Proposal: A New Economic Model (can simulate global financial crisis)

[Noblejms]

As an ex-Lehman employee who experienced the financial crisis first hand, I have been fascinated by the idea of economic armageddon.

There's no other game out there capable of simulating this, as well as providing the fun, except for Victoria.

I know Paradox probably won't consider any fan suggestion for Vicky2 that is more complex than changing names (cough.."Clergy" to "Educator"), so this is for Vicky3.

Last night after thinking about it for a long time, I come up with a possible game design that can simulate the following:

1. Building castles in the cloud.

2. Economic boom and fall of an industry sector, like the internet boom in 2000's. But in Vicky we could have something like luxury clothes boom.

3. Exposure to global economy which provides higher profit but also greater vulnerability and could lead you into financial ruins.

4. Foreign investment.

5. Possibility of the whole world going bankrupt through domino effects.

6. You can be less developed and thus less vulnerable to financial crisis, like China before its economic reform.

I will buy any game that claims to achieve the above effects.

My proposed design is as follows:

1. All countries can borrow or lend money from other countries with adjustable interest rates.

2. Capitalists POPs can borrow money (not from country) but must make periodic interest payments afterward. How much they can borrow is set by regulations, which the player can adjust.

3. Factory/RGO will default on periodic payments of the loans if they are not profitable. Profitability is based on taxes, regulations (economic policy), supply and demand, efficiency etc. Factories will close and fire all the craftsmen/clerks if it goes bankrupt. Capitalists will devolve as a result.

4. Capitalists POPs can build factories in other countries and the factories will recruit local workers. This is only available if two countries have an economic treaty allowing direct foreign investments.

5. Government will be able to buy or sell financial derivatives, the values of which can be based on another country's average monthly income or profitability of certain industry sectors. If you have no idea what I'm talking about, think of it as stocks for now. I'll give 2 examples below:

A. You buy a derivative on the furniture industry index. In doing so, you make an initial $1000 payment and agree to pay/receive any returns earned on the index times some base value. Assuming a base value of $5, if average furniture prices increase by 10%, you earn $5 x 10% = $0.5 on that day.

B. You buy derivative which is based on Mexico's economy (its average 3-month income). You also make initial payment and agree to make daily payments. If Mexico political condition changes and its income plummets, you earn less than you pay and thus lose money. Eventually you may end up selling the derivative and lose the entire intial investment money.

I know this is not very realistic, but the overall effects will be. Leverage (loans) and financial derivatives are essential to simulate a global economic boom or crisis. It also allows for the following global economic cycle:

Stage A: Low earnings, low debt use, low derivative use, low vulnerability.

Stage B: Increased earnings, increased risk appetite for debt and derivatives, increased vulnerability.

Stage C: High earnings, over-use of debt and derivatives, very high vulnerability.

Stage D: Bubble bursts, factories close and craftsman/clerks fired, some capitalists devolve, back to Stage A.

 

[unmerged(63310)]

It is not really the earnings but the savings that leads to higher risk appetite so for a game mechanism it would need lower competition from other investment types or all the other investments earn very little on a given principal. So only capitalists could invest, or maybe even better there is a set base principal amount required so only the richer capitalists and very rich clerks or some other POP using Vicky system could invest. That way also when a failure wipes out the investing POP and sends many other POPs out of work the slightly poorer but still relatively rich left over POPs with savings good start the process over.

No need to simulate inflation or anything if the competing investments just make much lower return than the derivatives and have a certain required sum of principal to invest. Unless you want to also let the stock owned factories or state capitalism governments also invest with the capitalists which could really create a bust if prices fell more than anticipated... major war ends suddenly and small arms prices crash or steamer factories come online and the clipper factories suddenly nearly pointless.

Although the economy overall would have to be slightly more flexible with prices than in V1 to really let derivatives achieve much returns compared to any other investments unless the other choices were just terrible.

 

[telesien]

Although it sounds interesting, I would say that Vicky style model can be more simplified. When we have diplomacy/economy/politics/warfare in one game, we can't expect for one part to become too complex.

The way I would like to see it (now I don't separate things that are already done with others) is something like this:

1) Governments can borrow money from each other and POPs, with actual interest being really paid. Making every deal with different and individually set interest rate would probably be too much to handle and it wouldn't work well. Better way to do it would probably be creating another small WM, where you would be able to put excess money and the interest rate would be based on supply/demand and technology level in economics. Bonds issued to POPs would have more arbitrary set interest rate based just on economical level.

2) POPs can loan their savings to cappies via stock market or financial market, that can be abstracted. I don't know much details about 19th century derivates, but IIRC they were mainly commodity based futures and options (see CBoT for details) and not nearly as speculative as now. The detailed enough way should look like this: clerks (as the richest middle class) have savings and they loan it to cappies for some interest rate (again given by technological level). Cappies use them to build factory and from earnings pay the interest.

I know this creates problem with difference between dividends and interest payments (no dividends payed with 0 profit), but it can be either solved by a) having two loan channels (it is still not that much) or b) another abstraction. All that would act on such a small level, that you won't even notice the difference and after all the stock market boom for anyone else but cappies would be so late in the game, that it can be done totally as classical loans.

No matter the way, POPs would have way to increase income with risk of loosing savings. Higher tech level (f.e. liquidation of assets) would lower potential losses, but factory in red numbers being closed would still make them loose money.

3) Cappies acting as "jokers." Having direct foreign investments can be too complex for some policies to count properly, but I believe it can be possible for cappies to lend money to cappies in different countries and thus simulating it with the same consequences as above. Cappies could also be the only POP type to be able to buy bonds of different governments.


That is how I would like it, but I am affraid it is still too complex to fit in such broad game as Vicky (no matter if we are talking about 2,3,4, etc.)

 

[unmerged(58627)]

I really like this idea. It offers a lot of in-game value, important factors for war or non-aggression. I hope they consider it for an expansion.

 

[ArneHD]

How about financial products allowing capitalists to use money from non-capitalist POPs to build factories instead of their own money, in return for giving away income to these POPs? It might be able to simulate the great depression if prices deflate, factories are no longer profitable and close, POPs have no job/lower income and buy less goods, prices deflate more, more factories close, more POPs go out of work and buy less goods, prices deflate further, and so on.

 

[Noblejms]

It is not really the earnings but the savings that leads to higher risk appetite.

I think by "savings", you're talking about the wealth of POPs in Victoria, while I am talking about putting money into a bank. So it's a bit different.

People invest and borrow more when the market's looking good and have more cash to spend with, and that is determined by their earning power.

Only when the market becomes risky people begin to save their money in banks, which is relatively safer. So low POP earning will actually decrease risk appetite.

the slightly poorer but still relatively rich left over POPs with savings good start the process over.

Those "poorer" POPs did not have a lot of money to invest in risky assets, therefore in a financial crisis they will lose less money and can start the process over.

Yeah the idea is giving the player and AIs the ability to engage in risky investment activities which are interlinked, with high potential gain or loss.

 

[unmerged(63310)]

I think by "savings", you're talking about the wealth of POPs in Victoria, while I am talking about putting money into a bank. So it's a bit different.

People invest and borrow more when the market's looking good and have more cash to spend with, and that is determined by their earning power.

Only when the market becomes risky people begin to save their money in banks, which is relatively safer. So low POP earning will actually decrease risk appetite.



Those "poorer" POPs did not have a lot of money to invest in risky assets, therefore in a financial crisis they will lose less money and can start the process over.

Yeah the idea is giving the player and AIs the ability to engage in risky investment activities which are interlinked, with high potential gain or loss.

But the money any POPs put in the bank comes from their savings which equals wealth in Vicky as POPs don't own other assets unless they are allowed to purchase stocks, derivatives etc as you are proposing but before they do own such asset all they have is their savings. Unless we totally change the model and allow POPs to borrow against their own future earnings which could be considered an asset although not as tangible.

The POPs though can't know if the market is looking good or bad(which actually you could make the same argument about people many times) and will only react to their own individual situation. IE- POPs in a good earning situation will invest while the ones in a bad situation will put money in banks which is itself a type of investment but for any game model to work that has the constraints POPs do there would have to be always enough POPs in a good situation for the investments and higher efficiency that results to continue.

The poorer POPs having less money to invest is why I said a minimum sum for the investments... since poorer POPs aren't the ones building railroads etc anyway the capitalists who lose most of their wealth in a crash would need the poor POPs money to keep making purchases to recover. If the poor POPs also could invest, even in much lower amounts- then how would the game mechanics allow a recovery? Both the rich and poor POPs lost their money... or else do you figure its dynamic enough with enough investment options no nation would have a large enough portion of its population invest in a bad instrument at the same time, or even if that happened they could borrow their way out from other less unfortunate nations?

 

[telesien]

Only when the market becomes risky people begin to save their money in banks

You are from USA right? Don't forget, that people in Europe are traditionally much more conservative with their money and even now most of them are in banks and pension funds. We don't invest the way you do and the stock market was never that big deal in Europe.

 

[Dentatus]

All of these savings are thrown out the window if the ability to inflate is incorporated.

 

[Sid Meier]

Some cultures are more traditionally prone to savings, nations that can rely on those cultures end up with banks with alot of investment capital.

Anyways if Victoria could simulate this I would preorder it.

 

[telesien]

Some cultures are more traditionally prone to savings, nations that can rely on those cultures end up with banks with alot of investment capital.

Anyways if Victoria could simulate this I would preorder it.

That reminds me of Japan and the huge success of their banks (yes, it is old). It was based on the fact, that Japan didn't have any state pension funds
at all, so everyone had to make their own savings and they were naturally putting them to banks. HUGE amount of cheap money for them...

 

[Noblejms]

Some cultures are more traditionally prone to savings, nations that can rely on those cultures end up with banks with alot of investment capital.

Anyways if Victoria could simulate this I would preorder it.

You're not really Sid Meier, are you?

 

[EGaffney]

Some cultures are more traditionally prone to savings, nations that can rely on those cultures end up with banks with alot of investment capital.

Anyways if Victoria could simulate this I would preorder it.

Can you link to a paper proving this please. The East Asian Tigers had high savings rates because of a lot of government intervention, and even then it was in the post-WWII period.

 

[KaiserChicken]

Some cultures are more traditionally prone to savings, nations that can rely on those cultures end up with banks with alot of investment capital.

Anyways if Victoria could simulate this I would preorder it.

There are no savings-prone cultures. It is only incentives that matter. That is why I am satisfied with an endogenous savings rate, as most modern models of economic growth put it (Ramsey-Cass-Koopmans, Overlapping Generations, etc).

 

[unmerged(63310)]

I'm not sure if you want to make the argument that experience doesn't reflect savings... plenty of papers on the differences between the depression era generation etc even when they had more money to invest in later years or the experiences of many generations who lived thru a widespread crash, of course the problem is not every group which experiences such a big economic problem acts the same way but some things besides incentives are working on people's decisions.

Incentives also are difficult to really categorically credit with aggregate decision making as people work on wrong assumptions frequently and asymmetric information issues plus the behavioral economists claiming gambling mentalities left and right these days.

 

[ddudee]

To the OP. I suggest you state your ideas in a way that could be used by the guys doing the programming. Try to pick up the ideas that you think are the most important and feasible, justify it, and explain (in detail) how it would fit in the current model of Victoria. Try making a diagram (maybe in a M$ Word document) to better clarify your proposition and if you have some programming skill write some pseudo code to help them understand what you are trying to say. Then submit it to them. I guess that would increase the probability of your interesting ideas to be implemented. Or this will be just another thread with nice ideas that will be forgotten.

 

[Alexander Seil]

That reminds me of Japan and the huge success of their banks (yes, it is old). It was based on the fact, that Japan didn't have any state pension funds
at all, so everyone had to make their own savings and they were naturally putting them to banks. HUGE amount of cheap money for them...

Of course it should also remind us of the fact that Japan's economy was mired in a swamp for the last 20 years because no one ever spends any money

Frankly I believe the first priority is a self-consistent economic model - no trade with the Martians, money that doesn't appear out of thin air and disappear into a black hole, etc. Modern economic theory is neither reliable enough nor simple enough to be taken as a starting point for an in-game economy, plus, it doesn't have the teleological characteristics a game economy has to have. It's conceivable, if unlikely, that the 19th century was a fluke! A lot of good your economic theory will do you then, since you'll be stuck in a Malthusian cycle 99 times out of 100. Fun times.

That said, some kind of a mechanism for creating bubbles would be nice, to get a little business cycle mechanic going. I believe it's already possible, in a limited sense, because Artisan production preferences are path-dependent - they keep producing the same good if it made money in the past, so there seems to be a possibility for a bubble there, especially if some Artisan suddenly turns Capitalist, builds a factory, floods the market and puts both other Artisans and himself out of business. If you think about it, the same thing could also happen with factories in general, provided that Capitalists aren't aware of the game's pricing mechanism, so that several Capitalists could suddenly decide to build factories of the same type based on current prices, only to see them go out of business a year after completion.

 

[morganja]

Interesting stuff, but too much speculation in the non-financial use of the word. I would like to see the game model the actual economic environment of the period based on historical data and incorporating evolving theories. The player should be making the same decisions that the governments had to make at the time.

The economic model in these games have always been truly bizarre. I'm not sure if they have ever consulted an economist.

 

[telesien]

Of course it should also remind us of the fact that Japan's economy was mired in a swamp for the last 20 years because no one ever spends any money

Yes, somewhere between Japan and USA must be the right path to avoid bankrupcy

 

[unmerged(63310)]

That said, some kind of a mechanism for creating bubbles would be nice, to get a little business cycle mechanic going. I believe it's already possible, in a limited sense, because Artisan production preferences are path-dependent - they keep producing the same good if it made money in the past, so there seems to be a possibility for a bubble there, especially if some Artisan suddenly turns Capitalist, builds a factory, floods the market and puts both other Artisans and himself out of business. If you think about it, the same thing could also happen with factories in general, provided that Capitalists aren't aware of the game's pricing mechanism, so that several Capitalists could suddenly decide to build factories of the same type based on current prices, only to see them go out of business a year after completion.

I don't think it is possible a few or even a lot of capitalists building new factories would flood the market since it is a world market... unless the demands of POPs are more strictly tied to their literacy and wealth- so 10 auto factories suddenly appearing would more than satisfy demand. Keeping with V1 mechanics though any new tech factories will not be very efficient requiring some time before output is appreciably large and it almost has to be that way with the curve POPs take in the game so that sustained investment is made in the new techs.

The only way for a crash I can see with the dev comments so far would be either artificial reasons(event, price change base) or for war goods. A long war would demand investment over time in small arms etc and when the war ended the demand would suddenly collapse. What other goods would see such a collapse in demand? Maybe clipper ship factories when steamer techs become available but a large part of the world might still be demanding clippers for awhile unless WM trade is almost entirely over land.

Artisans are going to be a small part of the population and might actually act to reduce investment by capitalists in new goods that tech enables compared to Ricky as there will be some demand satisfied right away by artisans. I think war goods, war debts, and war indemnities are likely to be the main causes of any crashes unless the devs unveil some new mechanic. I wouldn't hold your breath... the focus is on stable mechanics with a system where money doesn't appear and disappear. Maybe in an expansion.