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Building an Economy: Human Capital

06 Thursday Jul 2023

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

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Returning to the Labor component of the four factors of production in our quest to build a worldbuilding model of the economy, we will now discuss human capital.

Human capital, unlike other characteristics of one’s labor such as your health or general attitudes toward work, is often domain-specific. You may be a highly trained surgeon, but that would do you little good if you have to plant crops. You might be an expert at negotiating trade deals, but that doesn’t help you if you are trying to program your thermostat. In general, the value of your human capital depends on, and interacts with, the available opportunities you have to apply that human capital.

There are many kinds of human capital. In our model, we’ll focus on three:

  • Training,
  • Experience, and
  • Interpersonal skills.

Obviously, this categorization is artificial. Distinguishing between training and experience is not always easy or useful. And the development of interpersonal skills is influenced by training, but also by cultural context—both in terms of what is considered proper etiquette in that culture, and in terms of whether the culture encourages values like teamwork, taking responsibility, giving proper credit, and politeness or other values such as saving face, kiss-up-kick-down, dominance, and rigid separation of roles. So interpersonal skills should strictly speaking interact with the “Culture” factor of labor in our model. Nevertheless, as a scaffold for our thinking, we’re still going to use this three-part division.

Experience and interpersonal skills are fairly self-explanatory. (Some people develop particular skill in working with others, in a way that measurably shows up in company performance, and these skills can be learned; see Crucial Conversations: Tools for Talking When Stakes Are High.) In the rest of this post, we will be discussing training in particular, and focusing on a key question that has wide-reaching implications: who bears the costs of a worker’s training?

(Note: “costs” include actual money, but also instruction time and effort, the frictions involved in assigning real work to a trainee, and the like.)

Following Kathleen Thelen’s book How Institutions Evolve, we can talk about three kinds of vocational skills: general, industry-specific, and company-specific. General skills are widely applicable, such as literacy or basic computer skills. Company-specific skills, on the other hand, are only useful within a particular company—how to use a custom inventory system, for example. Finally, domain-specific skills are useful within a specific industry.

Because general skills make a worker more valuable across industries, a worker who gains general skills is more likely (all else equal) to leave her current employment and find a better offer. As a result, employers will generally not want to pay for their employees to gain general skills (all else equal), because even though they would benefit from having skilled employees, those employees are likely to be poached away and the current employers are less likely to keep the benefits of such skills. The employees, on the other hand, will want to pay for general skills because the risk is low: even if their current job goes away, the skills will be useful to many other employers. Employees thus get the benefits of having general skills, and are willing to pay for them (if they can afford it!).

For company-specific skills, companies have a much easier time paying for workers to develop them; the skills only have value within that company, so training your workers makes them relatively less likely to leave. As long as the employer is confident that a worker will remain, and as long as company-specific skills would actually be useful, the employer is likely to pay for such training. The employee himself is relatively less likely to pay for company-specific skills, for that reason.

But when we consider domain-specific training, we have a problem. If the worker bears the cost of his own training, he also runs a relatively high risk that no one will hire him for that job even after he is trained (since it only applies to one industry). If so, the cost of the training will be wasted, since he would not be able to apply the specialized training in a different domain. As a result, the worker will be less willing to bear the cost of his own training unless he had some sort of assurance that the investment would pay off.

Conversely, if the employer bears the cost of training a new employee with domain-specific skills, she runs the risk that the employee will receive all the expensive training and then happily jump ship to a different employer, or strike out on his own, or simply underperform at his new job. The employer will be unwilling to spend lots of resources training employees unless she had some sort of assurance that they would remain with her, and perform up to par.

This is probably why medieval Europe featured long apprenticeships and state-sanctioned professional guilds—apprentices could devote years of their life (but did not have to pay money) to learning a trade secure in the knowledge that their master would employ them (albeit under bad conditions), and the master could invest the considerable effort needed to train an apprentice secure in the knowledge that the apprentice could not run off early and ply his trade elsewhere, because the apprentice could be imprisoned or even executed. The apprentice was locked into his contract for several years, long enough for his master to reap the benefits of his growing skill.

On the other hand, there are significant drawbacks to the apprenticeship system. First of all, the master is taking a big risk—what if you turn out to be really bad even with training, or dishonest, or just unpleasant to be around? Second, the apprentice has to sacrifice many years of his life toiling for someone else—and what if the master is cruel, or incompetent, or just bad at business or teaching? Why not take opportunities to abandon your master and improve your life?

Most of all, an apprenticeship system requires overpowering coercion to work—either from a powerful state that enforces contracts between master and apprentice, if you’re lucky enough to live under one, or else a social milieu that tolerates private violence by masters and guild enforcers against the hapless apprentices. Or perhaps both.

In modern times, we typically use other means, which have varying levels of success and different outcomes. Here, we’ll talk about two models, and call these a “liberal” labor system and an “organized” labor system.

In a stylized “liberal” labor system where workers can move between companies and industries without restrictions, companies have less assurance that they will be able to keep workers around after they have been trained; as a result, companies tend to invest relatively little in workforce training (except for company-specific skills), and workers themselves are encouraged to finance their own training.

Workers, for their part, will therefore tend to invest in general skills that do not depend on a particular employer or industry, as they have a higher likelihood of benefiting from such investment wherever they end up. They will also invest (where possible) in especially valuable skills that are industry-specific (such as computer programming), because the expected return from such investment is still positive even with the uncertainty of the payoff.

But less valuable industry-specific skills (such as trades) will tend to be neglected. Moreover, the skill development of the workforce as a whole will largely depend on the workers’ ability to invest in their own skills. If they lack the funds, the time, or the access to credit, workers will not be able to get all the skills they want. (This is a particular problem at the beginning of your career, when you have no money!) As a result, a “liberal” system will tend to produce a workforce with reasonably levels of general skills and highly valuable industry-specific skills, and a large gap of skills in the middle.

One way to address this gap is for the state to provide free or subsidized education to younger people, especially to fund the development of general skills. Unsurprisingly, in the United States over half of the workforce has college degrees, while only perhaps 35% of German workers do (and many of these are professional degrees, rather than what Americans would recognize as a liberal-arts degree).

Another way is for companies to offer strong incentives for employee loyalty, partly mitigating the poaching problem. Examples include the Japanese system of worker seniority, or the common practice among American startups to offer restricted stock compensation that vests over several years.

By contrast, in a regimented system of long-term employment with few opportunities to switch jobs (what Thelen calls an “organized” system, as one finds in Germany), companies will be assured that they can capture the benefits of training investments; each company will therefore train its employees to the level that the company needs (or thinks it needs). However, workers themselves will tend to underinvest in their own skills; because of the limits on job choice, they will not reap all the benefits of such investment.

As a result, an organized system tends to produce a workforce that has good basic and “middle” domain-specific skills, but lacks skill on the high end. (In Germany, for instance, nearly half of workers have attended vocational schools, often funded by their future employers. Germany also features industry groups that collectively manage worker training, and agreements between companies to manage worker poaching.)

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The upshot is that a skilled workforce doesn’t spring from the ground fully formed. Someone has to bear the costs of training, and that someone has to be confident that she will reap the benefits of that investment. There are several ways to resolve the resulting problems, but each of them will result in a characteristic pattern of skill development—and such patterns can add texture to your invented societies.

*****

(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, along with some overlap with the planned third book, working title Tyranny for Worldbuilders. No idea when they will be finished, but it should be fun!)

Factor Mobility and Political Conflict

25 Sunday Jun 2023

Posted by in Economics, Politics for Worldbuilders, Writing

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In an earlier post, I mentioned the argument of Michael Hiscox that whether investment capital is mobile or immobile will play a big role in the way that political conflict over the economy plays out. The truth is, Hiscox argued that the same basic principle applies to all the factors of production.

Human capital too can be of general usefulness, like being able to read, or it can be highly specialized, like knowing how to audit the internal reports of a McDonald’s franchise. Empty land near a city could be used to grow crops or graze cattle, or it could be repurposed for housing or a factory; but land in the middle of a swamp can’t be used for much except fishing or peat harvesting. Even people themselves might be mobile or immobile, depending on how easy transportation is between where they are and where they might want to be. (Hiscox references the Law of One Price in describing this tendency.)

We noted in the earlier post that if capital is inflexible, then it cannot easily shift between industries and people will fight hard to defend their own industry against competitors; politics thus features intense lobbying and narrow sectoral factions, with the bosses and workers largely allied to defend their own niche. By contrast, if capital is flexible, then if one industry is having trouble, investors will simply shift their capital to a more profitable industry with a minimum of fuss. Thus, politics shifts its focus to broad, class-based coalitions (workers versus owners, haves versus have-nots). (Additionally, flexible capital is better able to serve as collateral for lending, while in its absence entrepreneurs are forced to rely on equity finance, which is more difficult to get.)

Essentially the same is true for the other factors of production. Labor and land, too, have different political effects based on how easily they can be repurposed. Ease of transportation plays a particular role in allowing resources to equalize between different regions or different industries. So does the state of technology; if workers can easily adapt to the machinery in different industries, it is much easier to shift people around than if machinery is highly specialized and takes a long time to master.

Hiscox notes that political conflicts over the economy thus follow some consistent patterns based on the level of technological development of a society. In a preindustrial society, the factors of production are relatively immobile: knowledge of a trade doesn’t transfer well, most industrial capital is immobile and difficult to repurpose, and transportation is slow and risky. In particular, money itself (e.g. gold and silver bullion) is tricky to move around, which limits the ability of investment capital to flow into poorer regions where there might have been good uses for it.

As a result, capital and labor do not readily shift between industries or regions, with the result that you often see guild rivalries and conflicts breaking along professional lines, with class conflict as such usually taking second place. (This does not mean that it never happens; for example, the Bauerenkrieg or Peasants’ War of c. 1524 was largely kicked off when German nobility put in place new laws on land ownership to force the free peasants into serfdom.)

Early industrialization, by contrast, makes factors of production much more mobile. Transportation gets much easier, reducing frictions in shifting factors of production between regions or from one use to another. Unskilled people can more easily move between industries, since basic factory work is similar across industries in this stage of industrialization. Similarly, advanced education becomes useful in a wide range of industries, and someone initially educated to be a priest could readily become an engineer, scientist, diplomat, and statesman. Capital likewise becomes much more mobile, as much industrial equipment is relatively multipurpose.

It is no accident, says Hiscox, that mass politics based on class divides becomes much more salient in the period of early industrialization. (For example, Marx’s argument about the role of unemployed workers as the “industrial reserve army” of capital would make no sense in a preindustrial economy; unemployed weavers could not magically become potters or shipbuilders.)

Later industrialization causes factor mobility to decline again in relative terms. Human capital becomes much more specialized (for example, a growing number of Americans today are seeking master’s degrees, professional degrees, and PhDs, finding that a “mere” bachelor’s degree is not enough for their needs). So does productive capital (for example, the cost of building a single semiconductor plant can be as high as $10 billion!). Also, specific forms of human and technological capital can only be used with each other—a computer programmer is useless without a computer, and an astronomer cannot function as such without massive telescopes. So, says Hiscox, class-based political struggles tend to decline, and industry lobbying rears its head again.

(Hiscox notes that government policy can improve factor mobility, as in Sweden, and allow class coalitions to persist—and at the time of his writing, Sweden was able to respond to economic shocks much more rapidly as a result, particularly through wage equalization between industries.)

Since Hiscox wrote, I would argue that we have seen a relatively unbalanced situation develop where parts of the economy are getting more flexible, and other parts of the economy are getting more inflexible. It is far easier today to invest in, say, a broad-based ETF of Chinese companies than it was thirty years ago, and just as easy to yank your money out with a few mouse clicks. But building a factory now requires highly specialized robotic equipment, some of which is impossible to use in any other industry. A general grounding in basic computer use or marketing skill can be applied in many different industries; and at the same time, to be a physicist or biomedical researcher now virtually requires getting a PhD first, where in earlier times you could get started with a bachelor’s degree or even be entirely self-taught.

No surprise that our modern politics feature a weird mixture of class-based politics and sectoral-lobbying politics, in a volatile and high-temperature mix that makes it much harder for any political conflicts to be resolved.

*****

At any rate, Hiscox’s model gives you a handy lens to think about how factor mobility can affect the politics of your own invented worlds. In particular, if you want to have class conflict in your story, make sure that the economic environment is conducive to such conflict, as opposed to conflict between competing guilds, for example.

*****

(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!)

Asset Values and Interference by Others

13 Tuesday Jun 2023

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Let’s say you have a merchant caravan of spices, going through dangerous territory. The success of your venture is partly, or even mostly, dependent on the actions of many other people. The spice dealer can choose not to sell you spices in the first place. The caravan workers can threaten not to work, or to run off with your spices. A bandit can threaten to rob your caravan; a government bureaucrat can threaten to deny you entry to your destination. Each of these sources of vulnerability will depress the expected value of your spices—unless you can mitigate the risks somehow.

Douglass North makes a key point on this subject in his book on institutions. We have said that uncertainty tends to lower the price of an asset, because the expected value of the asset—the likelihood that you will actually enjoy the benefit of owning the asset—is reduced. But uncertainty can come from several sources. Some uncertainty is “natural,” such as the chance of bad weather harming a wheat field’s harvest. But some is intentional: other people acting to damage or take your asset. North states that in general, the price of an asset will be reduced the more that other people are able to affect its value.

North states that the most efficient way to mitigate the risks that other people pose to your asset is to give each party a cut of the action—to give them incentives to cooperate with you. (Strictly speaking, he says that you should give each party property rights in the asset; but he’s using “property rights” loosely, to mean “a share in the benefits.”)

So you would pay the spice dealer a high enough price to induce her to sell to you; you would pay the caravan workers a high enough wage that they will not be tempted to shirk. You might pay the bandit a toll high enough that he doesn’t want to risk his life fighting for more (and if enough other people do this, the bandit might “go legit” and set himself up as ruler of a petty state controlling that part of the road). And you would pay the government bureaucrat (legally or illegally) to let you into the city.

And despite all of the money you’d be paying out, North says, you’d still end up making more money (on average) than if you decided to bear the risk yourself. True, if you managed to dodge all the dangers without paying, you’d be fabulously rich. But the chances of disaster would eventually catch up to you, which is why the expected value of your spice venture would be so low at the beginning.

Of course, you could decide to deal with your problems in a less cooperative way. You could deter the bandit by outfitting your merchant workers with guns, for example. You could try to smuggle your spices into the destination city, rather than paying off the bureaucrat. You could steal the spices rather than buying them. North, being interested in how people deal with property rights, is less interested in these solutions, but we as authors have a larger toolbox to work with—especially since we like conflict in our stories!

So this was just a quick post discussing another cool conflict that you can explore in your stories: all the ways that a hero’s venture can be stymied by other people, and how your hero manages to reconcile all the diverging interests. (This might be by killing off all the interfering people, depending on your story!)

*****

(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!)

Building an Economy: Labor and Motivation

06 Tuesday Jun 2023

Posted by in Economics, Politics for Worldbuilders, State Formation

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We return at last to our discussion of the Land/Labor/Capital triad of the factors of production (plus entrepreneurship, which is nowadays considered its own factor). We’ll start with a broad overview of Labor as a factor of production, and then zoom into the role of motivation on labor productivity.

Labor is unlike other factors of production like raw materials, for two main reasons:

  • If you don’t use an iron bar today, you can use it tomorrow; but if you don’t work today, that work potential is gone forever. You can work tomorrow, but you could have worked tomorrow even if you also worked today. That is, labor is a perishable resource. (It’s also a flow, not a stock; you have a maximum intensity of work that you can do at a given time, and you can’t “store extra work” for later.)
  • Unlike resources like wheat, or gold, or cars, which are largely interchangeable with other units of the same resource, one person’s labor is not the same as another person’s labor. Our labor is affected by individual skill, training, motivation, and differing opportunities to apply that labor to useful work. Labor is thus heterogeneous. (Indeed, one of the trickiest problems with labor is the difficulty in measuring labor outputs, and in assigning people to where they can do the most good—a great source of frustration when you’re out of a job!)

As we are trying to build a simple but powerful model of a fictional economy for worldbuilding purposes, rather than trying to exactly describe the real world in all its messy glory, we’re going to identify three major factors that influence the labor productivity of a society:

  • Human capital,
  • Physical strength and health, and
  • Culture.

The rest of this post will discuss the impact of culture on labor productivity—and particularly, cultural influences on our motivations for working.

Culture has many effects on labor productivity—for example, whether individual initiative is rewarded or punished, whether people are used to teamwork and obedience or if they resist authority, whether people are diligent and careful in their work or take a slapdash attitude towards maintenance. (The eminent economist Thomas Sowell noted that in the early United States, a Scots-Irish Southern “cracker” would walk around or through a creek running through his property for years on end, without any thought of improving the situation; whereas a Puritan-descended Northerner would almost immediately build a footbridge. This is but one example of the larger pattern identified by Max Weber in his Protestant Ethic and the Spirit of Capitalism.)

All of that is important, but for now we will focus specifically on motivation. Different people are motivated by money differently, as John Médaille discusses. Médaille, in Towards a Truly Free Market (a fascinating argument for the Catholic-infused economic doctrine of Distributism), points out that employment is unlike most commodities in that “[l]owering wages does not [automatically] increase employment; only the prospect of selling more goods induces employers to take on more hands.” On the flip side, wages cannot rise arbitrarily high; at a certain point, either profit rates will go to zero (causing capital to withdraw from that industry in search of better returns elsewhere), or wages will rise above the capital substitution rate, i.e. the point where it makes more sense to spend money on infrastructure and robots than on people.

Moreover, unlike other commodities where rising prices stimulates more supply, higher wages will not automatically elicit more effort from people. In some cases, it actually reduces effort. Médaille presents three stylized models for worker motivation:

The surfer works only as much as needed. Once he earns enough money to feed himself and see to his other necessities in a minimal way, he stops working and goes surfing for the rest of the week. If you want to elicit more work from a surfer, you would actually need to pay him less. (This tendency occurs in many peasant societies. In 19th-century Germany, the ruling-class Jünkers found that they could increase agricultural yields by suppressing peasant incomes to a level of utter misery, forcing them to work more in order to survive; if they paid the peasants more, on the other hand, yields dropped as the peasants simply drank away the surplus.)

The homebuyer has goals: he wants to achieve a certain level of material comfort (such as buying a home), to take care of the family and achieve some level of social status. Increasing pay will elicit more work from the homebuyer as these goals become achievable—but only to a point. Once pay is high enough and the goals are achieved, the homebuyer will not continue to increase work output and may even start to reduce output at the high end, as other things (leisure time, time with family, social involvement, etc.) become relatively more important than another few thousand dollars in the bank.

The oil rigger, on the other hand, is highly motivated by money and will work more if he gets more of it. At a time in his life where he has few other commitments, the oil rigger is willing to work incredibly hard in exchange for incredible pay, with the plan of benefiting from the accumulated money later in life. The more you pay the oil rigger, the harder he will work, until the point of sheer exhaustion. Cut the oil rigger’s pay, on the other hand, and he will leave in disgust to find better opportunities elsewhere. (See also investment banking, many commission-based jobs, and so on.)

As a result, the productivity of a given society’s workers will be influenced by the relative proportions of Surfers, Homebuyers, and Oil Riggers among its workers. So what determines that proportion?

Ronald Inglehart’s 1997 book Modernization and Postmodernization argued that societies exhibit coherent patterns of cultural development that are partly predictable, based on economic conditions that allow for and stimulate cultural change. This change generally happens across generations; people’s values are usually set by their experiences in childhood and early adolescence, and do not change much as they get older. But in times of rapid economic change, the values of the next generation can differ significantly from those of their parents. Moreover, even though economic conditions make cultural change possible, the resulting cultures also have an independent influence over later economic performance.

A key argument is the scarcity hypothesis: people tend to most value things that are in the shortest supply. In a time of social disorder, people will value authority and tradition; in a time of poverty and starvation, people will value material things. In a time of material abundance but soul-crushing conformity, people will value self-expression and autonomy. And these values persist once they are stamped into a person during adolescence and early adulthood, even as external conditions change.

In this book and in later research, Inglehart argues for two discrete axes of broad cultural variation between societies (and to a much weaker extent, between individuals): traditional versus secular-rational values, and survival versus self-expression values. (He initially thought that these axes were independent of each other, but later research suggested that they correlate strongly.) A society with “traditional/survival” values is a Traditional society, marked by deference to tradition, low economic growth and consequently significant poverty and insecurity, and little importance placed on political rights or personal fulfillment.

In a society with growing wealth, increasing state capacity, and bureaucratic organization, this cultural pattern gives way to the “secular-rational/survival” configuration, which Inglehart calls Materialism. In short, the spread of rational methods and organization is thought to bring true prosperity into reach—all we must do is work hard to achieve it. As a result, traditional authority is displaced by Science, Industry, and the State, and people develop strong work ethics beyond what are typically found in traditional societies. Work brings reward, and so the more you work, the better you are rewarded.

As wealth grows even more, societies reach a point where increasingly hard work no longer yields as much marginal benefit. Material safety is now taken as a given by those who grew up with it; this new generation shifts from a survival mindset to a self-expression mindset, which Inglehart calls Postmaterialism. This generation lacks the focus on material reward that marked their parents’ work ethic; they work in order to express their values, not merely to feed themselves, and are not as willing in the aggregate to spend nights and weekends in the office for the sake of higher pay.

(Obviously, Postmaterialism depends on the material prosperity that enables it. If material conditions suddenly regress, a cohort with Postmaterialist values will struggle to adjust, and the social consequences of this struggle may be dire.)

So as worldbuilders, we can think about the cultural attitudes at play in our invented societies, and how they will influence labor productivity and the economic development of the societies. There are some fun stories that can be told on these themes; can you think of any?

*****

(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!)

Inflation and Deflation, a Quick Primer

02 Sunday Apr 2023

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I can’t remember off the top of my head reading much fiction that used conflicts arising from inflation or deflation, but as Neal Stephenson demonstrated in his System of the World books, you can actually generate some pretty cool plot conflicts that way. But many people lack a good understanding of what inflation or deflation really is and how it comes about, and I suspect authors are similar. So let’s dive in.

(We’re going to focus on the political/inequality effects of inflation and deflation, rather than purely economic. So I’ll be skipping discussion of inflationary spirals, for instance.)

One tricky bit is that when we speak of “inflation,” we might be talking about at least three separate phenomena:

  • Price levels are rising because people are actually getting richer and are spending more money on things, somewhat faster than production can increase in response (which we will call “wealth-driven inflation”).
  • Price levels are rising because real wealth is staying the same, but a bunch of new money is sloshing around the economy due to borrowing or other forms of money creation, leading to artificial demand not backed by real increases in wealth and consequent distortions in wealth distribution (“monetary inflation” or “bubbles”).
  • Price levels are rising because it is literally getting more expensive to make anything, so price increases coincide with destruction of wealth and real increases in poverty (“stagflation”).

Similarly, “deflation” could mean a few different things:

  • Gentle price declines due to increasing technological or organizational efficiency over time.
  • Sudden price crashes due to the collapse of a speculative or demand bubble.
  • Ruinous price declines because nobody has any money left to buy things with (i.e. persistent economic depression).

Generally, a healthy economy ought to see alternations of wealth-driven inflation and gentle efficiency-led deflation, so that new production and innovation are encouraged and then make people’s lives better. Unfortunately, “prodigals and projectors” (as Adam Smith referred to reckless overborrowers) tend to leverage themselves to the hilt whenever possible; and at the same time, governments often try to magic money out of thin air in order to pay for their programs, without paying as much attention to creating real wealth.

On the flip side, even mild deflation becomes terrifying to the Powers That Be as more and more of the economy depends on free-flowing debt on the one hand, and massive investments in fixed capital that need to be repaid over long periods of time on the other. Both debtors and owners of fixed capital would be crippled by price declines that lead to declining profits, since they would no longer be able to pay their debts or obligations generally. (The same applies to the government itself, which relies on tax revenue funded by economic activity and generally has rigid obligations.) Thus, governments have tended to favor mild inflation instead of allowing gentle oscillations between inflation and deflation; the Federal Reserve, for example, has an explicit target of 2% inflation.

As a result, governments often promote increases in the money supply, promising that it would be a cure for all that ails us. Instead, it tends to fuel violent booms and busts, of the type that we are well familiar with today.

Monetary Inflation

Note that an increase in the money supply doesn’t magically spread across the entire population instantly. It starts when one corner of the economy suddenly earns a lot of new money—perhaps from striking gold in the hills, perhaps from exporting oil and sowing the seeds of Dutch Disease, perhaps by selling bonds to the Federal Reserve (paid for with dollars hot from the metaphorical printing press). That first sector then spends the money in other sectors, like luxury cars and real estate for example, and bids up the prices there; and eventually the tide of new money washes across the economy in general. But the initial “nouveau riche” sector was able to spend money at almost the original prices, while successive groups had to pay higher and higher prices for goods, while the very last people to be “enriched” by the new money end up suffering from inflation well before they actually “benefit” from it.

(The foregoing was a very brief summary of a point made by the brilliant Henry Hazlitt in his 1946 book Economics in One Lesson, in Chapter 22—starting at page 148 in this free edition in the paragraph beginning “[a]n increased quantity of money comes into existence,” though properly the discussion begins on page 145. Every person who has any opinions at all about economics ought to read this book, more than once.)

Note also that if prices increase in this way (due to increased buying pressure), by definition this will hurt the poorer segments more, simply because they don’t have the purchasing power to keep up. This is especially true with food. If luxury autos double in price, a poor family won’t care; but if eggs and milk double in price, suddenly the poor face a serious threat to their well-being. The net effect is that high inflation harms the poor more than those better off, tilting the relative balance towards the rich (though even the rich might not actually be better off, in real terms).

Some people say that inflation is good for the poor, because it would tend to increase their wages; but that’s rarely correct. First off, if the poor are net borrowers, they simply pay higher interest rates on new borrowing. Even existing debt, if it is variable-rate, becomes more expensive. People with a lot of existing fixed-rate debt do benefit, but such people are rarely poor. Second, even if nominal business profits are rising from higher prices, that doesn’t automatically translate into higher wages. If there is a lot of competition for jobs, from other workers or from technological improvements, then employers need not pay any extra or could even reduce wages. (Arguably, this has been the story of the last forty years.) Only if the labor market is tight, and employers desperately need to keep their employees happy, will wages tend to rise along with revenues.

Stagflation

Prices could also increase due to real increases in the cost of production or sale. This is easiest to see when fuel and electricity prices go up. Energy is an input into almost everything in the economy, so even if total wealth stays the same, producers will have to raise their prices or go bankrupt. This means that fewer people will afford to buy what they used to; most people will have to cut back. In other words, the rise in prices simply means that society has gotten poorer, because it is harder to make things.

Energy is not the only input that could cause this effect. Increased regulation, difficulties in transportation or supply-chain management, higher wages, higher salaries for executives, or increases in crime and property destruction can also impose costs on companies, often forcing prices higher. (Some of these costs might come with benefits, while others might be pure waste, but that is a different discussion.)

Deflation

As we noted, mild deflation is usually healthy—if prices are declining because the economy is getting more efficient at making things, that’s another way of saying that people are getting richer because they can buy more things. However, prices can also decline as part of the hangover from a speculative bubble. We can see this in the stock market when prices suddenly collapse after a long bull market. But it happens in the real economy, too. For example, one major cause of the Great Depression was that lots of manufacturers built new factories in the middle and late 1920s, each of them overestimating the total market demand for their goods and underestimating the amount of competition that would be online by the time their own factories were finished. As a result, the market was soon flooded with manufactured goods, and most of the manufacturers went bankrupt.

(A famously influential book on booms and busts was written by eminent economist Irving Fisher during the depths of the Great Depression. He also summarized the book in this article, which is quite a useful read. Fisher’s book was a major inspiration to John Maynard Keynes in the development of Keynes’s general economic theory.)

In a deflation due to a shortage of money, and a consequent excess of production, people sometimes rediscover that money is only one way to pay for things. People might resort to barter. Communities might create alternate payment methods such as local currencies or scrip. If you are lucky enough to find a supplier willing to extend credit, you can receive inputs now and pay for them once you have sold your goods. These means are usually inefficient compared to money, however, which is why they tend to disappear when the economy recovers.

If a deflationary episode persists for too long, it might lead to a deflationary spiral—people fear that prices will continue to drop, and therefore buying anything today is a surefire way to lose money. So people hoard their money instead, causing producers to lose their buyers and go bankrupt (especially if they have to meet payroll or mortgage payments). If it goes for too long, a deflationary spiral can permanently cripple the economy and reduce economic output.

Not everyone suffers in a deflationary spiral, however. Prices for everything become cheap—especially investment assets such as troubled businesses, stocks and bonds, or land, as their owners face financial ruin and need to sell quickly at any terms available. And if you have money in the bank, a deflationary spiral can be a fantastic opportunity to buy up assets and make a massive profit once prices normalize (assuming that they do!). (For example, if you had perfectly timed the stock market bottom midway through 1933 during the Great Depression and bought into the S&P 500, you would have nearly tripled your money by 1936.) As the saying goes, during deflation, “cash is king.”

A Takeaway?

All of the above being so, it would be easy to imagine that evil oligarchs might deliberately engineer a sequence of booms and busts in the economy, so they could buy assets cheaply during crises and then sell them to overexcited investors during the good times, gradually concentrating much of the world’s wealth into their desiccated, claw-like hands. The extent to which this happens in real life is, shall we say, unclear. But it would be a fantastic fictional plot, wouldn’t it?

And in any case, you can use the concepts here to impel several kinds of plots. For example, the biblical Book of Ruth is kicked off when Naomi’s family leaves Israel to escape an economic depression.

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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!)

Building an Economy: Population Density

20 Monday Feb 2023

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

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After a great deal of procrastination, it’s time to revisit the Land/Labor/Capital triad, identified by the classical economists like Adam Smith and the like as the key factors of production.

(Side note: modern economists consider entrepreneurship to be a fourth factor of production. I’m still trying to figure out whether there is a nice way to characterize entrepreneurship in our model, as it would obviously lend itself to strong stories.)

Remember, we’re not trying to explain everything about an economy from the ground up. We’re trying to build a relatively simple, yet powerful and flexible framework that worldbuilders can use to quickly mock up the contours of their invented societies. Once the bones are in place, you are then in a position to dive into all the cool little details, confident that they will be consistent with the structuring logic.

So when we talk about land, we’re going to focus on three broad variables—each of which can have surprisingly powerful implications:

  • Population density
  • Ease of transport
  • Natural resources

Really, these are interrelated. For example, you can’t have a dense population without lots of food, and and an easy way to get the food to people. Still, it’s useful to consider them separately to keep everything straight in our heads. Let’s begin with population density.

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If you want to have a country or region with a high population density, that implies several things. We already noted the need for lots of food and efficient transportation of it. On the other hand, you don’t necessarily need to have urban cities, if people are living in densely placed villages and growing their own food with intensive agricultural methods. (It will mean that animal husbandry will likely use methods that require little land, rather than pasture-grazing.) And the material standard of living might still be low if most people are producing food, rather than more specialized goods. Still, the more people there are living close together, the more opportunities for specialization and exchange, and the more likely that the economy will develop more complexity.

Conversely, if the population is thinly spread, the people might still be relatively prosperous. They could have large herds of livestock that move from place to place, or practice a carefree foraging lifestyle where they only spend a few hours a day gathering food and use the rest of their time making luxuries, playing games, fighting with neighbors (!), or relaxing. Or they might be desperately poor, if the land is not very productive and they all have to work hard to feed themselves, since there are few opportunities for trade. With a thinly spread populace that cannot sustain specialization and exchange, chances are that the energy surplus of the society will be small, which limits the development of their society and culture. (And you can see how the productivity of the land interacts with population density.)

So whether you choose to have a dense population or not, you can play around with what that looks like for you and your story.

But what about the political effects of a dense population, or its opposite?

Note that the more thinly spread the population, the harder it is to control the territory. If you are being oppressed by a ruler, or landlord, or moneylender, or cruel family members or whatever, you always have the option to pull up stakes and run; and all else equal, it is more difficult for a ruler to stop you if the population is thin. This is because fortifying the border to keep people in would be too expensive, compared to the number of people being contained. By contrast, if the society has a dense population, it is relatively more efficient to fortify the border even at great expense, because of the large number of people you will be able to contain and control.

Jeffrey Herbst argues that this is one of the key differences between the experience of Western Europe and of precolonial Africa; Western Europe, being densely populated and urbanized, made it worthwhile for rulers to fortify their borders, the better to control the moments of their people (as well as to defend against invasion!). In Africa, however, the landscape was so vast compared to the populace that there was little practical way to control the territory as such. Instead, African rulers focused on strategies to control people directly—ties of loyalty or marriage for some, enslavement and physical domination for others.

Let’s see why. When seeking wealth or other resources, a ruler must ask a key question: is it easier to exploit one’s own people, or someone else? If your people are easily controlled and restrained, it will be relatively easier to tax them. If your people can move around easily, however, then they will not tolerate heavy taxation. On the other hand, if your army can also move around easily, it becomes more attractive to invade your neighbors and cart away plunder, in goods or people.

So as a broad pattern, we see regions of high population density focus on fortification of borders and relatively high reliance on taxation or other means to generate resources from their own people (which does not exclude invading and pillaging neighbors, of course!); and regions of low population density feature relatively higher mobility, societies that feature relatively less political coercion and taxation, and lots of raiding of neighbors for treasure and slaves.

Of course, rulers can also change the population density of their territory. A very common pattern, as James C. Scott tells us, was for city rulers to concentrate the surrounding populations by force within the city walls, and have them cultivate fields that were within easy reach of the city (and the city’s military). This allowed them to tax their peasantry’s output more easily than if farmers were living in distant villages.

So when you’re creating a new territory, think about the population density of the land, and then consider what consequences flow from that. The implications for your story might be surprising.

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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, along with some overlap with the planned third book, working title Tyranny for Worldbuilders. No idea when they will be finished, but it should be fun!)

Uncertainty and Value

29 Sunday Jan 2023

Posted by in Economics, Politics for Worldbuilders

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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!)

Pirate Ships

20 Sunday Nov 2022

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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!)

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

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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!)