The Economics of SimCity

I remember when I was about 14 years old, I was helping out my cousin with his English homework (none of us are native English speakers) and all of the sudden I realized he had an amazing stock of vocabulary in his brain, but didn’t know how to pronounce them. On my attempt to find out why, I discovered he learned all of it by playing games, that were never translated to Portuguese. The game, however, never really verbalized the words, so he knew how each of them were spelled, but not how they sound. This was the first time I realized games are an excellent source of education, in which the one playing it becomes deeply involved in the process, gains huge amount of information and at the same time, associates many of the main concepts into their daily lives.

I could spend an eternity talking about many different games (surprisingly or not one of my specialty areas in Economics happens to be Game Theory), bsimcityut for this particular post I will focus on SIMCITY. The concept of the game is really simple, you are given an initial endowment of coins and a piece of land. You are the mayor of this town, also the builder, and in Economic terms, you would be what we call the Social Planner. In some economies, the Social Planner does in fact exist, in the role of a particular agency such as the Central Bank, or in the picture of a dictator, but in most cases Social planner serves as a benchmark to economists. In most economies, people make decisions of what to produce, what to consume, where to work, how to spend resources, and you have all of those individuals making decisions simultaneously, not collectively, and yet every decision one makes affects all the others. This complex aggregation of decisions drives economy to its equilibrium, that can be good or bad. How do we know whether the decentralized decision making is driving economy to its besimcity-demands-100574723-largest possible outcome? We imagine a Social Planner, what would this supposedly benevolent Social Planner do if he were to allocate the resources (capital, labor, income, consumption) himself, not particularly caring what each individual likes, but rather what would maximize the collective welfare for society. In this game, you are the social planner, and no particular inhabitant of your “made-up” city makes decisions of what and how to produce, what to allocate resources in, what to consume…but you can read their thoughts from time to time, such as: “I wish I lived next to a park”, or “I don`t like living next to a factory”. As the social planner, you take their opinion into consideration whenever making your own decisions, but ultimately you take a look at the available resources you have, and make a judgement call as to what would be the most appropriate decisions to make.

One very interesting thing that caught my attention in this particular game is the Tax Revenue structure. Simcity-Buildit-Happy-Sims-Taxes-City-HallThere is a little bit of a causality inversion attached to it. In the real world, politicians promise services to society in the hopes of raising taxes. Once the taxes are risen, then this particular politician may or may not actually spend the money on what has been promised (I digress). However, in SIMCITY, your tax revenue is 100% correlated with the inhabitants’ satisfaction towards your administration. Therefore, your tax revenue has two components to it: i) Population size (the more people the more income) and ii) Overall satisfaction. To be a little bit more technical the population size determines your tax revenue potential and over all percentage dissatisfaction of population will discount from full potential. You might be thinking now: This sounds like a great system, why don`t we carry from SIMCITY to real life?  scbigovtview1Because au contraire to real world applications, in SIMCITY the Social Planner (in the case, the player) has perfect information about the level of satisfaction of its population. And one might say: “OK, we can do constant survey in order to figure out the level of satisfaction of everyone”. Surveys cost money (Perhaps even more money than the potential adjust in taxes that would result from this project), and would likely be inefficient. If you were to knock on every door asking the households their level of satisfaction, implying that greater satisfaction will imply paying more taxes, I guarantee you people will “be unhappy” with the government. People react to incentives, people won`t reveal their real welfare when it comes to Public Goods, which is the whole reason why we need a government that can impose taxes.

As the government, there are some investments you might make in order to: i) increase citizens satisfaction and; ii) increase scbieducationmap1population within the surrounding area (ultimately, both of them result in increasing tax revenue). Although I can agree that population satisfaction will increase and perhaps even population, I believe one important aspect is left out of it: If you invest in Education for example, the most important consequence isn’t the short run increase in population, but rather the associative effect that you have between increasing human capital and the production functions available. I understand how this would be complicated to incorporate into the game, but investing in education versus gambling for example should increase productivity. If you are playing today’s version of the game, Education and Gambling have essentially the same effect into your administration. Why would the Social planner care particularly about the education sector for example? The same thing happens with transportation, for example. The creation of public transportation does nothing to decrease traffic, it is just another instrument to increase population and money growth.

This economy market structure is somewhat faulty, and I will walk you through it so that you can see what I mean. In the scbifactoryprodqueue1beginning, you can build a certain number of factories, that have fixed production capacity. As you move further into the game, you can build better factories (again, the access to better factories will depend solely in the size of your population), which in Economics is precisely the concept of Economies of Scale or “in the long run of costs are variable”, you can plan the size of your factories in the long run, despite of the fact you are ‘stuck’ with the choices you have made on the short run. You can also build shops, in which the goods that were produced in the factory may again be transformed into a different final consumption good (or as an intermediate good depending on whether it may be used again in another shop and transformed into a different good). The shops, as opposed to factories, can never have their productivity increased. You may use paper currency (I will get to the different kinds of money in a bit) to increase the production line, but not productivity itself. This is based on the assumption that nobody spends everyday playing, so you can program goods to be produced while you aren’t there playing, so in a sense expanding the production line is still HQ 2somewhat expanding productivity, and I would be fine with this analysis, except for the fact that cities are allowed to trade, and if you are allowed to trade but not increase productivity, there is a fundamental economic problem with the game: Everyone has the same opportunity costs. This essentially makes trading a simple transfer of present to future consumption, without actual generation of value. A town has no incentive to specialize and trade creating real economic value, and the game becomes a zero sum game. One might ask: If it isn’t beneficial, why would people trade? The answer for this consists of two parts: The first one I mentioned before, consumption transfer from present to future, (there is no access to credit in this economy, so you cannot transfer future consumption to present), so as a way to generate coin currency, that will later on be used on purchasing city utility structures, keeping the Sims happy, generating more tax revenue, keeping the economy going. The second reason was, I am sure, not intended by the game developer, but it ended up working nevertheless. Players have an additional resource they bring into the game: time. Some have a lot, some too little. For players with a lot of time in their hands, they can spend it on the Global market and actually do some arbitrage. For most players, the market works in such a way that they only have incentive to sell, because trying to buy anything is too time consuming, and no real economic value is generated.

IJHQhJjIf I were to suggest any improvements to EA for SIMCITY that would definitely be allowing players to invest either paper currency or Golden keys to improve productivity in certain sectors, so that cities could specialize, making trade the positive sum game it was meant to be. Another peculiar point about trading that I would like to make is that all of those goods have a price ceiling (that is, a maximum price you are allowed to charge) which not only generates dead weight loss (all the items that should have been sold but weren’t due to impossibility of covering opportunity costs), but also prevents users to learn a very important lesson in Economics: the constant pursue of equilibrium price. What a fantastic thing that would be if you decided how much to charge not only by thinking “what is the maximum amount of money I am allowed to get by selling this item”, but instead you changed people’s minds by thinking “what is the maximum I can charge for this good and still be able to sell it to someone else”, that unique skill, figuring out the reserve prices that compose your demand curve, realizing it is indeed downward-sloping would be a fantastic gain for players, regardless of which field of studies one decided to pursue. Ultimately, even getting a job is a market, in which you are the supplier of your own labor, and you need to figure out what is the maximum you could ask for and still be employed. That would be then my second suggestion: Make the market a free market, without price ceiling.

Simcity-Buildit-Upgrading-BuildingsThe goods that are produced, in factories or in shops can be  ‘consumed’ as they turn into inputs for building upgrade, they can be sold in exchange for simoleons, or they can again be turned into inputs for the production of new goods, and so on. In this particular aspect of the game, the developer EA did a fantastic job of capturing the complexity of an economy when it comes to goods assuming different roles, sometimes as intermediate goods and sometimes as final goods. The greatest aspect of it particularly the rich Law of Motion that it brings to money flow, since you may choose to stock purchasing power in for of coin based currency, or in the form of many different goods, making asset a multivariable vector. However, the stock of assets has a constraint: the size of the city storage unit. You start with a fixed capacity, but it is possible to increase as you go along by accumulating some items, that cannot be produced but rather randomly appear as you keep checking the population’s thoughts and requests. This is indeed a very creative way EA found to capture the random shocks and stochastic processes an economy faces. Once you receive the random item, you basically have two choices: You either sell it for yet more simoleons (coin based currency, see topic below Simcity-Buildit-Expansion-Special-Itemsfor currency explanation), or keep it in your storage unit, sacrificing another slot of asset keeping. The model in place then shows that increase on actual capacity (we may see this is production possibility frontier) is due to stochastic processes as well as the result of accepting the opportunity cost of having your storage of assets limited for however much time it takes to gather all the necessary items. The further along we play, the harder it gets to increase by demanding more items to upgrade, as well as making you sacrifice bigger portions of your storage unit in the process every time. This reflects diminishing marginal productivity and the eventual rise in long run average total cost. The same process of accumulation and gathering of random items goes for expanding the city area. For the player it might seem like two different processes, but they are indeed very similar from an economic point of view, since they are both constraints to our production and economic growth capacity, and this gathering of items and opportunity cost of storing them are precisely the shadow prices, how much one optimizer must pay to relax the present constraint, or in other words, how much you must pay to transition from short run to long run, and make this fixed cost you now have variable. EA, in one word: Bravo!

I will conclude this post talking about the different currencies available in the game. During my undergrad, I had two very good professors for Macroeconomics and Monetary that really opened up my eyes to the complexity and interesting things surrounding a monetary system. As I advanced into my professional career and went to grad school, I ultimately shifted my interests focusing on the Micro side of things. As it turns out, they can never really be dissociated, making the Micro foundations or Macro the even more interesting.  In the game SIMCITY, there are 3 different types of currency: The coin based currency,

Money-Guide also called Simoleons; the paper based currency and; the golden keys. On our daily lives, we have coins as basically smaller fragments of paper based currencies, but in SIMCITY, they are essentially vouchers for different things, and you may obtain them in different ways. I am not going to explain in detail the ways to obtain different kinds of currencies, but rather the richness that such distinction brings in economic terms. Simoleons are the currency one might bring to pay short run expenses, giving the scenario you already have, you may choose to spend in such and such way, to keep your citizens happy, get tax revenue, which basically implies: to keep economy going, nothing that will indeed provoke significant economy growth, but rather a maintenance of the already existing optimal path. The paper based currency, on the other hand, is the most versatile. It can be used in a number of situations: To undo bad decisions (like you just put something to be sold that has no demand to it, and you want to free the slot), to get items instantaneously that you had no patience to wait (having no patience is equivalent to saying your time constraint was bigger than the payoff and effort to put into it) or, my personal favorite, to increase the size of the production line for shops. among those, the last one is the only one that actually increases your production possibility frontier, by making sure the resource ‘time not spend playing’ that we all have may be used more efficiently, therefore making paper based currency essentially a long run currency, the prices you pay to make fixed costs variable. The golden keys, on the other hand, are currencies you have to ‘work’ for. You may get them through disaster challenges (a prize if you may, for surviving a catastrophe) and shipping items under their market value. Golden keys can be used for building special buildings, which its sole purpose is increasing population, therefore tax revenue.

Overall, my analysis of the game is that it provides a very rich and involving way to understand economics, in a model that isn’t too simplistic, and yet not too complicated. Hopefully, if players take good lessons out of it, it will definitely be a good way to enhance management skills while still having fun.

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