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Fire Lord Pi
2012-10-21, 08:56 PM
My understanding of economics is very simple.

To those of you who know more about how money works, what would happen if a business (or group of businesses) where making profit at a fairly decent rate (in a large city or metropolis) and didn't put the money back into the economy. Whatever they would sell would be produced only at the cost of labour and labour would be provided by willing members or slaves (cared for by outside resources).

How would this affect an economy?

Vorr
2012-10-21, 09:24 PM
This is one of them weird theoretical things...but

It would be near impossible for a business not to put money back into an economy. Even if you had slave labor, you'd still need to pay the slave watchers. And you'd still need materials to make whatever your selling. You can't make a wooden barrel without wood, for example. And you'd need tools and such to make whatever your making, plus transportation, warehousing, and security. And you really can't have slaves do security for obvious reasons. And then you'd have taxes, fees, and such from the governments. And finally the higher ups of said business are not exactly going to sit around and not spend the money they make.

But if a business was to do this, well it would need to be the size of Wal Mart to have any impact. If Wal Mart was to 'horde money' for even a week.... First off you'd have a lot less physical money around. This would start to cause problems for the poor and cash only folks. Though in a modern world the impact would be a lot less as it would just force people to use bank cards and such.

And if Wal Mart could somehow spontaneously make everything to fill their store everyday and did not have to buy products, well that would put a lot of other companies in trouble, if not out of business.


But, simply put, a business could not really horde money and exist.

Craft (Cheese)
2012-10-21, 09:34 PM
The simple answer is people switch to using another form of currency. If this group gobbles up all the gold and silver in the world then people will just switch to salt or something (not to say the transition would be smooth, mind you). Transactions don't become impossible if you take away money, they just take on a different form.

Knaight
2012-10-21, 10:00 PM
My understanding of economics is very simple.

To those of you who know more about how money works, what would happen if a business (or group of businesses) where making profit at a fairly decent rate (in a large city or metropolis) and didn't put the money back into the economy. Whatever they would sell would be produced only at the cost of labour and labour would be provided by willing members or slaves (cared for by outside resources).

How would this affect an economy?

It depends on how they are making profit. If, somehow, they had a bunch of untaxed land that was fully self sufficient (basically, they have an internal economy that doesn't interact with the greater economy in some way) then they are basically just taking money out of the system somehow. This brings us to the matter of how - are they bringing wealth in, or not? If they are bringing wealth in, then the larger economy can simply produce money and trade it for wealth of some sort. What happens then depends on whether the money is somehow difficult to produce (precious metals generally are, paper money generally isn't). Then, the last thing to check is whether the wealth being brought in, if it is being brought in, is in the form of consumables. There are a few major categories to consider, from the perspective of the larger economy.

No wealth in, worthless money out - Money is added to the system, then it is taken away through something that doesn't actually add wealth. The money is easily produced. Basically, this is just a strain on the system, as it adds a few bureaucrats, and even worthless money is technically only near-worthless.

No wealth or consumable wealth in, valuable money out - Precious metal supplies or similar are generally depleted domestically, forcing inflation, other economies (which are usually connected to political units of some sort) gain power. It's generally a mess. If you look at the economic side of the British-Chinese tea trade*, where Britain shipped out silver for consumable tea for ages, you'll get some idea of what this looked like. However, with consumables that are necessary it can also remove strain to some extent.

Non-consumable wealth in, worthless money out - This is basically free stuff. Free stuff is awesome.

Consumable wealth in, worthless money out - This is also free stuff. It essentially frees up the existing consumable market to go do something else. Said transition has a good chance of not being ideal.

Note that non-consumable essentially means something that can be used repeatedly, but will eventually be consumed. Consumable would mean something like food, firewood, or tea, where it is used then can't be used again.

*I'm not getting into politics on this forum, and they aren't hugely relevant during most of the trade anyways.

kieza
2012-10-21, 10:47 PM
Okay, professional economist here:

The most feasible scenario for this to happen is that this company buys materials and labor and sells product like any other, but that any profit it makes, it simply hoards in a giant vault in the form of hard currency. (It doesn't deposit it into a bank, because the bank would loan it back out, thus returning it to the economy.) Now as previously mentioned, the business must be making a lot of profit in order to have a noticeable effect, but let's assume this is the case for the sake of argument.

Now, this is going to make the company unable to compete in the long run, but we'll assume that it has acquired a monopoly and created barriers to entry before starting to take money out of the economy.

Now, with this money out of circulation, it's going to shrink the national money supply, leading to deflation: the prices of everything will fall, including wages. If there's a lot of lending in this economy (which is an assumption in a modern economy, but may not be the case for a D&D economy), the borrowers will default on their debts, since their wages have fallen and the house/car/whatever is worth less money, but the amount they owe is unchanged. If there are enough defaults, or the company continues hoarding currency long enough, you may see a banking crisis similar to the '08/'09 American financial collapse. The effects will continue as long as the company continues removing currency from circulation.

In order to correct or compensate for the problem, there are several possible paths. The government may mint more coinage to replace the money taken out of circulation. Banks may issue lots of paper debt as a supplementary means of exchange. Citizens may shift to an unofficial currency (salt was mentioned), use a foreign currency, or turn to a barter system. And as an extreme measure, the government may step in and force the company to return its hoard to the economy.

Now, if no steps are taken to correct the problem, and the crisis reaches its logical extreme in which the company somehow removes all money from the economy...well, it's not going to happen in a realistic world, because the population will switch to some alternate form of currency long before it happens. But if it were somehow to happen, you'd have a situation in which there was no medium of exchange or store of value: people would have a lot harder time buying or selling things, or saving up money for a later date. In short, you'd have a medieval economy, with drastically lowered capacity for trade and mercantilism, and probably a lowered standard of living.

Fire Lord Pi
2012-10-22, 06:42 PM
Gracious thanks for your knowledge. Though you mentioned a medieval economy. What effects effects would this have on an (already) medieval city?

Coidzor
2012-10-22, 06:46 PM
Have you heard about the time when coins just vanished from Argentina (http://www.slate.com/articles/news_and_politics/foreigners/2008/12/yes_we_have_no_monedas.html)?

Slipperychicken
2012-10-22, 07:35 PM
My understanding of economics is very simple.

To those of you who know more about how money works, what would happen if a business (or group of businesses) where making profit at a fairly decent rate (in a large city or metropolis) and didn't put the money back into the economy. Whatever they would sell would be produced only at the cost of labour and labour would be provided by willing members or slaves (cared for by outside resources).

How would this affect an economy?

a) Those are the worst businesses ever. They have every reason to reinvest the money to make more money, or just blow it on luxury items (Boats 'N Hoes), or on stockholder dividends. At the very least, put it in one or more banks, which will reinvest the cash for interest.

b) Reducing the supply of currency causes deflation (value of currency increases as supply decreases). It also make it harder for people to buy things, since there's less money going around. This will slow the economy's growth by reducing demand.

c) If the shortage got severe enough, the government would just print/mint more money and put that into circulation. If they print money, businessmen realize their money is a "use-it-or-lose-it" deal, since it will lose value if they keep it all in their coffers, and spend it anyway. Or the government will just pressure the businessmen into actually doing something with the money.

J-H
2012-10-22, 08:29 PM
Short answer: Depends on the size of the economy involved, and who else is involved. China did this in the 1800s with silver, until the Opium War.

Amarsir
2012-10-22, 08:46 PM
Interesting question. And lots of good answers already.

If you step back a bit, you see that this is some business trading valued items for slips of paper. (Or circles of metal.). The money has no intrinsic value, it's just a formal IOU to get something in return for what you provided. If you never want anything in return, then you're simply foregoing the work / property that you're entitled to.

Which leaves the choices
A) the government creates more currency, spreads it around, and this business serves everyone to get it.
B) the city runs out of currency and transitions to barter or something replacement money. (As this is happening, the business itself would have to lower its prices to match the money supply, until both approach 0 together.)

Now a more troubling situation would be if, instead of hoarding cash, they bought up something of real value like land. That has intrinsic value and is harder to replace.

J-H
2012-10-23, 07:26 AM
If you step back a bit, you see that this is some business trading valued items for slips of paper. (Or circles of metal.). The money has no intrinsic value, it's just a formal IOU to get something in return for what you provided. If you never want anything in return, then you're simply foregoing the work / property that you're entitled to.
Fiat money with no backing in specie (gold, silver, etc) is something that's only been around for the last 100 years or so. I don't see a low-tech fantasy world having paper money that can't at least be traded for a specified amount of gold/silver/etc...

Eldan
2012-10-23, 07:50 AM
Well, letters of credit in various forms were around for a long time. THough, as you say, they were worth defined sums of valuable metals.

Now, a bit further back: what happens if all the coins are precious metal? I imagine if a city or noble was printing its own money and someone kept scooping it all up and bringing it away, people would switch to a different currency, or even a different trading medium.

Slipperychicken
2012-10-23, 08:12 AM
Fiat money with no backing in specie (gold, silver, etc) is something that's only been around for the last 100 years or so. I don't see a low-tech fantasy world having paper money that can't at least be traded for a specified amount of gold/silver/etc...

China used it from the 10th century till 1455. And some Europeans were using it in 16th/17th centuries. Technology wasn't the limitation, an understanding of economics was :smallyuk:

The appeal of fiat money to a government is it can be used to finance costly wars more easily, by printing more money. Yes, it causes inflation in the long-run, but can increase demand in the short run (demand, in war, being for weapons, armed personnel, supplies, etc).

Countries, historically, used fiat money in war (to finance the war), and switched to gold/specie standards in peacetime (to keep inflation under control).

Jay R
2012-10-23, 08:17 AM
The essential fact you have to realize is that a business makes 2-5% profits.

They are still eating, using materials, living somewhere, wearing clothes, etc. In a modern economy they are also using water, electricity, etc.

(Yes, of course they're using water in a medieval economy, but they aren't paying for it.)

So most of the money gets ploughed back into the local economy anyway.

Radar
2012-10-23, 09:14 AM
b) Reducing the supply of currency causes deflation (value of currency increases as supply decreases). It also make it harder for people to buy things, since there's less money going around. This will slow the economy's growth by reducing demand.
And this can lead to massive gains if used at the right moment and with enough care. If you can hoard enough money to cause deflation, your vaulted coins gain value. You can then use this to buy out properties, goods and so on for much less then normal. The sudden influx of money on the market will probably cause an inflation and help the economy, but now your wealth is placed in other things then pure money. Rinse and repeat. Such a mechanism is one of the reasons many countries keep vast national reserves of their own currency - it's there to prevent anyone from shifting money exchange rates for profit.
It is true, that waiting for too long will only result in you sitting on a big pile of worthless coins.

Fiat money with no backing in specie (gold, silver, etc) is something that's only been around for the last 100 years or so. I don't see a low-tech fantasy world having paper money that can't at least be traded for a specified amount of gold/silver/etc...
Strictly speaking gold and silver are fiat money as well, since they don't have any intrinsic value. Any comparison like "a shovel is worth ten breads" is a form of a social contract.

Doug Lampert
2012-10-23, 11:34 AM
Short answer: Depends on the size of the economy involved, and who else is involved. China did this in the 1800s with silver, until the Opium War.

An excellent historical example, and note that "the government steps in and forces you to spend the money" actually happened. It happened even though the people hording the money WERE the government of arguably the largest and strongest country in the world (they certainly thought they were the strongest). The British and various other countries stepped in and forced them at gunpoint to open their markets and start spending money.

Modern China appears to be hoarding US$, and running into the problem that the US Government can print dollars faster than they can hoard them. There's some worry about what will happen if the Chinese government ever wakes up and realizes they're traded us an enourmous amount of valuable goods for little green peices of paper, but on the opposite side there's the old saying about when you owe the bank $100,000 you have a problem, when you owe the bank $10,000,000,000 or so then the bank has a problem. China may be incapable of admitting that their green peices of paper are ultimately worth no more than the US government's full faith and credit.

Slipperychicken
2012-10-23, 12:28 PM
China may be incapable of admitting that their green peices of paper are ultimately worth no more than the US government's full faith and credit.

Which is literally the most reliable and commonly-traded asset in the world. And with good reason, too; The US has never defaulted on its debt, in all its years of prosperous operation. It's so reliable that some countries even circulate US dollars instead of creating their own currencies.

Warning: Real world politics.
{Scrubbed}

erikun
2012-10-23, 04:25 PM
Gracious thanks for your knowledge. Though you mentioned a medieval economy. What effects effects would this have on an (already) medieval city?
Removing money would likely kill large-scale trade, especially for perishable goods, but have little more effect. People would be forced to barter for good and services.


And a business participating in removing money from an economy would likely go "bankrupt" because if nobody is accepting the money in trade anymore, then the business can no longer make purchases with it.

If we are talking about a valuable resource (say, gold) rather than fiat money, then the business will likely not "make" any more money from selling it back than from buying it; the supply/demand curve indicates that the last bit of gold is worth a tremendous amount, but the entire stock of gold cannot be sold for that amount because there are not enough people willing (much less able) to pay that amount for it.

Slipperychicken
2012-10-23, 06:28 PM
If we are talking about a valuable resource (say, gold) rather than fiat money, then the business will likely not "make" any more money from selling it back than from buying it; the supply/demand curve indicates that the last bit of gold is worth a tremendous amount, but the entire stock of gold cannot be sold for that amount because there are not enough people willing (much less able) to pay that amount for it.

And what would they exchange all that gold for, that they couldn't just buy normally, without hoarding?


I could see this happening if the businesses are local branches of larger companies, which simply export their profits to some foreign entity (rather than reinvesting locally). If the trend was large enough, it would certainly impoverish the local economy, making it harder for both the local government and local business to provide services, because there's just no money for it.

The government would (assuming it hasn't been bought out), as I've said before, either a) try to pressure the business into spending locally, b) just raise taxes on those businesses and reinvest the money themselves, or c) be exploited and have an extremely weak economy which is probably dependent on these businesses to function.

BootStrapTommy
2012-10-24, 06:56 PM
But, simply put, a business could not really horde money and exist.

As an actual Economist I approve this message.

Vorr said it straight. End of discussion.

Kelb_Panthera
2012-10-25, 12:04 PM
Since we're talking D&D here, how about this scenario.

Some epic anarchist wizard creates a spell that creates an utterly massive quantity of standard sized coins. The spells duration is permanent(D). He takes portions of this massive pile to money changers and gets it into circulation throughout a large region, and gives it a few months to spread throughout the various economic sectors in that region.

Then he dismisses the spell, causing large quantities of money throughout the region to simply vanish.

For argument's sake lets assume he some how slipped this past anyone that might otherwise have noticed large numbers of magic radiating coins.

What happens to that economy?

Radar
2012-10-25, 01:17 PM
(...)
What happens to that economy?
It goes "Tango Uniform", if you catch my drift. Considering that the distribution of fake coins will be random, some people will lose a lot, while others barely anything. If it was a single unlucky person, then sucks to be him. If it's a solid percentage of the population, then people will refuse to just roll with the loss, so various protests, demands and possibly riots can be expected. With no financial records to sort things out (if we are talking about a pseudo-medieval world) and an obvious distrust in the currency (what is stopping anyone from repeating the fake money trick?) barter trade would look like a safe alternative.

Slipperychicken
2012-10-25, 01:20 PM
Since we're talking D&D here, how about this scenario.

Some epic anarchist wizard creates a spell that creates an utterly massive quantity of standard sized coins. The spells duration is permanent(D). He takes portions of this massive pile to money changers and gets it into circulation throughout a large region, and gives it a few months to spread throughout the various economic sectors in that region.

Then he dismisses the spell, causing large quantities of money throughout the region to simply vanish.

For argument's sake lets assume he some how slipped this past anyone that might otherwise have noticed large numbers of magic radiating coins.

What happens to that economy?

Assuming that people used the coins as currency, and no government entity cracked down on the counterfeit money: he increased the money supply for a while, then decreased it to normal levels. Not much different from what a central bank does every day.

Increase money supply; more money is available, so people can buy more things with it. Increased demand stimulates economic growth, although the currency's value decreases in the long run since the new currency doesn't reflect added economic value. Businesses prosper, new jobs added... until the inflation kicks in. Prices will rise to reflect the influx of currency, and people will realize their money isn't worth as much as they thought. Inflation will make long-term investment less attractive, so people won't build as many factories and storefronts. People buy more stuff in the short-run, not so much in the long-run.

Caster reduces currency supply from inflated level; less money is available. People can't buy as much, and they're also losing faith the currency since it literally disappeared overnight. Demand decreases to pre-Wizard levels, employment declines to normal levels, normal folk can't buy as much from businesses. Economic activity declines (fewer transactions made) and prices fall to pre-wizard levels. Also, people will blame magic-users for currency manipulation and probably lynch a few Wizards in response.


So the caster didn't accomplish much, unless he's a currency-trader, in which case he could have made lots of money.