The Economics of SimCity

I spent many hours playing SimCity when I was younger. In the game, when you plan and build your city it is easy to rapidly expand and quickly build up a massive city. Almost every time I did this, my cities would go into financial crisis and go bankrupt. Rapid expansion was a sure-fire way to ruin my city. The cities seemed to function well at first but the growth was not sustainable. To grow so quickly I had to borrow money and the interest added up too quickly. I ran out of money, my roads would crumble, my citizens would move, and I was left bankrupt. On the other hand, when I was more patient and took my time to slowly grow my cities, they would usually be very successful and could grow very large.SimCity 2000 Screenshot

This situation is often reflected in our economy. Companies expand rapidly then get into financial crises. The government grows rapidly and gets into a financial crisis. Congress recently raised the national debt cap to over $11 trillion! That’s an obscene amount of money, even for a nation as well-to-do and large as the United States. The surge in oil prices and subsequent decline showed that speculation about oil prices, which basically meant people purchased oil futures in the hopes that oil prices would rise; of course, oil prices rose as people continued to speculate higher and higher prices in their greed for better returns on their investments. Demand for oil did play a minor role in driving up oil prices but it was only a very small part. We’ve had increases in oil demand for years without a concomitant surge in oil prices. Adjusting for inflation, oil prices have been quite stable since the 1950s. It was speculation more than anything else.

The housing market followed a similar SimCity growth trend. Housing prices were increasing exponentially. People who owned homes were quite excited to see their equity increase. People started buying homes on the speculation that prices would continue to rise – that they could receive huge returns on their investments. Many people purchased homes they couldn’t afford. It was speculation about housing prices that increased their prices beyond sustainability. People had access to too much money at too low interest rates. Lenders gave money to risky borrowers because they could turn a large profit. All of these forces collided, causing a huge housing meltdown. It was like John Henry working himself to death trying to beat the new technology. In this case, the housing market worked itself to death not to prove that they were relevant in the face of new technology but to make more money.

Just like in SimCity, this rapid growth was not sustainable. People were too greedy, too speculative. They turned the housing market and the oil market into nothing more than gambling. People were speculating on the specualtions then using those second-level speculation “funds” to fund more projects or investments. The citizens of the U.S. cannot really blame anyone but themselves. We became greedy. We did not follow sound conservative financial advice; instead we went after what seemed like the easiest and largest profit. It turned out to be too good to be true. In the end, the surest way to build wealth and to grow the economy is not by gambling – by speculation – about the future. The surest way to grow net worth is to live within our incomes as individuals, families, and a nation.

2 thoughts on “The Economics of SimCity”

  1. Ironically I ran into this the other day when I was playing a similar city building game. I found that I could build the entire city very quickly but I would always end up in debt. If I played it right I could get my investments to pay off before my debt got out of hand, but if I ran into any unforeseeable problems then my debt got to great and it caused my city to fail.

    While these are just games, they are also mathematical algorithms that determine what happens. The economy is also governed by these mathematical algorithms, and while the algorithms that govern the economy are more complex then the typical computer game, they are part of the same class of mathematical algorithms, and thus exhibit the same effects. At some point this type of rapid growth and speculation becomes unsustainable and the economy becomes subject to a class of equations referred to as the equations “population dynamics”. These class of equations get their name from the fact that they were originally developed to study population dynamics (obviously).

    Because the economy had unsustainable exponential growth it only recently reached a point where the growth began to be constrained by reality, and thus suffered a “population collapse” which is typical for unsustainable exponential growth.

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