The Wealth of Factions
(editors note: Richard had planned to publish this book for the great Edrejan fair. After his disappearance his family have compiled it from his notes into a mostly complete version. Regina Neville)
A Treaty on Eredrejan Economics by Richard Neville
My aim for this book is to give a concise, impartial, and empirical look at the field of Economics. Economics being the knowledge and study of money, trade, and capital. The aim of this would be to look at what methods and approaches can be used to affect and manipulate the economies of Eredreja.
Chapter 1: Economy Basics
To begin talking about economics we must understand some basics. An economy is a complex system of connections between production, consumption, exchange of goods and activities that ultimately determines how resources are distributed among a population. This exchange of products and services serve to fulfil the needs of the population that make up the economy in question. when referring to Edreja, there are multiple areas which can be referred to as part of the economy. For this book I will not be investigating the economies of individual nations, the price of basic goods and labour. These trades are often of little importance or real knowledge to the average participant of a gathering of nations. You can talk all you want about how much a loaf of bread is worth in Albion, but as soon as you look for one at a spring moot or gathering that price becomes meaningless.
Therefore, for this book we are talking only about the closed economy that results between nations while taking part in any of the 4 large scale gatherings of nations throughout the year. This trade focuses less on the basic needs (as most basic needs, such as food and shelter are provided or not exchanged in gold) and more on a different set of needs and wants. Predominantly, the need to survive and the want to influence the world. This results in the economic equivalent of a micro-climate, where a slice of cake can sell for several silver to a gold and an enchanted weapon sell for a gold above production price.
Chapter 2: Supply and Demand
Supply and demand is the theory that an items value is subjective based on who’s buying it. You’ll hear this often shown by the presence of traders. Traders can, by knowing someone who values their item low and providing it to someone who values it higher, make a profit. This is called a margin and the process in total referred to as Arbitrage. This is due to differences in demand. As an example, a perfect thought may be valued very differently to a wealthy ritualist who has managed to stumble on a ritual slot 10 mins before paperwork must be submitted. As compared to a ritualist with a full team, a tight budget and very little investment in the ritual result. As you can imagine the first ritualist may pay way over the odds while the second may still buy one, but only if it’s going cheap.
Demand can similarly be affected, which leads to an effect on supply. In the example of one a year potion, the supply of them is far higher early in the year as all potion makers have their once-a-year magical slot available.
However, the supply is limited and therefore the amount of potion goes down throughout the year, so if demand stays high the price will increase. There are examples where supply can match demand. This is the case for clear thoughts and summoners elixirs where the available slots to make them can often be increased to match an increase in demand.
If something is taken from this chapter it should be that value is subjective. Nothing has a set value. You can craft something for 10 gold but if no one wants it, it’s only worth 10 gold to you. To anyone else its worth only what they are willing to pay for it. This may seem obvious but there are many misconceptions about value. It is often a misconception that high prices are due solely to greed. However, prices change wildly from year to year. People don’t become “more greedy” this year from last, there has just been a change in the supply or in the demand.
It is my opinion, and a lesson I would stress from this whole book, prices are a messenger, they can bring good news or bad news. How you respond to that message will determine how you can react to and effect the market.
For example, many think that value should inherently be linked to the amount of work or production time going into an item, but this is a flawed concept. You can work hours on making the most high-quality piece of armour or clothing, and it can still be worthless if no one wants it.
The principles of supply and demand are also important in terms of money. Money itself is a commodity, which means that money can be in high demand or in low demand. This is all relevant to the number of items they can be purchased with.
Chapter 3: Liquidity and the Value of Money
Liquidity is the name for the process by which money enters and leaves the economy, the gatherings of nations can be seen as a mostly contained economy, all money that comes in and out by certain methods with little change. Crafting is the main means of money leaving the economy as the cost of materials is often fixed, and effectively leaves the closed system as it is used acquire items that are not owned by economic parties. An economic party being a sentient, and in most cases, selfish participant in that fixed economy. This can be traders, guild masters, crafters, or consumers. Because the money used to craft is not going to any of these parties to be used for their own selfish desires it is considered to leave the economy. Money can also enter the economy, these include examples of money earned between the gatherings of nations through economic skills like apprentice, but for most this rarely exceeds 1 taal per year.
In addition to supplement this most economic parties earn money by returning to their nations and earning money in other ways (often done in groups at specific times, colloquially known as ‘strawberry picking’ though it can encompass many different tasks). This also acquires money from a non-economic party and provides it to an economic party. Trade between economic parties rarely effects liquidity, as the total money within the economy rarely changes. This liquidity as you may imagine influences the value of currency due to supply and demand.
This theory is relevant for liquidity when you realise that it influences money too, more money in the system the less demand there is for it. Economic parties can pay more for items, which drives up the price of items. The supply of money increases but the demand and supply of items stays the same. It can be debateable or not whether this happens in practice, however, there have been observations of this process occurring in practice. An example is the influx of items in 1121, for whatever reason items that were created in 1119 ended up flooding the market in 1121 and with extended durations. This led to the market being flooded with items lowering the demand due to increased supply. However, this was less seen in the market for magical potions, in which the supply did observably increase however the price remained high as the demand was still enough to keep up with the increased supply.
Chapter 4: Inflation and Deflation.
A quick summary of inflation and deflation are the effect of the money supply, in comparison to the supply of available goods, to the price of goods and services. Inflation being a decrease in the value of money and therefore an increase in prices, with deflation being an increase in the value of money and therefore a reduction in prices.
The diagram shows how certain changes to the money supply or production supply will naturally result in money being more or less valuable compared to the goods they are exchanged for. Another factor is that technological advancement is naturally capable of lowering prices, if means of producing enchanted swords increased in quality over time becoming cheaper than the effect would be items becoming cheaper. That can happen in certain cases like potions being developed and then reduced to lower level of crafting. But in most cases the prices of items can fluctuate rather than being on a constant downwards trajectory which would be the case if the technology level of nations was advancing, however the technology level of factions is mostly stagnant. Other changes such as new rewards for strawberry picking in the form of low-level ritual powers. This is likely having a deflationary effect by reducing the amount of money in the economy. In some cases, rewards of powerful crafted items have had a visible effect on the value of crafted master weapons and armour. This can also cause a deflation spiral due to the lack of profits on items making crafting items less viable so less money being removed from the system. while production naturally increases with time, crafters become better and better with time which is rarely offset by deaths.
Therefore, I would argue that in 1121 the economy was in a state of deflation. Money was in many cases far more valuable than the items being sold. Making it not worth buying them, the massive increase in crafted items from strawberry picking and from crafted items from the previous year lasting longer lead to a flooded economy.
Gold exists as a currency for one main reason, it’s the only means of exchange recognised by the guilds. Without the guilds and especially the armourers and alchemists, recognising gold then there would be little reason to use gold as a medium of exchange. Gold has a few qualities that makes it a poor store of value and means of exchange. Firstly, the limit on safe transport ( as the ability to conceal gold is limited) however this is partly made up by the bank ledger itself allowing large funds to be transferred instantly between economic parties, however this adds the limitation that money in the bank is only part of the market when the bank is open. Obviously due to bank masters needing food, water, rest, and time off, the bank cannot be open from dawn till dusk. This is relevant to us because it can result in theoretical money, which for periods does not exist in practice. This is compounded by other issues, such as promissory notes, loans and contracts not being viable due to lack of centralised government and inter factional enforcement of contracts. A contract of owed money made between say a Viper and a Hart may fall apart. if one party fails to enforce due to the different laws and motivations of the factional command conflicting with the interest of the economic parties. This makes promissory notes and I.O.U’s very risky with people you don’t know or trust.
What I am referring to is the potential for inflation though the influx of money into the closed market present during the meetings of nations. In theory this could be very beneficial for crafters or anyone who bought items during the low prices and flooded market. This is only the case if the prices to make items remain the same and do not increase with inflation. However, this can result in more crafting, more money leaving the economy, and in the profits being countered by an increase in the cost of items that the money is spent on.
The question is whether the influx of gold by whatever means will affect the price of crafting materials as they are not a direct part of the market. There would have to be a severe incentive to earning money through strawberry picking to cause inflation. And what we have seen is the exact opposite. Deflation is a potential dream for traders, as the price of items will be forced down, making crafters accept lower margins for themselves.
This theory for money supply can also be thought of in terms of money ‘sinks’ and money ‘troughs’ with those practices that remove money being a sink and those that put money in a trough. Knowing this can aid you in predicating the market, allowing you to see influxes in items early can allow you to capitalise on cheap items or avoid a volatile market.
Chapter 5: Possibilities for the Future
The economy of Eredreja could be revolutionised by several theoretical introductions, but the acceptance of them may take a very long time. An example of this is loans and promissory notes. Loans have the potential of freeing up money that would normally be stored in the bank and allow the loaner to make higher interest at low effort but high risk. Unlike trading which requires time, risk, and contacts. This could be very beneficial to both traders and people with large funds in the bank, and beneficial to the recipients of the loans.
However, this requires some form of enforcement if it is to become mainstream. The same can be said with concept ideas such as ‘options’ the idea being that you can sign a contract in which you pay money for an item yet to be made and have the option to buy fully later. There are advantages to these in that it allows traders to effectively trade items that don’t exist yet and it allows crafters to earn more money up front for their skills, as money now is usually preferable to the amount spread over multiple years. However, options trading comes with risks, the crafter may die before he can fulfil the trade ( a very real risk regardless of how careful you are) and without a central legal system that can enforce contracts between factions this makes enforcing these contracts dubious. Changes to rituals have also made these kinds of contracts less viable. Before factions had rituals planned sometimes years in advance and having the ability to plan long term in terms of ritual boosters would be beneficial. Now they must be allocated on the Friday. Similar can be applied to master weapons, with most people not knowing what the major threat will be until the year comes around.
Chapter 5.1 Money: what makes a good currency?
Currency is an inevitable part of specialisation and a solution to a problem called the ‘coincidence of wants’, this occurs when one person needs something and has a commodity, they can only achieve their goal through barter if another person wants what they have and can give what they need. For example, a potion seller needs a weapon, so they need to trade with a weapon crafter who needs a potion of a similar value. Currency provides a third, universal good that, in theory, everyone wants. A good currency should have all the properties shown in the following diagram.
A currency that is not fungible cannot be exchanged for each example of the currency (an issue with items like shells for example,) gold is portable but has issues, you can’t conceal more than a small amount of gold and even then you need to be a skilled concealer, making walking around with gold dangerous. Uniform, a taal has the same purchasing power as another taal. And divisible, a Taal breaks down into gold, silver and occasionally copper. Limited supply however is debatable, from what we know of the Bank gold currency it doesn’t seem to have its value linked to the inherent desirability of the metal. If anything, the fact they are metals seems to be a holdover from an era before the current economic system. Really it is its acceptability that makes Gold the de facto currency, as all guilds only accept crafting exchanges in gold. you could exchange that item for whatever, but you will always have to go back to gold to craft an item. This makes them in demand. Whether they are limited in supply is debatable.
A currency with its own inherent worth is called a commodity currency, this can be anything with high desire, such as precious metals or jewellery. However, gold has many of the same issues as commodity money without any of its advantages, such as it being cumbersome to transport and deal in without bank transfers, resulting in ques at the bank regularly. Its unsafe and risky to transport. The only advantage Bank gold has over commodity is its immune to debasing, it doesn’t matter what it’s made of it can still be exchanged at the same rate at the guilds for the same services. And as we can see with changes to the economy in 1122 changes to the scarcity of money can have severe repercussions to the economy.
Chapter 5.2: A new economic system
A major argument stems from the gathering battle of 1122, with Edreja effectively intervening in the affairs of the heartlands using essential beings like the Archon of law when factions were seen to be cooperating too easily. Why the dragon would want this conflict is hard to say, but I would argue that the supply of money being in the preview of the bank has similar issues. Whatever issue might be being suffered by the economy many resorts to bringing their issue to the bank in the hope of swaying the dragon to make changes which in their view might ‘fix’ the economy.
This is my view rarely works, as whatever the dragon has deemed in terms of money supply and changes to the world which effect the value of money are unlikely to be changed easily. However, if an economic system can be developed where the supply of money can be influenced independent of Edreja and the bank that changes things. If a means of storage can be achieved independent of the Bank and guilds, that opens the possibility of a currency banked on the value of gold rather than the gold itself.
If this currency can then be legitimised by their exchange for crafting supplies and use of the forges than that would make this a new currency with multiple advantages to Bank Gold. It could be transported safer, be traded in higher denominations and supply of the currency can be determined by the respective banks of factions rather than Edreja. And individuals unlike the Bank are motivated by profit, this motivation leads to innovation, expansion, and economic activity far beyond what we have now.
New niches in the market can be uncovered that more people can involve themselves in. This also allows money to be available for factions when needed. The risk of lending in our current system is incredibly high, meaning if a faction has the need of increased production, such as for a war, but lacks the immediate funds it can rarely drum the funds needed. Even if the production capacity of the faction is up to task.
I believe this style of new economic system could be highly beneficial for growing the economies of the factions of the Hartland’s. Propelling them beyond the capabilities of outside nations and the many threats that emerge to threaten the factions and often the existence of Edreja. However, it does require cooperation, a means of storing money without reliance on the Bank and the desire by people to make a change and invest in this new system.
I strongly encourage any who read this and have the own comments to find me, I’ll happily include your criticisms and contributions. My intention with this thesis is to promote a discussion on a side of Eredreja I feel underutilised and talked about. And with all scientific exercises it is impossible without peer review and engagement.
Richard Neville. Trader for the Macintash trading collective.