Economic Simulation Prof. Foldvary

Players and payoffs The Players: The king, citizens, employees, merchants, bankers,  government officials, brokers, landlords. The payoff: real goods, learning, fun, assignment credits.

The king's laws 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 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 labelled 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 council may be recalled by a petition to the king of 20 percent of the citizens, after which there is 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 round New 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 Bank notes are redeemed for cash. Cash may be converted to hugs and kisses. Consumers consume. Discussion and analysis. E.g. did government create DWL?