 30 or 40%.

But in exchange for such a large share, the peasantry expected something in return. This magnate was more than your landlord; he was expected to be a patron as well, protecting the welfare of the sharecroppers when times were bad and harvests poor. Depending on how bad things got, landlords might be expected to reduce their share of the harvest, extend low-interest loans to the sharecroppers to tide them over, or even to open their storehouses and share out some of their accumulated grain.

That is, landlords were expected to insure the subsistence of the sharecroppers, and only their commitment to do that would justify their taking so much of the harvest in good times, and their claimed social position as landlord and patron. This is what Scott called the “moral economy of the peasant.”

Sometimes, landlords reneged on their social obligations and withheld food during bad times. Or worse, landlords actually increased their demands on the peasantry, in order to stabilize their own incomes at the expense of the peasants. (This was a particular hallmark of the colonial European regimes that took power in Southeast Asia in the late 1800s and early 1900s.) Doing so was hazardous, since starving peasants with nothing to lose would sometimes rise up and massacre the landlords, and seize what food they could find. They would feel justified in doing so: the landlords had violated the moral economy. They had broken the bargain.

But in the early 1900s, excessive demands on the peasantry in Southeast Asia became more and more common as two things changed in tandem:

  • local patrons were gradually replaced by absentee landlords who lived in the cities, away from the villages; and
  • regime security forces became stronger, and better able to repress peasant uprisings.

For more on what happened in that case, read Scott’s book. (And in writing this post, I came across the article that apparently inspired Scott, a nice discussion of food riots in 18th-century England, which the author argues were undergirded by a similar moral economy; summary here.) For our purposes, we should focus on the key question: in bad times, whose position is stabilized at whose expense? And what moral system or expectation is being upheld, or violated, in the process?

This shows up frequently in “modern” society. Insurance companies, for example, collect money from us every month based on the promise of making us whole if some catastrophe happens. If we suffer a loss but the insurance company denies the claim, we feel betrayed, as if we had been robbed. On the other hand, if (say) a massive hurricane sweeps through an area and wipes out all the housing, property insurers may face the prospect of bankruptcy and go running to the government for a bailout. The bailout, in turn, would ultimately be financed by taxpayers, so the justness of the bailout would partly depend on the how just the tax system is. And so on.

The government itself taxes us a great deal, but we only acquiesce if we think that the government is seeing to our wellbeing in return. In bad times, the government is supposed to protect us from harm, or at least cushion the blow. If it does not, then the government will have a hard time justifying its taxation. And taxpayers will feel a moral right to object and demand better, perhaps at gunpoint.

In general, we tend to have a moral expectation that the wealthy and the powerful protect the welfare of the poor, especially if the wealthy became so on the back of the poor. This is a moral economy, a set of expectations that are overlaid on “normal” economic relations and help to constrain them. (You can imagine other types of moral economy rather than the patron/client model. For example, what if rather than guaranteeing subsistence, the economy was “supposed” to guarantee opportunity? Or provide a pure meritocracy, in which the unmeritable deserve to suffer?)

Unfortunately, it often happens that the powerful elites stabilize their own position at the expense of the weak masses, as happened in Southeast Asia during the Great Depression. This causes great suffering or even starvation; and it can also sow the seeds of revolutionary violence, if the weak are able to rise up. In the very worst case, as Joseph Tainter teaches us, it can lead to entire societies collapsing: if elites make greater and greater demands on their societies even when times are bad, eventually the societies are unable to meet those demands and the society implodes. (What will arise in its place is a different question. Sometimes the answer is “nothing,” if the society wipes itself out via starvation and violence.)

To recap, in your worldbuilding, it is worth asking these questions:

  • What moral expectations do the weak have of the powerful, especially if the powerful become so on the back of the weak?
  • Whose income, wealth, or social station is being stabilized at the expense of whom?

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Addendum: The posts in this series are intended to go into books of my planned series Politics for Worldbuilders, the first book of which is already published. I had initially planned the second book to be Tyranny for Worldbuilders, which would discuss various techniques of state rule and how they are resisted. But as I’ve been writing out these posts, I realized that I was trying to mash too many concepts into the same book (state capacity, and authoritarianism, and political economy, to name a few), and they didn’t coexist nicely. So I’ve decided to split off the discussions of political economy into their own book, which will be the new Book Two in the series. At present, the plan is that this book will start with the concepts discussed in this post, and build on them with the other “Building the Economy” posts as well as other posts on political conflicts revolving around economics. I think that the book writing will go a lot faster now that I have a more focused plan.

Watch this space!

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(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Wealth for Worldbuilders. No idea when it will be finished, but it should be fun!)

Building an Economy: Different Property Regimes

28 Sunday Aug 2022

Posted by in Economics, Politics for Worldbuilders

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Let’s say you’re worldbuilding a new setting, and you want to experiment with a different kind of property system than feudalism or bourgeois property. Presumably, you want a property system that leads to more humane results and better use of resources—or maybe you want a system that encourages waste and oppression, the better to foster story conflict! So what kinds of systems are out there, and under what circumstances do they tend to have good or bad results?

It turns out that different kinds of things work better under different kinds of property regimes, shockingly enough. In particular, economists tend to point to two features of a good: whether it is excludable, and whether it is rivalrous. “Excludable” means that you can keep people from using the good. For example, I can prevent you from driving my car; but I can’t prevent you from breathing the air (which is nonexcludable). “Rivalrous” means that if one person uses the good, another person cannot. For example, if I eat an apple, you can’t eat the same apple. But if I listen to a radio station, you can listen to the same radio station without interfering with me.

I can already see your eyes glazing over; so let’s give an illustration:

Archdruid Thorne strode into the shrine, his eyes briefly glancing at the throngs of worshippers forlornly waiting outside the sacred building. Commoners were not allowed inside the shrine, forbidden to benefit from the life-granting energies it generated. They could only make offerings of food and coins at the door, in the hopes that one of the druids would deign to bring out a Stone of Life, which would heal illnesses of all who stood near it (no matter how common)—for a brief time.

Even though the druids jealously guarded their powers, still the mere presence of the shrine benefited the region. The air was cleaner, the rain was gentler, and the animals in the area more fertile and easily captured. So the people might grumble about the druids’ arrogance, but not very loudly.

Thorne sniggered. Today was the day, the day when he could finally unseat High Druid Ferrus and seize the Ring of Command for himself. Only one finger might wear the Ring of Command, and now that finger would be Thorne’s.

So, in this model we end up with a good old 2×2 matrix:

  • A good that is rivalrous and excludable (like a gold bar, or a chocolate cake, or a sleeping bag, or a bottle of water) is called a private good.
  • A good that is nonrivalrous and nonexcludable (like clean air, or a radio station) is called a public good.
  • A good that is nonexcludable but still rivalrous (like water in a river, or fish in the ocean) is called a common-pool resource.
  • A good that is excludable but not rivalrous (like a website behind a password, or membership in a museum) is called a club good or toll good.

(This model is a blunt instrument, but it still helps us grapple with some important concepts.)

Entire books can be and have been written about each of these concepts. For now, let’s examine common-pool resources a bit more.

In 1968, biologist Garrett Hardin published a hugely influential article, “The Tragedy of the Commons.” In it, he presented a type of economic good called a commons, and argued that relying merely on private property regimes to regulate its use would result in disaster. In his example, several herdsmen share a meadow, the “commons,” to graze their animals. If grass is plentiful, each herdsman has an incentive to add more animals. But if everyone does this, eventually the grass will be overgrazed and the commons will be destroyed. Thus, concludes Hardin, in a situation where private actors have incentives to overuse a shared resource, only government regulation of the commons will preserve it for the future and ensure that people benefit from it optimally. (Specifically, he was arguing for government-enforced population controls—”Freedom to breed is intolerable,” as he put it. But the argument is more general.)

This article became a powerful justification for government regulation of all kinds, and particularly regulatory regimes controlling natural resources. In response, as the incompetence and hubris of many government regulatory schemes became apparent, free-market economists led a push for deregulation in favor of private property. The argument was that, as Milton Friedman stated, “Nobody spends somebody else’s money as carefully as he spends his own. Nobody uses somebody else’s resources as carefully as he uses his own. So if you want efficiency and effectiveness, if you want knowledge to be properly utilized, you have to do it through the means of private property.”

As true as this is, it is incomplete. Unfortunately, not all goods function well as private property. In practice, government schemes of privatization sometimes work well, but sometimes amount to expropriating a common good and granting it to some well-connected oligarch for pennies on the dollar. (Or kopeks on the ruble, to be precise.)

Sadly, it took until Nobel-Prize economist Elinor Ostrom’s 1990 book Governing the Commons before policymakers understood that there are more options when dealing with resources than just private property or government control. Ostrom clarified the idea of a common-pool resource, such as fish in a lake or water in a river, which can be accessed by many people, and depleted by use. She argued that common-pool resources were often managed more effectively by their own users, cooperating with each other, than by government bureaucrats who often had little understanding of what they were doing. (Governments can still play a role, by providing resources to the locals or enforcing their mutual contracts, for example.)

I’ve not seen much fiction that featured communities of people stewarding a common-pool resource, but it’s a fertile area for stories. The management of a common-pool resource is perfect for generating story conflict. Will the users moderate their use enough to keep the common pool viable? Will some people try to cheat, and extract more resources than they are allowed to? Will the users face a sudden problem like a drought or poachers or the failure of the Standing Stones of Wisdom, and will they be able to converge on the right response? Might the local government try to seize control of the common pool, believing in its arrogance that it could do a better job of managing it than the users—or perhaps simply to extract taxes?

One more idea to chew on, just because I personally like it. In The Cathedral and the Bazaar, a book about open-source software development. To explain why many programmers work on open-source software for free and release such software for anyone to use, Eric S. Raymond discussed the concept of a bazaar good. Briefly, there is a relatively small class of public goods with the property that their creators gain enough utility from creating them that they would do it without needing to sell the good—and the goods also also become more valuable to the public as more people create them. Obviously, writing certain kinds of software is the most common example.

I’ve often mused that government subsidies might be redesigned to create new classes of quasi-bazaar goods, and achieve more efficient results. I’m not sure how, but fiction is a good place to noodle over such things.

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(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Tyranny for Worldbuilders. No idea when it will be finished, but it should be fun!)

Building an Economy: Money, Part 1

14 Sunday Aug 2022

Posted by in Economics, Politics for Worldbuilders, State Formation

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Living in our modern world, we have certain assumptions about how money works. But historically, money has taken many more forms than we are used to. That’s actually good news for writers: if you want to do something cool with your setting’s system of money, there’s a wealth of concepts to play with (no pun intended).

In this post, I’m not trying to give you a crash course on what money is. (There’s a decent article on Wikipedia that does the job, though it is perhaps too heavily influenced by David Graeber’s work.) Instead, let’s drill down and ask when a particular form of money might be more useful, to the political regime, than other forms.

In a nutshell, people tend to form different kinds of economic relationships depending on the kind of interpersonal relationships they have:

  • A family unit tends to be run as a dictatorship (with all financial decisions being made by the head) or a political community (different members have different inputs into the decision process, and eventually some sort of guiding consensus is reached). Family members might loan each other money or buy and sell between them, but these relationships are often highly conditioned by the “normal” expectations between family members.
  • Good friends or neighbors will often give each other reciprocal gifts, trying to stay more or less in balance over the long run; or they will extend and receive loans of goods or services, trusting that debts will be settled in some form in the future. Cash deals might occur, but in general cash feels somehow gauche, cheapening the social bonds between people.
  • With more casual acquaintances or people you don’t know well, but who live in the same economic community as you, you tend to do business on a cash basis—using a shared currency that is preferred in that economic community. Loaning money to people you may never see again is unwise, but you still operate in a shared social-economic framework and share a currency that you, and the people around you, value.
  • If two utter foreigners meet—living in entirely separate societies, sharing no long-term economic relationships so that they do not have a mutually-valued currency to use—they will resort to barter, directly exchanging useful goods that each party has and the other party wants. They cannot rely on any shared system of economic value, because there is none. Instead, the scope of the relationship is narrowed to the purely functional. (In today’s world, this has become vanishingly rare; even people on opposite sides of the globe can transact in dollars, euros, or bitcoin.)

From this sketch, it seems that the less trust you share with someone else, the more likely you will do business with tangible goods (like wheat, cows, or gold and silver coins) rather than relationship goods (like debt and gratitude).

Unsurprisingly, we see in history that money has taken several forms, but we can lump them into four main categories: commodities, representative currency or tokens, coins, and fiat. In real life these ideal forms sometimes mixed with each other at the margins, but we can start by understanding the pure forms.

Commodities

In trade relationships, some communities will tend to produce particular trade goods like olive oil, tin, colorful beads, and the like, and trade them for other goods from other communities. Over time, settled trade routes tend to develop, with predictable trade goods and expectations surrounding their exchange. Eventually, commodities like grain, timber, spices, or precious metals develop standard forms, measurements, and relative values with each other. For example, in the Ancient Near East, the Mesopotamian sheqel became a standard weight for gold, silver, and copper, used widely across the region. Egypt used a different system of weights and measures, as did the seafaring Mediterranean societies, and international traders had to be fluent with all three systems.

In a more modern context, think of how cigarettes are used as money in prison, or in areas wracked by war and dislocation.

For commodities to play the role of money usually means that there is no better money available. Trust is low, shared economic frameworks are weak or absent, and political authority is fragmented. A government would usually prefer a different monetary system if possible, because the other systems provide more ways for government to skim off the top or enforce its own authority (see below). On the other hand, if the government itself controls a commodity source—a gold mine, or wheat fields, or similar—then it will be happy for a barter system to standardize around its commodity.

Tokens

Commodities are heavy. They are also expensive to transport. (One estimate was that to carry gold bullion from Rome to Naples in the Renaissance era, it cost about 10% of the gold’s value in pack animals and bodyguards!) Unavoidable if you actually need the commodity for functional reasons; but if you only need it as money, wouldn’t it be nice if you could carry a piece of paper that could be traded to some trusted authority in exchange for, say, 100 bushels of wheat?

Alternatively, tokens can represent not an asset, but a liability—I borrow money from you, and in return give you a piece of parchment or paper or a stone tablet that entitles the bearer to get money from me. The paper represents my debt; it also makes it easier to borrow, since the lender can sell the debt to another party if she needs the money early.

Tokens allow for commerce to be much more efficient that having to rely on raw commodities as money. But they also tend to restructure commerce around those trusted authorities that hold the raw commodities in storage—merchants, banks, temples, governments, and the like. Thus, wherever possible, the regime will want to encourage such tokens both to generate more economic activity and to keep the economy’s focus on itself. Governments especially love debt tokens, since they can thus borrow large sums by creating new money (right up to the point that the money loses its value…).

Tokens can also be an especially useful way to make tax collection easier. One fascinating example of this was in colonial America. Colonial governments would issue “bills of credit” as paper notes that could be used to pay the bearer’s tax bill. The bills had an expiration date; so as the expiration grew closer, people with large tax burdens would tend to collect these bills and then use them to pay the taxman, at which point the bills would be burned. In theory, issuance of bills of credit would be restricted to a reasonable level, commensurate with the general tax burden. However, colonial governments often were tempted to issue too much “free money,” with results so dire that the American Constitution specifically banned the states from issuing bills of credit (see Art. 10).

On a more “squishy” level, a token currency can strengthen communal bonds compared to commodities, since each transaction implicitly endorses the token system undergirding the currency.

Coinage

Surprisingly, gold and silver coins were a later development than token money, first emerging (as far as we know) in the 6th century BCE in Asia Minor. They combined the “intrinsic” value of a commodity with the “brand power” of the issuing government. So in political situations that were on the less stable side, or that featured lots of trade between neighboring (and sometimes hostile) countries, a coin-based system might make more sense than a token system.

Why issue coins? Two main reasons:

  • If your coins became desirable, or else you actually banned the use of foreign coins within your realm, it would stimulate local demand for the coins.
  • If you issued your coins for more than the raw metal was worth—either because of the abovementioned demand for the coins, or because you were secretly debasing the coinage with base metals—then you would earn a profit on the difference, called seigniorage.

Thus, there were two competing impulses: to keep the currency strong so people would want to use it, or to lower the precious-metal content in order to make short-term gains (at the expense of an eventual economic crisis). Stable societies tended to prefer a strong currency. If people trusted that Tyre’s silver drachma actually contained a drachma of silver, they would prefer Tyrian coins to those of (for example) Rome, which frequently debased their silver denarii with copper. As a result, coins that were known to be sound tended to circulate at a premium, compared to coins from less stable governments.

A heavily debased coin, meanwhile, could effectively act more as a fiat currency (see below) than one backed by valuable metal. (This illustrates that the categories we are discussing are more conceptual than actual; a currency can have attributes from multiple categories.)

Fiat

Fiat is the system we generally use today: governments issue money that only has value because they say it does, and they demand that taxes and other debts are paid with that currency. Governments would obviously want to issue fiat currency, if they can; it basically lets them expropriate a vast amount of value by “growing money on trees,” so to speak.

The drawback is that weak or unstable regimes quickly see their currencies become worthless. Even regimes that aren’t in danger of collapse can destroy their currencies, by issuing too much of it. Hyperinflation is basically impossible for commodities or coins (even heavily debased coins), but is historically common for fiat currencies. The temptation for governments to overspend seems far too powerful in the long run.

Now, fiat currencies do have some virtues. Under prudent management, they can allow the money supply to be much more responsive to economic conditions than even a token-based system, avoiding deflationary spirals that can crush debtors. In the United States, we managed to somehow not mess up a period of low inflation for roughly thirty years. (But that seems to be over for now.)

In general, a fiat currency is a way for governments to try and create a store of value (and borrow lots of money in the process) through sheer force of will. Sometimes it works. But more than any other form of currency, fiat relies fundamentally on trust in the issuing government. No more trust, no more fiat money.

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Hopefully, this has been a useful look at different currencies, and some of the conflicts that can be expressed through them. And as we know, conflict = plot.

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(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Tyranny for Worldbuilders. No idea when it will be finished, but it should be fun!)

Building an Economy: Capital

12 Thursday May 2022

Posted by in Economics, Finance, Politics, Politics for Worldbuilders, State Formation, Writing

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Last post, we briefly noted that economies need capital to generate wealth and resources. Sometimes this amounts to a circular definition: we use money to make money. Moreover, money is infinitely flexible: we can use money profitably in a number of ways. If you have a moneymaking venture, and opportunities shift, you can easily shift your money in response. And it doesn’t have to be money; other forms of capital are also flexible and easily repurposed, like a computer, or a college degree in English.

But some kinds of capital are very specific: an aluminum-smelting furnace is designed to do one thing, smelt aluminum. You can’t use an aluminum smelter to bake bread, or dig a hole, or weave cloth. The smelter is capital, but it is a form of capital that cannot be repurposed; and if you tried to sell it, you’re likely to get back a fraction of its original cost. That changes things a great deal. If you invest in capital that is inflexible—whether because it has only a few use cases, or literally cannot be moved once it’s built—you’re committed. You will resist changes that make your capital worthless, and you will likely continue trying to pursue the original venture even after it stops making sense.

This has effects in the economy narrowly, but also in politics. Michael Hiscox argues that if the prevailing technology of capital in a society is flexible, capital can readily shift between uses and the important distinction is between people with lots of capital and those with little. As a result, you would tend to see broad political coalitions based on class: capital against labor, or haves versus have-nots. Policies favoring particular industries would be of little importance in the political system, since failing industries will simply have capital shift out of them with little drama; more important would be how to allocate the economy’s gains in general.

On the other hand, if capital is largely specific and inflexible—for example, large factories built around a single product that cannot be retooled easily, or large sources of natural resources like oil—then it will be difficult to shift between industries, and the economy will see a wide variety of industry-based interest groups. In such a setting, the workers in these industries would tend to be allies of their bosses; if the factory closes down, both groups suffer. And each industry will fight fiercely to defend its position, to push policies that favor it, to defeat policies that threaten it, and to squelch potential disruptor industries.

In the real world, economies tend to feature a mix of flexible and inflexible capital, which complicates things. (Some oligarchs’ wealth might be based on flexible capital, for example, and others’ on inflexible capital, which would potentially put them in conflict.) And it gets even more complicated once you factor in other types of resources—particularly land and labor, which we will discuss in future posts. (But we’ll be going nice and slowly, not least because I’m still figuring out the best way to present all of these factors, and build them into a workable model!).

Still, just the difference caused by flexible versus inflexible capital is already a powerful tool for story conflict. Not bad, eh?

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(This post is part of Politics for Worldbuilders, an occasional series. Many of the previous posts in this series eventually became grist for my handbook for authors and game designers, Beyond Kings and Princesses: Governments for Worldbuilders. The topic of this post belongs in the planned second book in this series, working title Tyranny for Worldbuilders. No idea when it will be finished, but it should be fun!)