Economic Simulation

Fred Foldvaryhttp://www.foldvary.net/

works/simulation.ppt

Players and payoffs

• The Players: The king, citizens, employees, merchants, bankers, government officials, brokers, landlords.

• The payoff: real goods, learning, fun, assignment credits.

1) Do not steal from the king. 2) Obey the penalties set by the

citizens’ government. 3) Only money generated within the

simulation is allowed. 4) Violators are banished from the

simulation and get no credits.

The king's laws

The territory

• The lands: poorland; middle-land; richland.

• Citizens may move to another district at any time unless restricted by law.

• The total land rent is labeled R.

Capital goods and labor

• Merchants may produce capital good K. • In the production function, K=1 without

the capital good, K=2 with it. • The capital good depreciates to zero each

period of production.• Each merchant hires 2 workers, besides

himself.

Local public goods

• Middle-land can have a local public good Lm at a cost of R/10 paid to the king.

• In the production function, Lm = .5 without and 1 with the public good.

• Richland can have a local public good Lr at a cost of R/5 paid to the king.

• In the production function, Lr = 1/3 without and 1 with the public good.

Production Functions• Poorland: Q = 1 + K*2 • Middle-land: Q = Lm(1 + K*4)• Richland: Q = Lr(1 + K*6)• For the self-employed, Q= 1, Lm*2,

Lr*3 for poor, middle, richland.

Economic rent, in goods

• Economic rent is the potential land rent when land is put to best use.

• Economic rent in Middle land: 4 per merchant, 1 per self-employed• Economic rent in Richland: 8 per merchant, 2 per self-employed.

The global public good

• There is a dam near the community.• It may burst at any time,• probability is 20% per period.• If the community pays R/5 per period,

the king will prevent a flood.• If flood, write essay about it.

Rent, money• Poorland is rent-free. • Richland and Middle-land have one

landlord each, who collects rent from the merchants and the self-employed.

• The unit of currency is the chocolate kiss or hug, convertible at $10 each.

• Every citizen is given $20 or two kisses.

Jobs and the Constitution• Each citizen may only have one paid job

through a period of production.• In a partnership, the main partner is a

job, and the other partners are not jobs.• The King hires a Secretary of Commerce.• Citizens may propose constitutional

rules, adopted by majority vote. The council must obey the constitution.

The king’s law

A council member or the whole councilmay be recalled by a petition to the king of20 percent of the citizens, after which thereis a new election. The king may rule on any dispute.

Landlords. The Council• Landlords are selected by die toss.• Landlords may sell their land.• Citizens elect a council. The council

elects a president. • The council legislates laws, taxes,

officials, public goods (if any). • Council may meet at any time.

Next roundNew period of production

• New banks are established. Banks offer demand or time deposits.

• Banks declare how much interest they pay depositors and charge borrowers.

• Entrepreneurs may form clubs for the provision of public goods.

Land rent

• Landlords declare the rent paid by merchants and the self-employed.

• The district rent must be equal for all self-employed and equal for all merchants in the district.

• If all rental is taxed, landlord keeps one good per merchant as a fee.

Merchant entrepreneurs

• Merchants create firms to sell goods.• Entrepreneurs declare which good,• which district they produce in, and• the wage offered, same for all

employees. • Merchants may form partnerships,

issue stock, or borrow from banks.

Production and sale

• Merchants pay their workers.• Merchants buy capital goods, if any.• Merchants get goods for sale to the

public and declare the initial price, the same for all customers.

• Merchants pay rent and any taxes. 

Purchases and taxes

• The self-employed get chocolate kisses or notes and pay rent, if any.

• The council collects taxes on wages and rent, if any.

• Customers buy goods; may write checks on demand deposits.

• Council collects sales taxes, if any.

End of the period of production

• Merchants and others pay back loans, with interest. Dividends are distributed.

• Depositors may withdraw time deposits.• Council collects taxes from banks and

depositors, if any, e.g. on interest.• Community pays for public good, flood

control; if not, chance of flood is 20%.

Next round

• Go back to “Next round” for the next period of production.

End of simulation

• Depositors withdraw their money.• Bank notes are redeemed for cash.• Cash may be converted to

commodities, the rest returned.• Consumers consume.• Calculations, discussion and

analysis.