I have noticed that Galactic Civilizations II had a very rudimentary economic system which failed to account for the complexities of managing an economy. Market centers, banks, and stock exchanges would mint money, even if there was no industry to produce goods to be traded, no people to deposit money in banks, and no corporations to be invested in. Furthermore, the economy in GalCivIII is entirely controlled by one's government, whether on new colonies which would not justify expenditure of private industry or on highly developed and established worlds with ample wealth to sustain private enterprise.
Part I: Productive Capacity
The economic system needs to be rebuilt from the ground up on the basis of reality. A new measure of productivity can be the basis of this. The ability to generate productivity would be inherent to improvements of various sorts, be they Xeno Banks, Advanced Market Centers, or Entertainment Networks. These could be operated either by private industry (more common on established worlds) or by one's government (more likely on frontier worlds). With the right input of raw materials, labor, business services, and money, a sector of one's economy will be able to use its fullest productive capacity. Events like general strikes, terrorist attacks, war, or financial crises will hamper the ability of an industry to be productively utilized to its fullest extent.
For example, an Advanced Factory making consumer products would not be able to use its fullest capacity if there did not exist a trade network that would allow it to reach its customers. Such a factory would not be usable to its fullest extent. For this reason, it is important to maintain a well-balanced economy. Over-relying one one sector will lead to crisis and economic decline and will not be sustainable in the long run.
An example graph of productivity is below:
The units given are only important in terms of how they affect the currency. In any other respect it is not possible to easily compare productive capacity units across sectors. A farm might produce 20 units of food and be very productive, however this would have relatively little effect on the currency compared to an equally currency-altering 2 units of industry.
Part II: Currency and Productive Capacity
The value of one's currency would simply be one's total productive capacity divided by the total amount of money in circulation, combined with a moving-average factor in order to smooth out adverse effects any short-term changes in currency value. There would be various types of money, including money in circulation, money tied up in financial assets, liquid savings, and interest payments. Financial assets are created when banks lend out liquid savings, as is a matching quantity of money in circulation; this lent money would attract interest (at an arbitrary rate subject to a moving average) that would form the banks' profits. The amount of lending that can take place will be, of course, proportional to the productivity of one's financial sector but limited by the total amount of liquid savings. Bank lending will be the engine that drives growth.
A sample graph of money supply of various types can be seen here:
As stated earlier, bank lending converts savings into financial assets and a matching amount of interest-bearing money in circulation. However, where did the savings come from? These savings will originate in a player's central bank and will be credited to the government treasury, increasing the amount of liquid savings: spending this money will add the money into the circulating medium. In order to decrease the amount of circulating medium, players can simply tax more than they spend and return the money to savings. To curb bank lending as necessary a "Destroy Savings" option should be available for money in the government treasury.
It was mentioned earlier that the money supply would have an effect on inflation. As a result a player could pursue an inflationary, stable, or deflationary monetary policy as best suits the player. Inflationary monetary policy would liberate money from savings and cause it to be used on circulating medium and for investment (in real terms), increasing one's capacity for productivity. Stable monetary policy would not affect these variables, while deflationary monetary policy would reduce investment and spending and increase saving (in real terms). In extreme amounts, inflation and deflation are harmful; used in moderation, they can help a player further their empire's economic goals.
Part III: Private Enterprise
Private enterprise should become an integral part of one's economic system. Dealt with as minor races, corporations are treated as minor races and can be created ex nihilo, spun off from another corporation, or merged into another corporation. Controlling planetary improvements, ships, or both to produce and market their wares, corporations will sell to consumers/small business (making goods that contribute to the well-being and happiness of the citizenry) and to other corporations (ships, planetary improvements, trade route operation, and other services needed for corporate operation), as well as to the government (military ships, planetary improvements, goods and services needed by government employees). Some corporations will be banks, lending an amount of money to other corporations, consumers, and government in exchange for profit from later. The sum total of all such transactions taking place in a given currency on a given turn adds up to one's money in circulation, analogous.
Most of the time the player will not interact directly with corporations. Purchasing ships in one's shipyards, for example, will be similar to how ships are purchased now: one can opt to directly purchase it, or instead purchase it from a variety of different corporations. The difference will be that corporations will have competing bids and a limited productive capacity, forcing players to choose whom to place their orders with. Micromanagement will give way to macro-management of the economic aspect of one's empire.
Part IV: Inter-Empire Trade
Each empire will possess its own currency, with which domestic transactions can take place. Foreign trade, however, requires that one civilization involved has the currency of the other and vice versa. As stated earlier, the value of a currency is determined by the productivity backing it divided by the total amount of circulating medium of that currency (excluding inter-government trade in third-party currencies); other civilizations will sell you their currency based on this rate. Corporations can conduct foreign trade by buying this foreign currency from your treasury at the same value and then immediately paying their suppliers, but governments can conduct trade in any currency that they desire. In order to maintain the status of one's foreign trade, it is important to maintain an ample supply of foreign currency reserves in order to meet demand from your corporations (which can only deal in your currency).
It is possible to enter into single-currency agreements with other empires for a period of turns, in which both empires' currencies are converted into one based on the combined circulating medium and productivity of both empires. Doing so eliminates the fear of running out of foreign reserves in the other empire's currency and will give a slight boost to productive capacity associated with Trade improvements: however, two central banks will print, and two governments will spend, one currency, with policy differences that could derail one's entire economy.
Overvalue and undervalue agreements should also be possible, in which another empire agrees to overvalue or undervalue your currency by a specific amount in inter-empire trade. Furthermore, an empire could demand that another empire accept only its currency as payment for a certain strategic resource or manufactured good. This could give rise to a petrodollar-style situation, in which an industrially stagnant but militarily strong empire maintains the value of its currency by militarily protecting important industrial and resource-producing empires while financializing its economy.
A United Planets resolution should be introduce to create a Galactic Credit, a single currency for use in inter-empire trade. A Galactic Reserve Bank would be created in order to issue this currency, which would be bought by countries using their own local currency at market rates. All overvalue and undervalue agreements would be nullified by the passage of said resolution, as would all single-currency agreements. The Galactic Credit would give a moderate boost to foreign trade, and could be enacted temporarily or permanently.
Part V: Economic Warfare and the Criminal Underworld
What was described above is the legal, standard method of running one's economy for the benefit of all parties involved. But what if one wants to destroy an opponent's economy?
It was mentioned earlier that the circulating medium was the sum total of all transactions in a currency taking place, and that the value of the currency was a moving average of the ratios between productivity and circulating medium on the previous several turns. If one has a large quantity of a given foreign currency in reserve, one could pilfer it through the criminal underworld (with various gangs represented as minor races, just like corporations) into the economy of the opponent issuing that currency, causing massive inflation and crippling the economy of that player until taxes are raised (a difficult action to perform) and money is removed from the economy. Upon discovery, the player performing the action will receive a minor diplomacy hit.
Alternatively, one could issue counterfeit currency of another empire through use of spies, driving up inflation to a degree and causing a moderate diplomacy hit. Conversely, to remove currency from a player's economy and cause undesired deflation, a player could send spies into the revenue service of an opponent, bribe tax collectors, and divert money to themselves or destroy it entirely. Both of these methods would result in a moderate diplomacy hit with the aggrieved empire.
As a third, drastic method, a player could use the criminal underworld associated with an empire in order to bribe the central bank to produce more or less of the currency as desired, resulting in a massive diplo hit upon discovery but of course producing the greatest effects while still active.
Part VI: Labor and Income/Wealth Distribution
Wealth and income distribution should also play a role in the functioning of the game. High income inequality will lead to general strikes, lower approval ratings, and protests in one's empire, while an excessively even income distribution will lead to little money being put into savings and ultimately will cause stagflation. Inequality in wealth will be the effect of this income distribution and will lead to further unrest and problems. Unemployment and employment will also play a role in happiness; in general, when economic conditions are normal and productive capacity is fully utilized, a society should be able to reach maximum employment.
As a sample income distribution I have the graph below:
The above is a moderate income distribution approximately where the United States was in the 1960s (its most equal time in history). A distribution like this should not be the cause of unrest.
Part VII: List of Possible Game Events
- Your banks are running dangerously low on liquid savings due to a past lending spree. Many small businesses are finding it difficult to obtain the operating credit that they need at times to continue functioning. A financial crisis looms in your empire.
- A new religious movement has swept through the galaxy claiming that work is ultimately harmful to the soul and that all beings should spend the maximum amount of time relaxing. Productive capacity will decline slowly for some time until it picks up.
- Urged on by historically low interest rates, many corporations have borrowed heavily in the past in order to make investments in their business. With interest rates rising corporations are now feeling the pinch and are starting to lay off workers.
- Income inequality has risen steadily over the past few years. While economic growth has risen moderately, a large amount of the new wealth has gone into speculative or spurious "investments" like property that do not themselves create value. If conditions continue the slightest change in the stock, bond, and property markets could result in total disaster for the economy.
- A wave of [economic sector] strikes, egged on by high unemployment and income inequality, has spread across [world]. Production will decline by 20% on that planet for each of the next [x] turns until returning to normal at half that rate.
Part VIII: Common Concerns
This idea is multifaceted and completely changes the economics of Galactic Civilizations III, and in fact is different from the economics systems in much of the genre. As a result, there are likely to be concerns regarding this idea on a variety of levels.
- This idea is too complex for anyone without an understanding of economics to use in a game—while the details of the idea might be exhaustive the actual implementation of the idea is designed to be easy in practice to understand. Creating currency, for example, should be a relatively easy task: the player sets an inflation/deflation target and currency is produced in order to allow the player to meet that target. Private enterprise should manage itself properly most of the time, and government orders can be made quite easily. Income inequality can be remediated through the passage of social welfare programs (which should be a budget item) or by periodically issuing newly created money directly to the citizenry.
- There would be too much micromanagement—in reality, the amount of micromanagement would decrease, not increase. Private industry would produce, upgrade, transfer among itself, and liquidate planetary improvements by itself, and direct player intervention would only be necessary for those few planetary improvements handled directly by the player. Only Research facilities, star ports, national wonders, and galactic wonders absolutely must be operated by government. On new colonies a player's direct intervention would be warranted, but planetary improvements could be sold to private industry to produce consumer goods once a colony gets off the ground and the use of said improvements would become profitable.
- Couldn't a player print all the money they wanted?—yes, they could, if they were prepared to suffer the effects of massive inflation. Excessive amounts in savings would result in lending sprees and consequent large interest payments that would cripple one's economy.