Monday, December 31, 2012

Best not to leave a live dragon out of your calculations

Frances Woolley wonders whether Smaug's adverse effects on the surrounding region might have been primarily monetary rather than fiscal. Smaug did sit on a rather large pile of gold, taking it out of circulation. And as people can rebuild, perhaps the long-term decline of Dale, Lake Town, and the surrounding region can be modelled as partially being fiscal in origin.

I'm going to disagree rather strongly here.

The primary effect was a strong supply shock - thousands of very skilled Dwarven craftsmen were eaten. Dwarvish replacement rates are very low - they're more fertile than elves, but hardly reach human or hobbit ability to repopulate a land.

Next, the entire region around the Lonely Mountain - Dale and Lake Town - served to service the Dwarvish industry. Dale produced agricultural goods in trade for the Dwarves; Lake Town ferried on Dwarvish goods to the rest of Middle Earth. Absent the Dwarves, there was no reason to rebuild Dale. And LakeTown remained a commercial town linking the Wood Elves and surrounding region with the rest of Middle Earth, but at a necessarily diminished scale.

Further, even one-off events can have long-term adverse consequence. Du Pont and Noy find that the Kobe earthquake permanently reduced that town's per capita GDP.

Finally, Bilbo's warning is important. It is foolhardy to leave a live dragon out of one's reckonings. We cannot model Smaug's attack on the Lonely Mountain as a one-off not-to-be-repeated event. The worst was done in that first attack, destroying the Dwarves and Dale. But Smaug continues to predate the land - none may dare pasture or raise crops near the Mountain for fear of the dragon. That's why it's called "The Desolation Of Smaug" - the area around the mountain where Smaug will see you with sufficiently high probability that it's just not worth heading in there. You can't rebuild Dale while Smaug is there. Imagine considering rebuilding New Orleans after Katrina, if you knew that your rebuilding would likely cause another hurricane every bit as destructive as the last.

For Middle Earth's macroeconomy as a whole, the production once undertaken at the Lonely Mountain would have moved to the Iron Hills and, perhaps, to Moria; I've not read enough of the secondary materials to know if Tolkien ever gave this as a reason for the dwarves there having delved too deeply, but a sharp temporary increase in production for inventory-building followed by steady-state increased production would have been their optimal response to Smaug. It would be too speculative to blame Smaug for the Balrog, but Smaug could perhaps be interpreted as having brought forward the Balrog event.
[Update: The Balrog long preceded Smaug. I was thrown by remembering that Thror's people had there sought refuge after the dragon but forgetting that they were seeking to reclaim it rather than moving to an existing settlement.]
On the monetary side, even though Smaug is sitting on a big pile of treasure, he also destroyed a massive amount of industrial and consumer goods. Had that gold remained in circulation after the large supply shock, too much money would have been chasing too few goods and we could have expected some inflationary consequence. I have no sense of the magnitude of the stock of liquid treasure relative to the flow of goods that otherwise would have been coming from the Lonely Mountain and so I do not know which way the net monetary effect will wind up running. It wouldn't surprise me if it were net deflationary, but it could be less deflationary than Frances is reckoning.

Blogging will continue to be light over this, my summer holiday.

8 comments:

  1. Eric - excellent analysis of the fiscal consequences of dragon invasion.

    While not denying the impacts of dragon invasion on the real economy, I maintain that the monetary angle is both important and underappreciated. According to the World Gold Council (quoted in Wikipedia) "all the gold ever mined totaled 165,000 tonnes.[2] This can be represented by a cube with an edge length of about 20.28 meters." Over half of that has been mined since 1950. Compare the picture of Smaug's pile pictured in the Hobbit (and my post) with a 20 metre square cube - Smaug's pile is significant relative to total global historical gold production. It's hard to believe that this would not have caused a serious monetary shock in an economy using gold for coins.



    B.t.w., any idea why the dwarvish birth rate was so low?

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  2. I'll hit on the dwarvish birth rate first. I don't know why, but there's only one dwarvish woman for every 3-4 men. See http://lotr.wikia.com/wiki/Dwarves . That affects birth rates. And, according to the same article, some dwarvish women don't marry for lack of interest. I don't know how this is an equilibrium, either in the evolutionary biology sense or in the economic sense. Maybe dwarves used to war far more often and so had very high male attrition rates, leading to odd selection pressures. But even still, you'd expect at least some dwarves to be able to bid enough for human or hobbit wives.

    Point taken on the size of Smaug's hoard. But note that much of the dwarvish part of that hoard (a twelfth came from Dale) would never have really been in circulation - the dwarves hoarded almost as badly as the dragon. A big chunk of that pile would have been in goblets and the like that serves as potential money that could be drawn into circulation were the real price of gold to rise, and I suppose that the expectation of that potential reserve stock could also have real effects.

    I'm also pretty happy to believe that prices could have been very sticky in the Tolkien world, making the monetary effects worse. If I remember correctly, prices rarely wound up working to equilibrate things as scarcity pinched; instead, shortages obtained.

    But monetary effects of that sort would have dispersed across the whole world by the time of the Hobbit (a Dwarf generation after Smaug took the Mountain); the Desolation remained confined to Smaug's immediate surroundings.

    In the counterfactual where gold remained in circulation, there's no way Dale would have been rebuilt - Smaug would have burned it down again. And Lake Town would have had a hard time prospering again - even if somehow a monetary push brought some new great innovation into production in Lake Town, the town's prosperity and gold, right next door to the Lonely Mountain, would have just attracted Smaug back again.

    .

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  3. i'm pretty certain Moria was lost before Eriebor.

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  4. Crud. You are right. I knew Thror's people sought refuge there after Smaug but forgot that they were reclaiming it rather than going to an established Dwarven city. Gimli's thinking it was safe also threw me.

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  5. That for which the dwarves delved too deep was another important commodity, mithril.

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  6. Of course. But if mithril could substitute for gold for some ceremonial purposes or if Moria also had gold veins accompanying the mithril lode...

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  7. After leaving Eriebor (and the events of The Hobbit), Balin (one of the 14) moved to Moria, and temporarily lived there, before being attacked.
    Balin was Gimli's uncle, hence why he thought it was safe to go there (he hadn't had news of his death).

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  8. Do you by chance know anyone that has done a psychoanalysis of Smaug? If so would you mind emailing me at daniel59802@gmail.com

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