Random notes that don't mean very much (they truly are random, and tangentially related to world building), so you can ignore this. Memo no. 1: What does having a good economy mean? Having wealth does not mean having a good economy. A lord can have a treasure vault filled with precious jewels and coins, but it does not mean that his state has a good economy. A good economy is more so defined in relation to the people of the state, rather than the lord of state alone. If the people of the state is rich, then the lord shall naturally gain wealth proportionally to the wealth of the people. This is better than a lord who burdens his citizens with oppressive taxes and enriches himself at the expense of the livelihood of the people. However, in order of a lord to operate a state, at least some source of revenue must exist at the minimum, otherwise the state would collapse from insolvency. Let's describe this with a mathematical equation. Code: E = S + P where E is the total liquid wealth of everything that exists in a state at a given time where S is the total wealth owned by the state where P is the total wealth owned by all private citizens combined The value E is typically immutable at any given time (the total "economy") since it is a natural variable; whereas the ratio between S and P can change with state fiscal policy. It is common to describe the relationship between private and public wealth in the terms of a "tax". This is because conventionally speaking, only private citizens are productive -- they are the farmers and artisans and craftsmen ("producers of wealth"), whereas the nobility and bureaucrats do not produce any material goods. The state derives its wealth by taxing the more productive people of society. A theoretically oppressive government might have a 100% tax, leaving its citizens with nothing. A theoretically anarchist government might have a 0% tax, leaving the state with nothing. We previously posited that a 0% tax is unviable because the state would collapse. The state provides the minimum function of security, both political (military) and social (law/justice), which are prerequisites for economic security. It is important to recognize that states do not exist in vacuums -- and many states (the neighboring countries) -- exist in competition with each other, so a centralized state with a sufficiently effective control structure is necessary for self-preservation in a machiavellian world. A 100% tax is unviable for multiple reasons. To examine why, we need to examine things from the perspective of a private entrepreneur and understand their thought process. Here is a hypothetical case study: An entrepreneur receives information from his confidential channels that it looks like the barbarian kingdom of Spicica would be willing to trade valuable spices in exchange for manufactured cloth. To take advantage of this information, the entrepreneur would need to invest capital in constructing a merchant fleet, send it on a trade expedition, and pray that the fleet does not see bad weather or other unfortunate events such as hostiles, which inevitably happens (fairly frequently) in this day and age. In other words, there is a hefty amount of risk involved, because it might cost the entrepreneur $5 million up front to fund this expedition. It only makes sense for him to pursue this risk he expects a large reward appropriate for the risk involved. Suppose that he can sell spices in the mainland for $20 million, and there is a 1/4 chance the expedition might fail and be lost at sea. In a total of 8 expeditions, the entrepreneur will invest $40 million, lose two ships at sea on average, and make a revenue of $120 million ($40 million lost at sea), for a net profit of $80 million. In other words, a 2-fold return on investment on a series of trade expeditions that take 10 years to fully conduct. Now -- let is introduce tax from the state: In a world with 0% tax, the entrepreneur is happy, because he takes most of the windfall home ($80 million net). In a world with 50% tax, the entrepreneur makes a revenue of $60 million, for a $20 million net. The return-on-investment is much lower than before, and if by chance one more ship is lost at sea than expected, the entrepreneur makes no profit. It would be a gamble for the entrepreneur to invest in this expedition, and he would have less incentive to invest than before. In a world with 75% tax, the entrepreneur makes a a revenue of $30 million, for a net loss of $10 million. Since the loss is expected, any sane entrepreneur would never consider sending a trade expedition to Spicica, since market forces are not favorable to him as a private investor. The point of this case study is to demonstrate that high taxes discourage investment and restrict the economy from reaching its maximum potential -- for instance, think of the jobs that could be created from supporting this expedition, and the manufactured clothing that could have been sold to Spicica? A 100% tax would completely destroy investment and the incentive to work. This is because business and work involves risk (farming is risky as well -- the crop yield might be better or worse one year to the next), and market demand can fluctuate from year to year. Since we have established that both 0% and 100% taxes are not good ideas, we need to recognize that that a state must exist at a happy medium in between the two.
Good analysis of taxation, but you made a mistake with the claim that 'nobles and bureaucrats' don't produce any wealth. Especially with regards to the time period you are talking about (late medieval), economic power is directly proportional to military power, more specifically the ability of a state to produce military power. While this has been denigrated in the modern time as the military-industrial complex, it remains a fact that the economic power of a state is inexorably tied to the ability of that state to produce military power, whether in the form of weapons and materials, or food and supplies (an army marches on its stomach), or in the form of trained soldiers. Two of those three components are primarily produced by the noble class, and training for soldiers is almost exclusively prepared by the upper classes. For example, consider a world in which states do not exist, and corporations control everything. In this world, the power of a corporation would be dependent on its ability to protect its own assets first, which allows them to profit materially and thus allows them to produce more protective power. Simple wealth would be insufficient to determine power. Further, the economic strength of each corporation would be based on the measurable effect of its military power to hold territory or enforce its will on other corporations. Allow this situation to develop, and you will find each individual corporation investing in all three areas (weapons, supplies, and training) so as to ensure a continuation of their military economic power. Even if the company makes no profit, if it's military power is stronger it will be considered stronger than another company (such as the relationship between the United States and the European Union, one of which trumps in wealth by the other of which is considered economically stronger because it can produce much more easily and quickly military force). The economy will be considered strong and successful so long as it can produce the necessary materials to defend itself and its holdings; another company which has far more 'wealth' or produces far more no military goods will be considered weaker unless it can also provide for a similar level of defense. This is why wartime economies are always so strong, because they are the simplest economies to directly convert into pure power. In other words, you are making a good point that taxation plays a role in economic power, but it is much more the military industrial complex and the link between wealth and military power that determines actual economic strength and viability.
It looks like you are just stating the obvious. *Pulls out gun and whispers* You aren't suppose to state the obvious, stop informing the masses *Pulls trigger* Time to clean up this mess before people realize what is going on.
Thanks i didnt know that. its a good point. However what you mean is that nobles have power. it doest need to be military power it can be politic or even economic. The security that power gives is the point.
the main income of states are usually tax,which they in turn invest in the development of the country,I think it will be better to say that military power is more of an indicator whether a country is wealthy or not and for the ability to protect,as long as you have money,there will be people that will want to work for you whatever it is,that's why mercenary and PMC are still a job today and because you know how unreliable this kind of paid soldiers are in the long term,that's why trained soldiers are needed,to ensure loyalty and quality,so PMC and merc is for the short term and trained soldiers is for the long term
This really feels like "all it takes to get to the moon, is to go really fast" Technically true, functionally useless.
Even if we take your example of the merchant trading to 3 nations, you are not factoring other costs that maybe involved. The 0% tax, you would need to pay protection fees to secure your cargo, this can be personal or hired security. Trade fees need to be payed before you can sell, this can be to a cartel. Insurance Cost for banditry. So that profit margin could easily turn into only 10 million as everyone runs up the operation costs. With the 50% tax, there could be loopholes that lower the taxes that need to be payed. In my country the corporate tax is at 30%, international and large companies only pay a fraction of this. Apple is one of the biggest tax advoiders with claims that they only paid 0.005% in taxes.
But making a proper economy in a story is a massive pain... Probably why so many stories don't even bother with it all that much.
Thanks @Aca1814ina and @Simon for your responses! I grateful for the time you took the respond to my memo. XD I think in response to @Simon, I would say that I absolutely agree that the real world is indeed much more complex. I wrote this memo not really to reflect reality, but because I think it's important to have a good understanding of your world's economic system before any fictional world-building can occur. Having a theory that simplifies things is important from the perspective of fiction, but it needs to remain believable. In this sense, I think it's important to establish a framework, and then apply the broad understanding that people will always find loopholes around any political, economic, and social system that exists that wasn't intended by a political leadership. To @Aca1814ina: You're right in the senses that providing services is technically a form of trade/wealth. The aristocracy engages in the business of providing services, rather than the business of exchanging material goods. I think I was going from the perspective of material goods to start -- especially since, as you've picked up on, I'm writing this for a fictional non-modern setting. With regards to the military-industrial complex: I would argue that it is a potential formula for the success of a state, but it is not the only formula that could be pursued. In addition, there are certain traps that can be associated with embroiling yourself in war depending on the context. In some situations, war can often make your own country poorer -- depending on the circumstances. But it really depends. I think we both agree that security is an absolute prerequisites for a strong economy. There are multiple ways of achieving that security. One sensible way is to build a strong military so that your enemies are afraid to invade your territory. Another path is to develop the correct alliances via diplomacy and utilize your allies military power while making them dependent on your economy. Frankly, the sensible thing to do is probably both -- not one or the other.
This was really informative. Now I have some knowledge before I take Micro-economics next semester. I think this is more macro-economics, but both are not mutually exclusive.
In some sense, it's "fake" economics, because I haven't taken formal classes in either. xD Which is why it's nice in some sense to read other people's feedback.
Do some research on the engel's law, the main thing to remember is that it is important to tax enough to pay for infrastrucure + security but not more than the engel coefficients modified by the cpi for the area....ish I'll have to land my kerbals before i can get into more detail
when you are at it @yuzuki please give some useful information about how to take a loan, i think when we do a business and we don't have enough money to start the investation, then do a loan is a good thong, but there is many case when this action only dig a deeper hell, pity the poor