Economics Lessons #1: The Classical View
Choubi Gogs
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Hi there,

As I'm sure you all know by now after looking at my profile page (ahem...whistle ), I'm a graduate student in Economics and working to get into a PhD program next year. Anyway, as I'm a big fan of boardgames (obviously), I thought I'll make a series of geeklists of Economics courses along with gaming examples. I hope you'll find these semi-courses interesting.

I will try to present here in a simple way what are the main models used, explain their main hypotheses, where these succeed and fail, all of this using games as metaphors.

Note that I'm only a student, and will try to broach vastly different subjects of Economy. Some of them I know a lot of (Decision theory), some it's more part of a cultural background (any kind of Macroeconomics). Anyway, these lessons will probably not be exhaustive, I may forget some things, I am also prone to errors, this is not to be taken as gospel truth. I will however try to make sure I don't say anything very stupid. If there are other economists out there, contradict me if I miss something.

Also, using games as metaphors can never be perfect so don't formalize yourself too much on it. (I know that my Caylus metaphor leaves a lot to be said for instance!).

Finally if you have any kind of suggestion to make this series of geeklists better, please go ahead!

In this first lesson, I'm going to the basics: the classical view.

edit: I'm sorry all, it appears I had blocked the comments on the geeklist. It is now fixed and you can all comment at will and say how badly I know the subject! Sorry about that. I've also unblocked the add item option if some of you have more things to say on the subject.
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1. Board Game: Wealth of Nations [Average Rating:6.93 Overall Rank:1135]
Choubi Gogs
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The Wealth of Nations, written by scottishman Adam Smith in 1776. Although this was his second book, this is usually referred to as being the precursor of modern economics.

This is the first acknowledged book that tried to study the rise of industry and commerce in Europe.

I'm not going to make a full lecture on everything you might find there as the book is enormous. That and the fact that, as many many economists, I haven't read the actual thing.

Still I'm going to raise one or two points (that most of you probably already know).
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2. Board Game: Caylus [Average Rating:7.83 Overall Rank:45]
Choubi Gogs
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Have you ever heard of the "invisible hand". Well this is where it comes from.

Adam Smith wrote:
It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.


The basic idea here is that the way markets work is not due to real cooperation between individuals but rather due to every individual looking out for number 1.

Adam Smith starts by acknowledging the fact that everyone tries to maximize his own satisfaction (being selfish). His main point is that this would result in the greater good for the whole of society.

For example: in Caylus, society (meaning the king) wants us to build a castle. However, us players only act in our own interest, meaning: we want to win. This in turn makes us build the castle as well as everything we would need to build the castle. For a 5p game for instance, some players will try and build the castle while others will just develop the city. At the end, Caylus will be a resplendent city with markets, statues, hotels, production facilities and an expertly-built castle. All of this came about just by us players being as selfish as possible (ie. trying to win).

With player selfishness, the society will arrive at an optimal point of development.

Considering this, Adam Smith rejects any kind of government action.

Suppose that in Caylus, the king tries to force players to build the castle, one could suppose he raises taxes on buildings and rewards building the castle (ie. awarding more points). We would arrive at a less than optimal point in which ALL players just build the castle and NONE develop the city. What would entail from this is that NO new production facilities or farms would be built and the castle might in fact be less developed as players miss resources.

You will all have recognized the beginning of the liberal ideology: markets are efficient, if something needs to be done, someone will end up doing it in his own interest. What the king needs, some players will do it. However, governments may tweak the interests of the players and therefore these might over-produce some things that society doesn't really need anymore and under-produce other stuff.

This is a very simple way of showing what the invisible hand means.

The conclusion is: markets have the natural ability to establish a price that provides faire returns on capital, labour and land.
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3. Board Game: Antiquity [Average Rating:7.90 Overall Rank:211]
Choubi Gogs
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Another subject I'll broach is the division of labour.

In The Wealth of Nations, Adam Smith talks a lot about productivity. The rise of the european nations came along with a rise of the workers producitivity.

For example, he argued that the division of labour would prove beneficial.

Assume we're playing Antiquity. Each time I build a farm I have several markers/chits to put in very small hexagons. Assuming I did it alone, it would take me 30 seconds to prepare one hexagon (putting one pollution chit and one food chit over it). To finish my farm of 5 hexagons would take me 2m30s.

Now imagine the other player in front does the same. It means that every 2m30s, we would have created 2 farm on the map.

Now imagine one player specializes in getting the pollution chits and the other player got the food chits.

It would take me 10s per pollution chit per hexagon, because now I always have to take my chits from the same reserve. The other player just puts the food chits above my pollution chits in 10s too.

Now it would take me 100s to put all pollution chits and 110s for the food player (he can only start once I have put my first pollution). The overall time of creating both farms is now of 110s < 150s in the previous case!

By dividing our work in 2 phases, we have gained 40s! This is an increase of productivity of 26%!!!

In fact, the example Adam Smith uses in The Wealth of Nations is about pins.

Of course, Adam Smith also recognizes a limit to labour division:

Adam Smith wrote:
In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations, frequently only one or two. ...The man whose whole life is spent in performing a few simple operations, of which the effects too are, perhaps, always the same, or very nearly the same, has no occasion to exert his understanding, or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. ...His dexterity at his own particular trade seems, in this manner, to be acquired at the expense of his intellectual, social, and martial virtues. ...this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.
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4. Board Game: Puerto Rico [Average Rating:8.06 Overall Rank:16]
Choubi Gogs
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To that point we have just discussed the grandaddy of modern economics and not at much length either. The thing is, The Wealth of Nations is a no-math book... By today's standards, this would be hard to read. In fact, my background is more of a mathematician than an economist, therefore so I don't know much about anything that doesn't include an Hamiltonian or anything that looks like it...

Anyway, the classical school of thought is pretty hard to define.

Mostly, what classical economics try to achieve is understand how european countries managed to pull out of stagnation as well as how the markets worked. The thing is, in the 18th century, most european countries emerged from a feudalist society where everyone could now freely look out for his own monetary gain.

For instance, Puerto Rico is a feudalist state, all workers do what we tell them to do, like serfs had to work the earth and couldn't do anything else. Nowadays, the system doesn't prevent you (well in theory at least) fom doing what you want. The question was therefore, how does demand for anything get met. Assume that your Puerto Rico colonists could decide for themselves on which building they could work and you can see that your colony will probably not look the same at game's end!

Also, how come, suddenly with industrialization, workers and europeans in general became richer?

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5. Board Game: Power Grid [Average Rating:7.91 Overall Rank:29]
Choubi Gogs
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Although I have already explained a little how Adam Smith answered some of these questions, I will now look at what a french economist said.

One of the basic foundations of classical economics is Say's Law.

Jean-Baptiste Say was a french economist whose views were also mostly liberal.

This is what his law states:

Jean-Baptiste Say wrote:
Supply create its own demand


To have an intuition of this, look at the resource market of Power Grid. There is always a supply for eveything, for instance garbage. At first, nobody usually wants to buy garbage (this changes if you have the power plant deck 2). However, when the prices fall, ie. supply increases, people start buying power plants that work on garbage and create a new demand.

Now this simple example is actually a usual misunderstanding of Say's Law. What it actually says is simply, for effective demand to actually exist, there needs to be an existing supply. In short terms, you cannot demand something that doesn't exist.

In fact, empirical facts show (even nowadays) that aggregate production usually moves ahead of demand. When there is an economic recession, production usually goes down before consumption.

This simple law has always been used since then, specially when economists study the business cycle.
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6. Board Game: You're Bluffing! [Average Rating:6.63 Overall Rank:1258]
Choubi Gogs
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Say was also the first to talk about monetary impact on prices.

He realized that if you injected new money in the market, the price of everything went up (as money has no intrinsic value but for what it can buy). However, the relative prices of the goods were kept constant.

This can easily be seen in You're Bluffing. When the donkey card comes out and every player gets new money, players will see that all prices do indeed go up! However, one will notice that the relative prices don't change, ie. the horse is still way more expensive than the chicken!

This basic idea was at the heart of monetary economics studied later on by economists like Keynes, Pigou or even Milton Friedman.

We have mainly seen some very optimist economists who worshipped free-trade. However, these weren't the only guys around at the time, some economists like reverend Thomas Robert Malthus had an entirely different view on growth.
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7. Board Game: Antiquity [Average Rating:7.90 Overall Rank:211]
Choubi Gogs
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Malthus is most famous for his Essay on the principle of population.

In this book, he realized that population growth was exponential. However subsistence level could only increase in an arithmetical way. To him, this meant that per capita growth was limited and could not go up indefinitely.

He was therefore very skeptic about the possibility of a future improvement of society as a whole, recognizing that most were bound to be kept in poverty and that no long-term per capita growth was possible.

The consequences of this were easy to get: at one point, something would lead to a decrease in our over-expansion, usually by a war or by the fact that creating new families becomes so difficult that abortion or other contraceptual means become common.

What he believed was that economies as a whole could not grow and were stuck in a Malthusian trap.

Basically: this is how economies worked:

1) subsistence severely limits population-level
2) when the means of subsistence increases, population increases
3) population-pressures stimulate increases in productivity
4) increases in productivity stimulate further population-growth
5) because productivity increases cannot maintain the potential rate of population growth, population requires strong checks to keep parity with the carrying-capacity
6) individual cost/benefit decisions regarding sex, work, and children determine the expansion or contraction of population and production
7) checks will come into operation as population exceeds subsistence-level
8) the nature of these checks will have significant effect on the larger sociocultural system - Malthus points specifically to misery, vice, and poverty

Looking again at Antiquity, we see that our civilization increase but it then comes a point where most of the land cannot produce anymore and will keep expansion in check.

Of course, while his main starting points seem irrefutable, his conclusions were often criticized. Marx for instance argued that Malthus didn't recognize the human beings capacity of increasing their food supply.
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8. Board Game: Dead End [Average Rating:5.53 Overall Rank:13178]
Choubi Gogs
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Analyzing the growth in the wealth of nations and advocating policies to promote such growth was a major focus of classical economists.

In order to do so, classical economists developped a theory of value and price. Petty introduced a distinction between market price and natural price (nowadays in financial market we woudl refer to the fundamental price but the idea behind that is the same).

Market prices are the prices at which we exchange our goods. Natural prices on the other hand capture systematic forces and persistent forces. While the market price may not be equal to the natural price, the natural price act as "gravitational attraction" to the market price (cf Smith).

What determined natural prices was hard to determine and as a matter of fact, it varied from model to model.

To Smith, the natural price was the sum of all natural wages, rents and interests needed to produce (wages for workers, rents for land and interests for capital).

Ricardo thought on the other hand that natural prices were given by production costs. His main disagreement was that the rent didn't determine the price but instead, the price determined the rent.

Some other economists believed the natural price to be given by the level of output (effective demand), technology and wages.

Overall, no classical economist really managed to develop a price theory fully.

One last thing I'd like to point out concerning this first session is that most classical economists believed in the benefits of free trade. Ricardo is as a matter of fact renowned for his model of trade. I won't talk about i here (although I could) but will leave this for a future lesson on trade theories.

Note that these theories have given birth to the neoclassical school of thought (although this is sometimes disputed).

Usually the biggest problem with these theories, apart fom the fact that they at times seem a bit unfinished, is that they all reasoned with very simpel assumptions, there was no assumption about frictions in the market.

As a whole, these economists have created the basis and the first ideas that economists today try to reinterpret. For example, how come we did know a long-term period of per capita growth, contrarily to what Malthus thought?


Anyway, I hope you enjoyed this small economics course 0.01.

Next time, I'll try to study something I know better like maybe what the Nobel prizes did and what were their contribution? Or maybe a lesson about international trade?
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