Best not to leave a live dragon out of your calculations

By Eric Crampton 31/12/2012

Frances Woolley wonders whether Smaug’s adverse effects on the surrounding region might have been primarily monetary rather than fiscal. Smaug did sit on a rather large pile of gold, taking it out of circulation. And as people can rebuild, perhaps the long-term decline of Dale, Lake Town, and the surrounding region can be modelled as partially being fiscal in origin.

I’m going to disagree rather strongly here.

The primary effect was a strong supply shock – thousands of very skilled Dwarven craftsmen were eaten. Dwarvish replacement rates are very low – they’re more fertile than elves, but hardly reach human or hobbit ability to repopulate a land.

Next, the entire region around the Lonely Mountain – Dale and Lake Town – served to service the Dwarvish industry. Dale produced agricultural goods in trade for the Dwarves; Lake Town ferried on Dwarvish goods to the rest of Middle Earth. Absent the Dwarves, there was no reason to rebuild Dale. And LakeTown remained a commercial town linking the Wood Elves and surrounding region with the rest of Middle Earth, but at a necessarily diminished scale.

Further, even one-off events can have long-term adverse consequence. Du Pont and Noy find that the Kobe earthquake permanently reduced that town’s per capita GDP.

Finally, Bilbo’s warning is important. It is foolhardy to leave a live dragon out of one’s reckonings. We cannot model Smaug’s attack on the Lonely Mountain as a one-off not-to-be-repeated event. The worst was done in that first attack, destroying the Dwarves and Dale. But Smaug continues to predate the land – none may dare pasture or raise crops near the Mountain for fear of the dragon. That’s why it’s called “The Desolation Of Smaug” – the area around the mountain where Smaug will see you with sufficiently high probability that it’s just not worth heading in there. You can’t rebuild Dale while Smaug is there. Imagine considering rebuilding New Orleans after Katrina, if you knew that your rebuilding would likely cause another hurricane every bit as destructive as the last.

For Middle Earth’s macroeconomy as a whole, the production once undertaken at the Lonely Mountain would have moved to the Iron Hills and, perhaps, to Moria; I’ve not read enough of the secondary materials to know if Tolkien ever gave this as a reason for the dwarves there having delved too deeply, but a sharp temporary increase in production for inventory-building followed by steady-state increased production would have been their optimal response to Smaug. It would be too speculative to blame Smaug for the Balrog, but Smaug could perhaps be interpreted as having brought forward the Balrog event.
[Update: The Balrog long preceded Smaug. I was thrown by remembering that Thror’s people had there sought refuge after the dragon but forgetting that they were seeking to reclaim it rather than moving to an existing settlement.]

On the monetary side, even though Smaug is sitting on a big pile of treasure, he also destroyed a massive amount of industrial and consumer goods. Had that gold remained in circulation after the large supply shock, too much money would have been chasing too few goods and we could have expected some inflationary consequence. I have no sense of the magnitude of the stock of liquid treasure relative to the flow of goods that otherwise would have been coming from the Lonely Mountain and so I do not know which way the net monetary effect will wind up running. It wouldn’t surprise me if it were net deflationary, but it could be less deflationary than Frances is reckoning.

Blogging will continue to be light over this, my summer holiday.