An economic model for Victoria II

[theJalden]

Meant Vic III in the title, I don't think I can change that.

Ok, so I'm not sure if everyone here has taken a macroeconomics course, but there is a great model of economic growth called the "Solow-Swan Model". The model isn't too complex, but it carries some interesting implications that mesh well with gameplay mechanics.

A reader's digest version of the model is the following:

In an economic region you have two major factors of production that vary: Labor and Capital. Labor is the workers who farm the fields, craft the widgets, and do everything. In this time period labor is constantly growing. Capital is the durable goods that aid in production, like tractors, plows, tools, furnaces, mills, factories and so on. Capital also degrades over time at a rate depending on technology.

The population will receive an income equal to the value of their production, which they can then spend on consumption goods: like food, liquor, clothes, and opera tickets. They also save a part of that income or invest it in increasing their capital.

The revelation of this model is that there is a theoretical steady state for a population's productivity where investment per capita is equal to capital degradation per capita plus the population growth rate. That you can increase productivity through more investment spending at the expense of consumer spending. That technology is the only way of growing the economic output per capita in the long term, and that there is a certain level of savings that maximizes steady state consumer spending.

I think that this sort of system could work well in a Victoria style context. Technology exists as a concept in the game. There would have to be a goal of maximizing consumption per capita to make it work well. Maybe that could decrease revolt risk, maybe you could be awarded points based on how much your population consumes. One thing that might need to change from Victoria II is the addition of a "capital" modifier in a province, which degrades over time if there is no investment spending.

 

[Amateur Emperor]

I'm interested in this idea. How would capitalists be represented? Even if not a distinct class, surely there would be pops who have a tendency toward accumulation and concentration of capital that would make up a capitalist class anyway in-game. If pops receive an income equal to the value of their production, the capitalist would cease to exist; there would be no money for them in a production-centered income distribution as they are not producing tangible goods but merely acquiring a rent from their control over the means of production.

 

[General WVPM]

Currently Victoria 2 already has several factors that increase consumption: consciousness, plurality and inventions.
But an increase in consumption means it's harder to satisfy needs, thus taxes have to be lowered or needs will be less satisfied (= less happy).
Would an increase in consumption in your suggestion also make it harder to keep your POPs happy?

 

[Aedelvice]

Von Thunen sees your theory on wages and has a s e i s u r e.

 

[Antiboyscout]

I'm interested in this idea. How would capitalists be represented? Even if not a distinct class, surely there would be pops who have a tendency toward accumulation and concentration of capital that would make up a capitalist class anyway in-game. If pops receive an income equal to the value of their production, the capitalist would cease to exist; there would be no money for them in a production-centered income distribution as they are not producing tangible goods but merely acquiring a rent from their control over the means of production.

This system does seem a bit limited to a pre-industrial craftsman system where workers buy there own tools and sell what they make. This system does not work for building giant factories if the workers keep all of what they produce.

 

[grimkm]

Currently Victoria 2 already has several factors that increase consumption: consciousness, plurality and inventions.
But an increase in consumption means it's harder to satisfy needs, thus taxes have to be lowered or needs will be less satisfied (= less happy).
Would an increase in consumption in your suggestion also make it harder to keep your POPs happy?

IT also has reforms to lower them..though you'er probably a better estimator of what these are.

 

[General WVPM]

IT also has reforms to lower them..though you'er probably a better estimator of what these are.

Reforms lower needs in Victoria 2?
Any source or test?

 

[Esben_DRK]

The problem with using the Solow-Swan model (S-S) (In addition to the model being a Neoclassical model with all the assumptions and flaws that entails) is that it's a high-level aggregate model that tries to explain how economies develop over a long period of time. A macro model like that cannot (And never tries to) explain the individual persons consumption, or how the individual industry fares. It's on a level where you essentially explain the development of the entire BNP - and that makes it both simple, easy to learn and impossible to use in a game that delves beneath the nationally aggregated level.

So why exactly is the S-S model inoperable in the game?
The S-S model gives you one total economic output [Y]. Now, whatever the merits of this in describing national (Or even regional like the EU or NAFTA) development, a game where your combined economic output is simply a Y with a semi-arbitrary number to compare to other countries, is far from the game expected in Victoria. This is a game about the Industrial Revolution, the political revolutions, the military revolutions and imperialism. THere is no level of detail in the S-S model to build upon.
The S-S model cannot, for example, tell the player whether building Luxury Clothes-, Machine Parts- or Artillery-factories is the better option.

The S-S model states that output [Y] is a simple function of capital [K], in a formula like Y=f(aK) [a being a constant]. Capitalism, the monetary system, investment, even basic ownership, was still under development during the Victoria game period - to have all that collapsed into a national value K leaves nothing in the games economic model.
A more advanced application of the S-S model lets us know that technology [t] can change the formula, so you have Y=f((1+t)aK), so technological growth will improve the long-term growth and move the equilibrium. But again, what does this tell us about the game?

Required investments are a product of your population [n], deprecation [d] and capital, in a formula as simplistic as this: (n+d)K. How much will a single industrial complex require in upkeep? We don't know. How much will a colonial empire require? No clue. An army? Navy? Political machinery? We cannot say.
We can know, from this model, that increasing your population will increase the required capital needed to make them work. How does that apply to the Scramble for Africa? How does it apply to the changing level of child mortality? Migration? Again, S-S doesn't give us any applicable insights into how the game should work.

Savings [ s ] (Damn this board formatting [ s ] without spaces to strike-through!) as a constant function of output [sY] may work on a macro level, and it could be an important insight that you can change your rate of savings [(s+delta-s)Y] to artificially move your equilibrium (And lower consumption) in order to get a higher growth, and that this saving must either be permanent, or steady-state growth will be diminished when the rate of saving reverses back to the earlier position... but how a poor family saves up, and how a bourgeois family saves will not be the same, it doesn't tell us much about what is actually saved (Ownership of land or the means of production? Stock of material? Monetary stocks?) or how exactly 'savings' are used to pay for the required upkeep of your investments.

I could go on, but my point can be repeated to: Independently of the veracity of the Solow-Swan model when describing long-term economic growth in the real world, the Solow-Swan model isn't useful to the game because of the macro-level that the model works on, and the extremely aggregated concepts it works with. The Victoria 1 and 2 economic models may be flawed, but building a new economic model around Solow-Swan will not make it any less flawed, just less interesting for the player.

 

[AmpsterMan]

Funny enough, while you are talking about viewing the economy through a Macro lense, i think the game's economic system can already be explained through classic microeconomics and even modified behavioral economics (modified in the sense that we know pretty much exactly how the agents behave and they behave differently from regular people)

From a Micro perspective, the game is not flawed at all. It has some parameters that need to be tweaked, but the underlying simulation is sound, if simplified.

In Vicky 2, we have all factors of production: Land = Provinces, Labor = Craftsmen , Capital = Factory level, Entrepreneurial Ability = Clerks, Capitalists (a stretch, but factories with more of both are "better") and Technology = Technology.

Utility is represented as well. Each pop has a unique indifference curve which depends on its Pop type, laws passed in its country, militancy, and consciousness. Elasticity of Demand is represented with the goods the class wishes to purchase. Since pops purchase in the following order Life Needs > Daily Needs > Luxury Needs, populations are more price elastic AND income elastic for goods at the higher end vs. goods at the lower end.

Macroeconomics is a way of essentially being able to combine the emergent properties of the microeconomics state of an economy. Since in Victoria II we have perfect information (though it's a whole lot and not aggregated in any way that is easy for us to discern) There is little need to have a Macroeconomic model to model Economic growth in Victoria. Ex. If I produce 50% of the world's Lumber and I get a technology that increases Lumber production by 20%, I know that I will now be producing at MOST 54%. In reality, I'll be producing less than that because at this point I am a price setter, not a price getter, so the increase in my production lowers the price so much that my firms will not be able to sell everything they produce. Classic Microeconomic take on a monopolist.*

*Ofcourse, this is only true if the demand for lumber was already 100% satisfied. If there was excess demand, then what I described would not happen at all.

The only things I would really REALLY want to see Victoria III add in terms of the economy is some sort of trade node system as in Europa Universalis, a private banking system that would allow for savings to be used as investment by others, (with interest rates and the whole bit, btw.) , and for factories to no longer be "owned" by the capitalists in that state, but rather by Nationwide (and maybe even international) firms.