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2 January 2013updated 26 Sep 2015 4:01pm

Smaug the dragon’s monetary tightening

The Hobbit and macroeconomics.

By Alex Hern

I love this post so much: Frances Woolley on The Macroeconomics of Middle-Earth:

The full economic impact of Smaug can only be understood by recognizing that the dragon’s arrival resulted in a severe monetary shock… It is clear from a simple inspection… that the amount of gold coinage Smaug withdrew from circulation represents a significant volume of currency. This would, inevitably, lead to deflation and depressed economic activity.

Bond Vigilantes‘ Jim Leaviss contributes his own thoughts on the monetary impact of a Wyrm:

So Smaug dies in the end, and the gold was released into Middle Earth’s money supply. Was there hyper-inflation as a result? Or did Nominal GDP return to trend (i.e. the “catching up” theory that has been talked about by Central Bankers like Mark Carney lately) without longer term inflation problems? If there was hyper-inflation perhaps the political instability that resulted allowed the rise of Sauron as a leader, and the subsequent world war between Men and Elves, and Orcs?

Offsetting Behaviour‘s Eric Crampton disagrees strongly with Woolley, though. The strongest effect wasn’t monetary; it was a supply shock borne by all those dwarves dying:

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Dwarvish replacement rates are very low – they’re more fertile than elves, but hardly reach human or hobbit ability to repopulate a land.

Leaviss also recommends reading the comments on Woolley’s original piece, which you should do. They address concerns like the relation of Smaug’s hoarding to the “Peso problem” (what are the rational expectations of a firm living in Middle Earth during the reign of the dragon?), whether or not Middle Earth is properly described as Feudal, and why nothing in the Hobbit seems to have a price.

More economic theory based around sci-fi/fantasy, please.

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