Economic model…strokes beard…

29 thoughts on Economic model…strokes beard…

1. It’s interesting how each new rule subtly changes the political bias of the game. Add in one thing and you’re subtly promoting privatisation, add another and you’re boosting socialism.

   Have you thought of releasing two or more games, in each of which you tacitly reinforce the players’ political biases? :-)

2. Oh, that diagram gives serious flashbacks to The Limits of Growth.

   Hopefully, though, your implementation isn’t in FORTRAN.

3. So many variables. What’s your approach to optimizing the weights??

   1. A huge and never-ending series of trial-and-error playthroughs to see what works and what doesn’t. i would love to think there is an automated system for balancing the game, but there just isn’t likely to be one that works :D

4. Businesses will try to grow productivity higher than wages.
   Depending on the labor laws you determine how fast it adjusts (or regresses).

   So you could create labor laws which would keep both factors as is or to benefit one (if we wanted to fix Italy economy)
   Maybe allow for extremer situations which would cause popular “revolution”
   (can’t remember the word)

   Low wages shouldn’t be considered for international trade, although most developed countries have trade deficits, doesn’t mean they have low trade (and thus economic pressure for companies to keep evolving).
   Germany can keep the salaries high because they have the productivity for it.

5. revolts*

6. I guess higher wages attract better workers (in terms of productivity and output). This would lead to higher productivity (and higher gdp).

   In saying that, I don’t think lower wages leads to lower productivity.. (China’s output is high). But technological advancement is probably going to be low..

   But laws could affect these like you said..

   It sounds like a lot of hard work to get the variables right. But democracy is a great game. I can’t wait for it :)

7. Productivity – higher wages do produce higher productivity to a point, due to better/more motivated workers. lower wages cause more dissatisfaction, however, unemployment is a factor here as well.

   As for Wages- generally, the more wealth the poor have, the better the economy is, as poor folks spend more of their check, which then goes into businesses, you get a higher velocity of money. This is an indirect effect.

   Trickle-down economics reduces the money multiplier, which is a big reason why it has a negative impact.

   I’m assuming that you mean on a governmental level, like a minimum wage? If so, minimum wages increase unemployment but reduce welfare costs for the employed (there’s a reason Wal-Mart’s wages are so resented in the US, Wal-Mart effectively uses the welfare system as a subsidy due to so many of their workers needing it)

8. Does maternity leave always have a negative effect on productivity? In a country with unemployment wouldn’t companies employ cover staff on temporary contracts thus negating the productivity reduction and having a positive effect on unemployment. Only countries with no unemployment would receive a productivity loss.

   Lower wages could have a positive effect on GDP and unemployment whereas higher wages the opposite. People spending because they have more doesn’t necessarily increase GDP. Companies would be less inclined to take on extra staff that are too expensive and new businesses would struggle to grow.

   Productivity does not have a direct effect on wages as no two people are the same. You can pay some employees in gold bars and it still wouldn’t make them work harder. As on your board I feel that technology and lifespan improve productivity whereas literacy in my opinion would effect technology. Don’t get me wrong if you pay absolute peanuts then productivity would suffer, but I wouldn’t use wages as a direct modifier for productivity.

   1. my assumption is that maternity leave would reduce productivity because a sub-optimal (temporary) replacement is doing the work. If we assume everyone is in the ideal job for them (ha!) then replacing someone for X months with a temporray replacement must reduce productivity no?

      1. Yes, that would be true, kudos. You’ve definitely opened a can of worms with this post. Good luck with all those formulas!

9. I am way less comfortable with D3 after seeing that model :P

   1. why? in what way?

      1. Because of the incredibly simplistic view of economics and democracy (but mainly economics) implied by that model.

         Of course, a game must be a simplified simulation of the world. If it were more than that, you would be given a Nobel prize or something.

         My point being that watch you make those decisions about what effects what, in what way, with little evidence, is slightly painful. It means in playing the game, I might constantly be annoyed that things don’t work the way I think they should, because you have pre-judged the effects of things.

         Of course, if the model were sufficiently complex that relationships were very complex, I can see that it might be satisfying in some fashion, so long as I could see what happened (I see, I increased wages, which made people happy, but then immigration increased, unemployment went up, that made people unhappy and they rioted, crime goes up, productivity is impacted, downward spiral, or whatever). But if you can’t really see that causal link, it will just seem like random stuff happening.

         And I think most such explanations IRL are just bullshit to baffle us, when they cannot be predicted ahead of time.

         Having said all of that, I have never actually played D1 or D2, so I don’t maybe get the kind of interesting gameplay that you are after.

         One last thing. I have some interesting theories of my own about how I would change the economic system if I get my hands on the levers. And I have tried. I suspect that your system would give me no ability to change any of the levers that I am interested in, because it is too simplistic to simulate them.

         1. Have faith, the system is infinitely expandable by trivial modding to do anything you want. Also, this is not the entire model, not by any vague standards. i don’t have a blackboard big enough :D This is a small subset of effects and objects that I was having trouble getting the relationships right. All of those objects have a ton of inputs and outputs not listed, and all of those links are governed by equations which themselves are not linear, and can depends on even more variables.
            For example, unemployment will also lead to crime (depending on many factors) and crime will impact tourism, which will feed into GDP. GDP will also boost C02 emissions which may affect our foreign relations, and thus our international trade and maybe tourism too…

10. I’ve stared at this a lot today and debated it with my invisible assistant, and we are concluding so far that actually there doesn’t need to be a link between wages and GDP *at all* in a direct sense. Wages will affect productivity, insofar as productivity is also a proxy for ‘competitiveness’, so high wages will reduce our global competitiveness, and through the medium of reduced exports (not modeled as a value, but as an effect) will reduce overall GDP.

    Secondly…
    There *should be a link between wages and productivity (think of productivity as competitiveness in this instance) in that high wages effectively reduce productivity (make our staff too pricey per hour compared to india), thus reduce exports, and result in a problem of cheap imports and lower GDP.

    …all subject to revision and change and tweaking, not least by the player, hopefully,

11. One problem I noticed on Democracy 2 was the link with welfare spending. If you implemented all of the welfare policies available and then spent the maximum amount you could on each of those policies, this didn’t seem to contribute to an issue regarding low productivity or a wasteful economy. I’m sure you are aware of the UK debates where there is a small section of society who refuse to work because they are better off on welfare benefits (possibly there is a link for your game, productivity and a wasteful economy there and the idea that high welfare spending and in the wrong places could lower productivity.)

    For instance, if you spend a moderate amount of money on all forms of welfare- this may not cause an issue. If you only implement unemployment benefit and then proceed to spend the maximum amount allowed for this, this may create unemployment, lower productivity and add to economic waste.

    1. D2 definitely had wasteful economy being fed into by a number of factors, maybe not enough. I am definitely modeling these factors in D3 now, although wasteful economy will be likely renamed ‘uncompetitive economy’ and will impact GDP (due to lower exports, cheaper imports etc).

12. I think that wages should increase GDP, via the multiplier effect. That is, if I’m paid more, I can spend more on other parts of the economy. I’ll also be exposed to more taxes (payroll taxes directly, sales and income taxes a bit less so). If most of your taxes are calculated relative to GDP, I’d definitely say you need to have wages feeding in there.

    I think wages should be effect productivity in a negative way (high wages->low productivity and vise versa). High productivity should tend to increase inequality (if that’s still something you’re tracking) and that inequality should decrease wages, making for a feedback loop unless other policies (like unions and the minimum wage) keep wages up and inequality in check.

    That’s the trap the USA (and perhaps other western nations) have been in over the last couple of decades, where the wealth from tremendously increased productivity (from computers and the Internet) has mostly gone to very rich capitalists (the “1%”), with wages being stagnant.

    1. That has to be modeled quite carefully though. A true model would look at UK vs overseas production costs and exchange rates, because the likelihood is that if I get a wage bump, I’ll spend it on a new blu-ray player made in asia, rather than something locally made. That’s all outside the scope of the game though :D

13. Would it be possible to introduce in the game some of the ideas on the following paper?
    http://www.democracynature.org/vol3/fotopoulos_outline.htm

14. I do like the idea of how wages should fit into this. Perhaps you could create income support or working tax credits as a welfare policy which could increase wages for lower income people. I’m assuming during economic downturns wages will get lower because of the turbulant economic conditions.

    1. This should be a natural emergent effect, because a downturn lowers GDP, which will raise unemployment, thus putting a downward pressure on wages (all things being equal).

       1. Another question I have is that on my democracy 2 game my options screen appears to be broken and won’t allow me to change things like inflation, employment, global economic conditions or turn off or on difficulty, manifesto etc.

          Any ideas how to fix this?

15. So basically there are two things going on here.

    If you have high productivity, that should mean the wages of your workers increase. If you have restrictive labour laws, that should also mean wages increase. But rising productivity will tend to *increase* employment at the same time as increasing wages, while high wages resulting from job protections, minimum wage etc. will tend to raise unemployment.

    One way you could deal with this would be to say, well, high wages would reduce employment ceteris paribus, but high productivity increases employment at the same time as wages, so if you have high wages because of high productivity, then you’d expect falling employment. Similarly, you could have high wages reducing poverty, but labour laws leading to unemployment which increases poverty. The problem with this is that it would be very difficult to calibrate the magnitude of the effects so that it works properly.

    The alternative would be to add in a variable for, say, unit labour costs, which is defined by wages *relative to productivity* – because that’s what capitalists really care about, and what really affects exports etc. You could then relate that to a more detailed system of currency, international trade, trade balances and so on. As an economist who is very attracted to that side of D3, I naturally lean towards more simulation in that area but obviously it would be more complicated and take more time and effort to design.

    1. I think the key here is to see productivity as also a substitute for competitiveness. So it’s not just output per person, but also affected by wages so that (for example) if we invested heavily in robotics, and automation, we could have a high productivity system which actually created unemployment (except amongst robot engineers!). This could only really be eliminated by global trade, as we basically all get jobs as robot engineers and export vast amounts to the rest of the world. Easy in an international boom, much harder during a credit crunch.

       1. Maybe the solution here is a ‘labour share of GDP’ variable. Labour regulations, minimum wage, high corporate / capital taxes etc. are bad for the economy, but make the labour share higher. And doing the opposite reduces labour share.

          It’s worth noting that if you invested heavily in robotics / automation, there’s no reason why you’d expect high unemployment to result, provided your economy is flexible enough. The most capital-intensive economies today, like the US or Japan or Germany, don’t have very high levels of unemployment (well, the current, temporary crisis aside). People just find jobs doing stuff the machines can’t do – but those jobs don’t always pay that well.

          Does this seem like a good way to square the circle?

          What a very capital-intensive economy *would* do, then, is reduce labour’s share of income, so that poverty etc. could be going up even if GDP is growing rapidly.

16. … as far as I understand economy there are two camps – and how you see stuff, depends a little in what camp you are:
    Those who favour demand side = John Maynard Keynes etc.
    Those who favour supply side = Milton Friedman etc. (Chicago school)

    If you think of the eocnomy as being a free market economy (that is: no monopolies, rational / profit maximising actors (homo oeconomicus), freely available information (no insider trading / frontrunning), not much government intervention) you expect supply and demand to find an equilibrium at a point, which optimises the capital allocation, and thus GDP (- “invisible hand of the market”).

    But each interference is able to move the equilibrium to take place at a suboptimal level: misallocation of capital happens.
    There is all sorts of things that can go wrong: if you boost demand too fast, the supply side might be too unelastic, and instead of boosting supply, you end up just with higher prices, and not equally more products produced; then everybody rushes to supply more, and you end up with oversupply / stuff that no one wants any more – maybe the product cycle has moved on etc. – intervention usually causes the business cycle to go to extremes. Sometimes even if the government wants to flatten it / work anticyclical.

    My guess on the effect of higher wages is, that it depends on how international the market is. If it is very international, and the wages are too high, the people will spend (and/or save) like crazy, but they will buy stuff (and investments) from overseas, since products in your own country will be relatively expensive (and return on investment will be relatively low at home). If the wages are too low, national demand (and savings) will drop to a minimum, but your exports will start to rise and you will attract foreign investments.
    But some parts of the economy are pretty much national: Service sector: your children will be taught in your own country, your elderly will need nurses in your own country etc. – if the wages here are too high, your government spending will go up ( thus taxes or national debt), or you will get a black market (- sometimes including “cheap” immigrants), or people will try to do it by themselves… (hair cutting, car washing, house and garden work – on the other hand: you only can hire people to do that, if taxes are low: else the average guy can’t hire the other average guy to work for him…).

    Without interfering, the wage level should tend to equilibrium depending on supply and demand for work… – high unemployment = lower wages; low unemployment = higher wages… – But with a high structural unemployment (- because of high productivity, not everyone is needed anymore, or because of bad education, there is no more work on that level) workers / unemployed might want to organise themselves / strike / protest etc. in order to get higher pay…

    I guess it is really hard to simulate all the interconnectedness… – without seeing how it worked in Democracy 2 it didn’t feel too bad: my imagination was filling in the blanks, as long as the game behaved not too irrational.

    P.S.: Situation in Germany
    When I look at what happened here in Germany through my lifetime, I come to the conclusion that you can have the economy distorted but functional over pretty long periods of time:
    In the 1980s wages where high, but so was productivity and exports (Through the decade long slow rise in the value of the DM after WW II, german industry was accomodated to ever lower competitiveness and forced to keep innovating). Then we would have needed structural changes to stay competitive, but what happened was Reunification instead of reforms: the economy was booming, because population “grew” by 30%, and they all wanted western cars, microwaves, refrigerators etc. – and they could afford it, because the DDR/Ost-Mark was traded 2:1 for DM (West) (- for very small savings even 1:1 I think), and wages where set at like 80% in the East – no matter how productive they were… – that lead to a decline in East Germanys industry and lots of unemployment (>5 million): from 1995-2005 Germany was the sick man of Europe – then wages stopped rising altogether and Chancellor Schröder introduced labour market reforms (“Agenda 2010”). After that “we” became super competitive: innovative as always, suddenly low wages (not rising for more than 10 years), and a weak currency (Euro instead of DM). In the end the german population not only exported goods instead of using it itself (“lower” living standard… – not everyone is driving a Mercedes or BMW), but also exported savings (german banks bought lots and lots of the packed US subprime house market-bubble-debt). After the Lehman-Crash in 2008 now we no longer export capital, but attract it as a “safe haven”… – building a bubble of our own…)

    1. P.P.S:
       The “distortions” of which I was speaking in my “P.S.” where german reunificaton and the introduction of the Euro: both used fixed currency exchange rates out of political reasons, both where historical unique features and both had long time effects (>10 years) – the economy of what was west germany in the 1980s would have probably developed completely different, if these two events hadn’t happened.

       But I guess nice, orderly economic theory runs into these kind of historical and political hiccups (wars and revolutions; sudden openings and closings of markets) all the time, and cope with it / maybe even cause them on a grand scale…? With so many moving parts, it seems impossible to predict what happpens in the future… – “ceteris paribus” is not met in the real world…

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