Nameback
Troubadour
In any large kingdom, republic, empire, or other political organization, economics is important. This is just as true of the ancient and medieval world as our world today. To that end, I'd like to use this thread to answer economic questions and provide insight into how economic policy can affect fantasy worlds.
First, I'll start with a post on some of the most essential basics: inflation and deflation. I'm starting with these because I find that macroeconomics--the economics of whole societies--is best understood by understanding money and how it is used.
Deflation: Deflation is nasty, and almost always accompanied by economic contraction, unemployment, and reduced output (fewer real-world goods and services being produced). What is deflation? Well, simply put, too little money and too many goods. When you don't have enough money to buy all the things society can make, deflation happens.
Remember, M (the supply of money) * V (how fast people spend their money) = P (the general price-level) * Q (the amount of actual stuff people can make). So when money disappears (M going down), or people hoard their money (V going down), then either P or Q must go down--and typically it's both. And it's Q going down that really hurts.
So, how does this happen and what does it have to do with your fantasy world? Well, it can happen a lot of ways, but usually it happens when a lot of debts go bad (people default on them) all at once. And it matters because it can cause depressions and huge social upheaval--ancient Rome suffered several deflation crises in the Late Republic era that contributed hugely to the political instability that led to Caesar's civil war, and the formation of the Empire.
What mostly happened in Rome was that, for one reason or another, the aristocracy hoarded huge amounts of money, leaving not enough for everyone else, causing prices to fall. When prices fall, people earn less for their labor--the problem for Romans was that most Roman citizens carried a good bit of debt. When they received less money for their labor and goods, they could no longer pay their creditors, and began to default in droves. This led to foreclosures, unemployment, poverty, and dispossessed masses--not to mention even more falling prices which perpetuated the cycle!
One reason in 91-86 BC that this happened was that because of the Social War (an uprising of Italian allies against Rome), people (especially the aristocracy, or patricians) began hoarding money out of fear and uncertainty at the war's outcome. This led to a dramatic fall in the prices of commodities and land. People could not service their debts and began defaulting. These defaults often resulted in foreclosures, which made prices fall even further by flooding the market with more land and goods that creditors had foreclosed on and were trying to sell to break even.
Another cause during the same period was the war with Mithridates, who invaded Roman Asia Minor. This made it very hard for Roman creditors to collect on their debts in Asia Minor (which was heavily indebted), causing liquidity problems in Rome; because these creditors had lent out so much in Asia, and because they could not be repaid because of the war, they could not make new loans to Roman citizens or indeed even the government! This led to even more deflation (sound familiar? This is rather similar to the 2008 financial crisis! Replace "Asia Minor" with "investment banks" and "Mithridates" with "subprime loans" and you get the picture!).
All this caused unemployment, people being kicked off their land (due to foreclosure), and general malaise. The unwashed masses grew in Rome as foreclosed farmers left the countryside and moved into the city. Soon, there was political fighting over proposed forms of debt relief.
In Rome, this meant typically that the Populares (populist politicians) wanted debt relief for citizens in general. However, the Optimates (conservative politicians) opposed debt relief, as the aristocracy was behind much of the creditors in Rome, and they would lose out if debts were wiped clean. This conflict was one of the most significant factors that led to the civil wars of the era! Indeed, Julius Caesar was a frequent proponent of debt relief, and this was one of the hot-button issues that divided him from the Senate.
Inflation: Inflation, in moderate amounts, is pretty much irrelevant. It hurts people who have a lot of money in cash, but most people had their wealth in things like land or commodities or slaves, whose prices would rise in time with inflation. However, sometimes hyperinflation would strike, and governments would print huge amounts of money. The problem with inflation, in simple terms, is the opposite of deflation: too much money, too few goods.
High or hyper- inflation happens because society needs more of a real good or service (something people actually make) than it can produce. Basically, when hyperinflation happens, it means that the society in question is suffering from a lack of real wealth. As opposed to deflation, when society doesn't have enough money, but has plenty of goods and services.
I'll again use Rome as an example. In the 2nd and 3rd centuries AD, Rome had a huge inflation problem that grew progressively worse. Prices were rising constantly at extremely fast rates and people had trouble paying for necessities. Why? Mainly because of the military.
Rome's military had grown progressively larger since Augustus to defend longer borders. Not only that, but each Emperor vied to lavish money on the army, because that helped secure his power. And if you didn't pay the army well? Your head typically ended up on a spike, and an army commander took your place.
So, Rome needed lots of money to pay its growing (and growing greedier) army, for purposes of both actual defense and defense against civil war from within the ranks. However, this became increasingly untenable. Why? Because most of the largest land-owners and aristocrats were exempt from most forms of taxation. This meant that taxes fell on the populace, from merchants and artisans and local creditors down to the peasantry. And frankly, they didn't have enough money to pay for the upkeep of the army.
A Roman Emperor at this time had basically a few bad options:
(1) Reduce the size of the army, lose the ability to defend large swaths of the Empire.
(2) Reduce the pay of the army, get assassinated or cause civil war.
(3) Tax the populace into oblivion, still not be able to pay army
(4) Tax the aristocracy and large land-owners, get assassinated or cause civil war
(5) Print money.
Naturally, the Emperors chose the fifth option. However, this didn't address the fundamental issue--Roman society simply could not make enough goods and services to support both a bloated army and a tax-free aristocracy! The result was a two-tier currency system, in which the army and bureaucrats were typically paid in un-inflated gold currency, and everyone else used hyper-inflated silver currency.
But, again, even if the Empire didn't print the money, something terrible would still occur. This is what I mean when I say that high inflation is a sign that a society needs more of something than it can produce. Because of the political instability and threat of civil war in the Roman Empire, it was a society whose political structure demanded a huge army and a hugely wealthy and untaxed ruling class--and the agrarian economy of Rome could not support that AND an entire plebeian population.
Now, if you have any economic questions, please feel free to ask and I will do my best to answer them!
First, I'll start with a post on some of the most essential basics: inflation and deflation. I'm starting with these because I find that macroeconomics--the economics of whole societies--is best understood by understanding money and how it is used.
Deflation: Deflation is nasty, and almost always accompanied by economic contraction, unemployment, and reduced output (fewer real-world goods and services being produced). What is deflation? Well, simply put, too little money and too many goods. When you don't have enough money to buy all the things society can make, deflation happens.
Remember, M (the supply of money) * V (how fast people spend their money) = P (the general price-level) * Q (the amount of actual stuff people can make). So when money disappears (M going down), or people hoard their money (V going down), then either P or Q must go down--and typically it's both. And it's Q going down that really hurts.
So, how does this happen and what does it have to do with your fantasy world? Well, it can happen a lot of ways, but usually it happens when a lot of debts go bad (people default on them) all at once. And it matters because it can cause depressions and huge social upheaval--ancient Rome suffered several deflation crises in the Late Republic era that contributed hugely to the political instability that led to Caesar's civil war, and the formation of the Empire.
What mostly happened in Rome was that, for one reason or another, the aristocracy hoarded huge amounts of money, leaving not enough for everyone else, causing prices to fall. When prices fall, people earn less for their labor--the problem for Romans was that most Roman citizens carried a good bit of debt. When they received less money for their labor and goods, they could no longer pay their creditors, and began to default in droves. This led to foreclosures, unemployment, poverty, and dispossessed masses--not to mention even more falling prices which perpetuated the cycle!
One reason in 91-86 BC that this happened was that because of the Social War (an uprising of Italian allies against Rome), people (especially the aristocracy, or patricians) began hoarding money out of fear and uncertainty at the war's outcome. This led to a dramatic fall in the prices of commodities and land. People could not service their debts and began defaulting. These defaults often resulted in foreclosures, which made prices fall even further by flooding the market with more land and goods that creditors had foreclosed on and were trying to sell to break even.
Another cause during the same period was the war with Mithridates, who invaded Roman Asia Minor. This made it very hard for Roman creditors to collect on their debts in Asia Minor (which was heavily indebted), causing liquidity problems in Rome; because these creditors had lent out so much in Asia, and because they could not be repaid because of the war, they could not make new loans to Roman citizens or indeed even the government! This led to even more deflation (sound familiar? This is rather similar to the 2008 financial crisis! Replace "Asia Minor" with "investment banks" and "Mithridates" with "subprime loans" and you get the picture!).
All this caused unemployment, people being kicked off their land (due to foreclosure), and general malaise. The unwashed masses grew in Rome as foreclosed farmers left the countryside and moved into the city. Soon, there was political fighting over proposed forms of debt relief.
In Rome, this meant typically that the Populares (populist politicians) wanted debt relief for citizens in general. However, the Optimates (conservative politicians) opposed debt relief, as the aristocracy was behind much of the creditors in Rome, and they would lose out if debts were wiped clean. This conflict was one of the most significant factors that led to the civil wars of the era! Indeed, Julius Caesar was a frequent proponent of debt relief, and this was one of the hot-button issues that divided him from the Senate.
Inflation: Inflation, in moderate amounts, is pretty much irrelevant. It hurts people who have a lot of money in cash, but most people had their wealth in things like land or commodities or slaves, whose prices would rise in time with inflation. However, sometimes hyperinflation would strike, and governments would print huge amounts of money. The problem with inflation, in simple terms, is the opposite of deflation: too much money, too few goods.
High or hyper- inflation happens because society needs more of a real good or service (something people actually make) than it can produce. Basically, when hyperinflation happens, it means that the society in question is suffering from a lack of real wealth. As opposed to deflation, when society doesn't have enough money, but has plenty of goods and services.
I'll again use Rome as an example. In the 2nd and 3rd centuries AD, Rome had a huge inflation problem that grew progressively worse. Prices were rising constantly at extremely fast rates and people had trouble paying for necessities. Why? Mainly because of the military.
Rome's military had grown progressively larger since Augustus to defend longer borders. Not only that, but each Emperor vied to lavish money on the army, because that helped secure his power. And if you didn't pay the army well? Your head typically ended up on a spike, and an army commander took your place.
So, Rome needed lots of money to pay its growing (and growing greedier) army, for purposes of both actual defense and defense against civil war from within the ranks. However, this became increasingly untenable. Why? Because most of the largest land-owners and aristocrats were exempt from most forms of taxation. This meant that taxes fell on the populace, from merchants and artisans and local creditors down to the peasantry. And frankly, they didn't have enough money to pay for the upkeep of the army.
A Roman Emperor at this time had basically a few bad options:
(1) Reduce the size of the army, lose the ability to defend large swaths of the Empire.
(2) Reduce the pay of the army, get assassinated or cause civil war.
(3) Tax the populace into oblivion, still not be able to pay army
(4) Tax the aristocracy and large land-owners, get assassinated or cause civil war
(5) Print money.
Naturally, the Emperors chose the fifth option. However, this didn't address the fundamental issue--Roman society simply could not make enough goods and services to support both a bloated army and a tax-free aristocracy! The result was a two-tier currency system, in which the army and bureaucrats were typically paid in un-inflated gold currency, and everyone else used hyper-inflated silver currency.
But, again, even if the Empire didn't print the money, something terrible would still occur. This is what I mean when I say that high inflation is a sign that a society needs more of something than it can produce. Because of the political instability and threat of civil war in the Roman Empire, it was a society whose political structure demanded a huge army and a hugely wealthy and untaxed ruling class--and the agrarian economy of Rome could not support that AND an entire plebeian population.
Now, if you have any economic questions, please feel free to ask and I will do my best to answer them!