Game Design, Programming and running a one-man games business…

Democracy 4: A better economic simulation

For a while now I have been putting off addressing a problem in the economic simulation for Democracy 4. Basically we have no monetary policy in the game, only fiscal policy, and for a long time, thats been pretty much fine and nobody has complained.

To put things simply, fiscal policy is when the government raises money through taxes and spends it on stuff. Monetary policy is where government messes around with how much actual cash exists in the economy. They are different ways to do things, and there are fierce arguments (what a surprise) about which works best in which situations.

For the lifetime of Democracy 3, its been a moot issue, because outside of Zimbabwe, nobody has made any major monetary policy decisions for a very long time. Inflation has not been a hot political topic for ages, and the terms ‘deflation’ and ‘stagflation‘ have not been in the news for probably forty years. Thus nobody objected to them not being in D3.

But 2020 is not 2013. Since the global financial crisis, a number of policy instruments have become more popular, and the discussion of monetary policy is suddenly very real. The two policies that have been active and also discussed are Quantitative Easing and helicopter money. Both are now in the game…

If I'm Holding Cash, Where Should It Be? - Osbon Capital Management

Quantitative easing is basically printing money, although policymakers pretend it isn’t, to avoid comparisons with the Wiemar republic or Zimbabwe, because it has a very bad reputation. QE is a special form of money printing where the central bank pushes a button and gives itself (for example) 100 billion dollars, then buys bonds and other relatively safe assets on the stock market worth 100 billion dollars. No ordinary people see any of this money, but it pushes up the stock market, resulting in higher business confidence, more wealth for stockholders, and with any luck, a more stable and maybe even booming economy!

Obviously this has side effects. This basically causes stealth inflation (possibly not visible because it is used to prevent deflation (prices falling) as a last resort. There is no way to avoid the fact that any form of money printing creates inflation. This makes people will cash deposits worse off (people with some savings) and can drive up prices. It also makes your currency weaker. However, if you have shares on the stock market, you are better off, and arguably it can cause an asset-bubble.


Helicopter money is similar. Its another form of money printing, but you basically hand the money in envelopes to every citizen. This has a similar effect in stabilizing the economy, but it makes the poorest better off (typically everyone gets the same payment), and is not skewed towards wealthy stockholders. The problem with helicopter money is you cannot reverse the process if it goes too far, whereas with QE, you can basically sell the bought assets, then destroy the imaginary money you bought them with, thus reducing the money supply, and stopping inflation going mad. FWIW I am lumping in ‘Peoples QE‘ with helicopter money to simplify things.

So…with those two very quick-and-dirty explanations out the way, how does this fit into Democracy 4?

18 Curious Facts You Didn't Know About Hyperinflation – Len Penzo ...

Both QE and Helicopter Money are ways to IMMEDIATELY boost GDP, and either make the rich/poor happy/sad depending which you pick, that do not cost anything at all. (You printed the cash remember!). Obviously there has to be a catch right?

Well yes… inflation and the eventual risk of hyperinflation (which is catastrophic and rarely recoverable). This means I have had to model both inflation and hyperinflation (I also added a border wall policy at the same time btw :D). These are now in the game, with a variety of inputs and effects and I’m still fiddling with getting the balance right which is HUGELY difficult. (The true economic theories here are amazingly complex and often contradictory so you can imagine what a mess it can all be…).

I have found (so far) that the best way to model the negative effects of inflation is through prices on food and oil. Most countries do at least some importing of oil and food, and this is a way to reflect the broader globalization trend and the impact of your currency weakening against the country from which you buy stuff. (For the US this would be china). To put things bluntly, if Donald Trump gave everybody in the US an extra (printed) hundred thousand USD, then the USD / Yuan exchange rate *should* change, making goods imported from china more expensive.


I am sure there will be very many long, multi-page debates on my forums once the game goes into pre-alpha sales and people with economics degrees, MSCs and PHDs p[lay the game and argue if certain effects make sense or are too strong/weak. This is tough stuff to model in a video game.

And yet… it has to be in Democracy 4. Look at any online politics forum and you will find people (especially on the left of the political spectrum) arguing that the government can print money as an alternative to austerity, and people on the right saying thats nonsense and we have to live within our means. It HAS to be in the game, and I bet loads of people will argue that I’ve done it wrong.

I guess thats game design for you :D

10 thoughts on Democracy 4: A better economic simulation

  1. Thankyou, I felt this is what was missing in Democracy 3. Will there be a central bank interest rate you can set?

  2. when inflation increases, debt decreases and if you increase too quickly this index can lead to the bankruptcy of credit institutions also inflation increases exports

  3. I think you should be careful to not overstate the impact of inflation or currency devalation. In recent decades the Fed has printed money like crazy and there has been no significant impact. Right now the Fed is buying hundreds of billions of dollars of U.S. treasury bonds per DAY and yet the dollar is actually strengthening against the Euro and even the Yen because people see it as a safe currency during the pandemic. I think that your simulations of Stability and Democracy Index from Democracy 3: Africa as well as Business Confidence from this game should have a significant role in affecting both currency valuations and debt interest rates. Weimar Germany and Zimbabwe were unstable nations so they could not afford to devalue their currencies since it would spook investors. The U.S. can get away with it because its economy is still fundamentally very strong and its stability as a democracy and as a superpower separated from other powers by oceans is unmatched. Its long-term outlook is good so investors are still willing to buy its treasury bonds. Perhaps the Global Economy should also play a role in the currency value simulation? If your economy is doing better than the Global Economy then it would make sense for your currency to become stronger, while if the Global Economy is better it would make sense for your currency to become weaker.

    1. You are right to point out the differences between USA and Germany in the 1930s with regards to inflation and stability. Thankfully our simulation theoretically can handle this, because we can adjust effects for each country with overrides, so its simple to have a ‘global reserve currency’ override for the USA that reduces inflationary effects, or makes the hyperinflation situation less likely for the USA. We can even link it to stability :D

  4. Is GDP capped?
    Or can it grow unbounded?

    I think that GDP stat should be more of GDP growth stat – below 0.5 is shrinking and above 0.5 is growing.
    Here also reaching 0 or 1 should be impossible, unless you have no policies affecting it positively/negatively and even then they should be at max.

  5. Hello to all
    In this baffling forthwith, I proclivity you all
    Esteem your family and friends

  6. Oh shoot. I have a lot of mixed feelings about this.

    (tl;dr If you have the ability to work with someone during the development of the game who has a strong background in macroeconomics, please have them help to design the monetary policy systems in Democracy 4. This is a really important topic and the way you’ve described how real-world monetary policy works in your post makes me feel nervous it might be portrayed inaccurately. I think you need to bring in a specialist, if only to consult with them.)

    I’m an economics major, and one of the things on my Democracy 4 wishlist was to have some control over monetary policy. It would be an absolute thrill to decide how the central bank of your country operates in-game. But that being said, it’s also a topic that’s very easy to misrepresent. Cliffski, a lot of the ideas about monetary policy/macroeconomics you described in your post seem like they come from the political discourse in 2020, which isn’t a super good source.

    Just to outline some of my concerns:

    The point of either helicopter money or QE is to help the central bank hit its inflation target, unemployment target, or whatever other target is in the central bank’s mandate. These two policies become relevant when traditional open-market operations/interest rate adjustments aren’t enough to hit those targets. Typically, demand-side recessions bring down inflation and increase unemployment, so *one primary purpose of these policies in response to a recession would be to increase inflation.* You’re describing it as “risking” inflation, which seems the wrong way to view this. If overdone, there is a risk of inflation outstripping the inflation target (which can result in hyperinflation), but if inflation is below the inflation target then *most economists would consider increasing inflation part of the goal.*

    You’re right that these systems are incredibly complex, and I think it’s important to provide a simplified version of them to players that’s easy-to-understand and fun to play around with. But the in-game representation should also be accurate. Right now, it looks like you’re modelling monetary stimulus as “a short term benefit to GDP that has long-term consequences for inflation,” which isn’t accurate.

    Definitely consult with a specialist before finalizing the way Democracy 4 handles inflation and monetary policy.

    (Side note: as of 2013, monetary policy hadn’t only been a major policy issue in Zimbabwe. ~5 years beforehand, the great recession prompted a huge discussion about stabilization policy. The US implemented QE in 2008, so I think the audience for Democracy 3 and Democracy 4 are going to be similarly interested in having it in the game.)

    1. Dude, I studied pure economics at LSE, this was theoretically my area :D (Although I don’t consider myself an expert, and there are many conflicting theories). When I studied economics, it was all macro maths. Behavioural economics hadn’t even been invented then…which is shocking. Anyway…

      Yup, its a real challenge to have a representation of monetary policy in the game that will keep both economics students and average gamers happy. Its true that the 2020 discourse on this topic is very populist and often not grounded in the fundamentals. Its also true that it varies massively from country to country based on stability, so Egypt printing money is more risky than the USA or Germany doing the same thing right now…

      One of the problems is that we need to represent the system in a ‘closed’ way. We cannot endlessly add extra variables like interest rates, money supply, the bond market and so on, because the game would collapse into over-complexity, so we have to bend the facts a bit here and there.

      Ultimately this area will always be contentious because even now, economists do not agree on whether QE/Helicopter money works or does not. It really depends on the circumstances. However we have to have *some* way to represent the risks involved with adding to the money supply, to prevent QE/HM just being one-click simple solutions to every problem.

      The model will evolve during alpha and then early access as we get lots of data from seeing how people play.

  7. … damage the world.

    Since money is imaginary and only exists in the imaginations of a species that is intelligent enough to have such concepts.

    QE is not like printing money since it’s all electronic so it won’t be anything like inflationary because theories of inflation don’t apply to electronic money economies because the “money” is not banknotes entering circulation, the money is merely debt ledgers between banks.

    Economics is pure ideology masquerading as science, if a meteor hit the earth and reduced most of earths population to bands and tribes, there would once again be no need for money, because of much less people on the planet.

    Free markets?

    Energy subsidies

    So let’s just cut the crap, we live in two tier societies where corporations and the rich exist above the law and rubber stamp their own policies via lobbyists since most people are politically illiterate as this blog shows.

    1. Whether money is cash, or numbers in a bank has zero effect on whether or not it was inflationary. Inflation in the 1970s was not a pure-cash based world. Inflation is just maths. And economics is definitely a science. No science is exact. I’m not sure how my blog proves people are politically illiterate. I’ve followed political issues for 35 years now.

Comments are currently closed.