How can magic and the economy reliably stand together?

Question

This question assumes that in any kind of magical world, any form of magi can create nearly anything, but especially -- using only magic, can create gold, silver, gemstones, other currency, etc. as well as any other kind of resource that plays a key role in that world's economy. So for example, this question also applies to worlds where magi can create only domestic animals and farming resources, as long as they're important in the economic model. (For example, the Gallic and Germanic tribes during the Roman era valued cattle above all else.)

I've just finished a great fantasy book where I found a passage in which a witch, crafting within few seconds with just a single spell and without using any additional resources than just magical energy, an amount of gold, described as enough to feed and supply an average family for five or ten years. When I read this, I immediately remembered many similar examples in other fantasy books and stories and this question popped into my mind.

We have central banks for real money and we have strong algorithms for virtual currency (bitcoins etc.). What could a fantastical, magical world use to secure its economy from influence of wizards and their magical addition to economic imbalance? What factors, rules, laws or anything else could save such world from economic ruin, made by one or more wizards able to create magically crafted gold or other resources at will?

Answer 1

I think it really depends upon the extent of the magic, but I see a number of different possible scenarios here.

1. Wizards can create anything from nothing, but there are a limited number of wizards. In this case, I suspect that governments or possibly an organization of the wizards themselves might limit the amount of the valuable good in question that each wizard can create. Maybe it'd be illegal to create gemstones or gold.

However, one wizard acting out of turn (providing he wasn't caught) could still have a substantial effect upon the economy. To see what an influx of precious metals would do to an economy, I suggest researching what happened in Europe when Aztec gold and silver started to pour in through Spain:

"Imported gold and, more significantly, silver probably affected the European economy more than all other foreign goods. After the Spaniards looted Aztec and Inca treasure rooms, the gold flowing from America and Africa subsided to a trickle, but seven million tons of silver poured into Europe before 1660. Spanish prices quadrupled and, because most of the silver went to pay for imports, prices in northern Europe more than tripled. The influx of bullion and the resulting inflation hurt landlords depending on fixed rents and creditors who were paid in cheap money, but the bullion bonanza ended a centuries-long gold drain to the East, with its attendant money shortage. It also increased the profits of merchants selling on a rising market, thus greatly stimulating north European capitalism."

Source: http://history-world.org/beginnings_of_north_european_exp.htm

2. Wizards can create anything from nothing, but at great cost. Whatever this particular "cost" is--perhaps years off their life span, mental fatigue, growing insanity, what have you--it is higher than most wizards are willing to pay and effectively limits the amount of precious items that they will create.

3. Wizards can create anything from nothing, and everyone has some magical ability, but magic itself is limited. In this case, the magic itself or whatever might drive magic under this system could function as currency.

4. Wizards can create anything from nothing, everyone's a wizard, and there's no limitation. In this case, I think you'd end up with a very dream-like, unreal place. There wouldn't even be an economy, and there'd probably be profound differences with the social structure and culture if everyone could have instant gratification, all the time.

Answer 2

Generally, there are limits put on magic, if anyone or even a relatively small number of people can create anything anyone wants at anytime without serious negative consequences, (say Star Treks replicator), there would be no need for any kind of economy, it would be a pseudo paradise where no one should want for anything.

That's why generally magic has restrictions in most worlds. Some like Harry Potter, you can't make something out of nothing (and have it stay, like the leprechaun gold), or it has to come from somewhere, stealing it from some location, or turning one thing into another. There is also generally a cost to the witch or wizard to perform these actions in one way or another. Without costs, there is no need to acquire, so no cost associated, if no buying, selling or trading, no economy.

Answer 3

Value of things is always based on their supply and their demand. If your world has a huge supply of gold (because it can get magic'd up, or it is naturally abundant) then it will be worth less than Earth-gold. At that point, the thing that is in demand isn't gold itself, but the wizard's time (and possibly any resource inputs) to magic up the gold.

There shouldn't be economic ruin, since the economy would develop around wizard time being valuable, not gold. There's the possibility that transmuting gold is "discovered", but that would be similar to any other economic disruption (the steam engine, the Internet, etc).

A more troublesome disruption is if the "mature" ability is introduced to an economy that did not develop with it (ie. a wizard-time economy introduced to a gold economy). This would be likely similar to the colonization of the Americas, with its fairly disastrous effects. In that sort of scenario, the economies would quickly shift so that a volume of gold becomes near equal to the wizard-time to create it, regardless of any efforts by either society (assuming perfect, reliable replication via magic).

In short, you need to decide what in your world is scarce (and less-so, in demand). If gold is scarce, then it will be valuable and economies will grow around it. If wizard time is scarce (to make gold, heal wounds, protect citizens) then it will be valuable and the economy will focus on currency as a token replacement for magical effort instead. If the magical components for spells are rare, then they (and the people who know how to find/farm them) will be scarce and valuable, and so on.

The thing to remember is that as soon as a single wizard can make a boatload of gold freely and cheaply, gold is no longer scarce since there's no (economic) motivation for them to not do that continuously otherwise. Over the span of ages, someone is bound to have been "that" asshole.

Answer 4

I'm an economist, and I think this is a fascinating question. Economics is the study of decision-making in the presence of scarcity. Scarcity means that what we aspire to have is greater than what we can (currently) have, which means that choice have to be made about which things we have and which things we choose to forego.

If magic is without limits, we are faced with abundance and not scarcity. In such a scenario, there would be no need for any sort of currency, monetary system, central bank, etc. While this would represent "economic ruin" in one sense — economics as a discipline would be ruined, as it would have nothing to study — abundance would hardly be ruin for society as we understand ruin: everyone would have the things they aspire to have.

If magic is very powerful but has some sort of limits, the shape of those limits would dictate what could be used as currency. Mere gold, if it can be easily and abundantly replicated by magic, would clearly be a poor choice as the basis for currency in a magical economy. Could magic conjure up a finite set of items that further magic cannot forge additional members thereof? If so, that could be currency. Is magic constrained by time? Perhaps something representing a claim on wizard-hours would be the currency.

Answer 5

The question specifies a number of important facts, and many of the answers here have challenged those facts' potential accuracy. I'll try, conversely, to accept the limitations proposed and see if that's helpful.

The strictures, as I understand them, are as follows:

1. Magicians can create gold, silver, gems, etc.
2. These products are indistinguishable from their mundane counterparts.
3. These goods are held to be valuable as currency.

Given all this, what might be done to prevent economic disaster?

First off, a corollary of the extraordinary power of magic as well as stricture #2 above: can magical means detect a difference? For example, can magical means be used to discern the history of a given object, its location of origin, etc.? If so, those who can afford to do so and have a vested interest in the stability of the economy (banks, governments, etc.) may well have wizards whose job it is to detect counterfeits.

But let's suppose that #2 is true in a radical sense: the created gold is in that case not a forgery. It's perfectly real. In that case, it seems to me that the issue devolves into one of interests.

On the one hand, there are those who have a strong vested interest in the long-term stability of the economy, such as banks and governments and so forth. You might say that everyone has such an interest, but that isn't necessarily the case. If I find a huge nugget of gold in my backyard, my inclination is to turn it into money (sell it to a bank or gold dealer, etc.); the fact that this may in some sense devalue the world's gold reserves isn't something I'm going to worry about -- I leave that to the world's financial industry, and if they have some suffering because of it, well, sounds good to me. Not my problem.

Now in early modern Europe, particularly in the sixteenth century, alchemy was big business. That isn't just turning base metals into gold, to be sure, but let's focus on that for the sake of the question. One way of dealing with alchemists was to punish them: the reasoning here is not that the gold they create is necessarily not real, but that the Crown has the monopoly on creating currency, and as a result, gold-making is arguably a crime of lèse-majesté. Another possibility -- equally attested -- reverses this reasoning: if this alchemist seems likely to be able to pull it off, the Crown wants him working for the Royal Mint. So in the end, it's a matter of interest.

1. Who has a strong and indeed vested interest in the totality of the world economy? Until quite modern times, nobody. If I have more gold than you do, whether "I" and "you" are individuals, guilds, or states, then I'm richer than you are, period, no matter where I got the gold. To be sure, the history of Spanish conquest and the import of vast amounts of gold and silver to Europe from the New World did cause tremendous damage in the long run, but in the short run it certainly made Spain very wealthy. And although we might now argue that this incredible surge of precious metals was a bad idea, the Spanish didn't see it that way at the time. So by this reasoning, if nobody is particularly looking out for the world economy, the only thing stopping magicians from creating gold is local interest.

2. What do local interests think about creating gold and such? Depends how easy it is, and how firmly the Crown or whoever holds on to its currency monopoly. If there are zillions of magicians running around doing this all the time, then I do think the value of these goods would have collapsed long ago, but the question as posed presumes otherwise; this suggests to me that producing gold magically is rather rare. In that case, magicians who can do this are themselves resources, like gold mines. So by this reasoning, the laws and such governing magicians creating gold will tend to approximate those governing gold mines, the differences being primarily that (a) magicians can move somewhere else, and (b) magicians can be killed. If I were the Crown, I think I'd want to link a to b: the magician works for me in the Mint, and does what I tell him to, and if he ever tries to move away I'll have him killed.

3. What wider implications does this have?

3a. If I'm a magician who can make gold, I either do or do not want to work for a state. Could be a very cushy job: the Crown doesn't want to have to kill the goose that lays the golden eggs, and it's not terribly difficult for the Crown to ensure that I lead an awfully pampered life if it wants something from me. So if I have that power, I may well seek patronage of this kind -- many alchemists in European history did precisely this. If for some reason I really badly don't want to work in this way, perhaps because I like traveling around, then I had better not advertise that I can create gold this way.

3b. Suppose there are three states, which for sake of simplicity we'll call France, Spain, and England. Now Spain has a whole lot of powerful magicians working for them, and they're cranking out gold and silver like nobody's business (cf. Spanish New World colonial exploitation). England and France would certainly like to have that same power, but they don't, so what do they do? France might well try to cozy up to Spain, do them favors and whatnot in order to get Spain to loan them a magician or give them gold cheap. England, on the other hand, might decide instead to kidnap Spanish magicians -- or even assassinate them (cf. licensed privateering in the Caribbean).

Conclusions

The central point is that magicians as described in the question are effectively moving gold mines. The powers that be will want to control these mines, and if they cannot do so, they will want to ensure that nobody else controls them instead. I do not see a global concern for "the economy" being a realistic issue in the absence of a global financial industry. If such an industry does exist, then it will act in much the same way as any ordinary state: it will want to control the moving gold mines, and ensure that nobody else controls them. It is certainly possible that such an industry will make the claim that it must do this to protect everyone in the world from ruin, but somehow I suspect that the people who run that industry will get remarkably wealthy as they achieve greater and greater control over the magicians.

Answer 6

In many cases this question can be compared to Star Trek, where they have replicators to produce everything out of "thin air". The conclusions are most likely the same:

If all goods are equally easy to create using magic, then they would all have an equal value given enough wizards to produce them. This would prevent any economy from existing, as there would be no need to acquire any goods at all.

If there is a lack of wizards, then several goods would be produced in a mundane fashion, so the value of a good would be equal to the complexity of it's production and their rarity. Goods that are easy to produce and are available in large quantities like bread, meat and such would have a low price. Goods that exceed a certain complexity or require certain rare raw materials would just be created by the wizards, in which case the price would be entirely based on how much others would be willing to pay. It would be difficult for a mere farmer in these circumstances to raise the price for his goods, as one could always deny to buy them, and instead buy from someone else or have a wizard conjure it.

If magic is not unlimited and certain items are more difficult to produce, then the economy would select the items which are the most difficult to produce as their currency. In Star Trek gold-pressed latinum became the currency for most worlds as it cannot be replicated (mostly because they encountered the same question and just wanted something to be a currency).

Answer 7

In my opinion the ability of wizards to create gold doesn't shift currency.

In our world we all have the ability to copy paper so it looks a lot like a £20 note (just use a photocopier), however if we were to take it to a shop and attempt to pay with it the store manager would laugh (and then call the police).

Why?

Because the money is a forgery, it's not a real £20 note it's a copy (and most likely a poor one at that). The only currency with value is the stuff which comes from the bank, copies have no value (unless you're duped). The banks would take this very seriously and would invest heavily in trying to prevent fraud (and perusing fraudsters).

What prevents a wizard from attempting to copy the currency

• Lack of skill to pass it off as genuine
• Risk of being caught

The higher the skill of the magician the greater their level of education and responsibility. This is where the education of your wizards come in, what is their day to day job. In most worlds it's working towards a cause beyond material wealth.

Answer 8

Assuming this capacity is widespread enough so that there is no scarcity in goods whatsoever, one kind of economy can still exist: service. Also, even if wizards can produce raw materials, it doesn't necessarily mean they are able to produce all refined goods. They might need knowlegde about the thing they create. There would probably still be wizards that specialize in, i don't know, producing clothes, weapons, food, because realistically not everyone can know everything.

Then we have an economy, although it looks a little different because there is so much magic. The currency would also be magically produced, with magic only few know, but that makes it easy to check it's validity (it would only be a token like our paper money). Maybe there is exactly one wizard or a group of wizards allowed to produce them and imprints a magical signature only these wizards know how to make.

Once at that point, we are not very far from normal economy any more, actually, just with a whole lot of magical items. The easiest way i can imagine such a society would be wizards-only. Normal people don't fit in as producers any more when there are many wizards, just as people running services, like a tavern, or a trader, (or a servant/slave).

Answer 9

If I've correctly pictured your specific scenario from your responses here, this small group of wizards would indeed upset the economy, to the point that magic and economy would not reliably stand together.

I imagine the first time a group of magi started to create money, either two things would happen. They achieve absolute power through their unlimited purchasing power, or they/their fake money is discovered and something is done that stops them and future magi from pulling this off. Either way, it's a temporary disruption at best.

Ultimately, the poor local seller likely won't care if the money he gets is fake or not. If it's good enough for him to accept, he can likely find somebody who will accept it as well. The real problem is going to be the government. They're going to want to shut down the wizards, and even if the wizards are keeping their money-making magic a secret, eventually some clever official is going to notice the effect the money is having on the economy, will investigate, and work on a way to stabilize things.

While there could be a small group of wizards working against the economy, I believe it's only reasonable to assume there would be magi working FOR the economy, who could use magic that is able to "create anything or nearly anything", and fashion some magical device that could be distributed to allow people to see if a coin or gem was made in the earth, or made by magic. And if you want to say the magic item is a perfect physical copy and has no trace of magic in it anymore, then I'd say they'd develop some way to 'carbon date' the items.

Problems caused by magic are easy to solve with more magic :)

Answer 10

Answers based on economics are excellent, as you can come up with any number of things that can be scarce and required for the magic (like the hearts of fallen stars in the movie "Stardust"). For something completely different, how about a story about the dangers of abundance?

The story of Midas and his golden touch is the first thing that comes to mind. Another is Proverbs 25:16: "If you find honey, eat just enough-- too much of it, and you will vomit."

Too many desserts and people get fat. What if food is free, but magic food requires EXTRA exercise to get the pounds off, and magic bicycles don't work? Magic clothes are beautiful, but they attract magic moths which reduce people to nudity in seconds? Magic carpets get you there fast, but magic dust bunnies on the carpets make you sneeze out pieces of your liver? This is so much fun, I could go on all day. In the end, non-magical cooks, doctors and tailors would clean up.

As Mr. Gold always says in "Once Upon a Time", "Magic always comes with a cost."

Answer 11

I know this is an old question but there are two good possibilities that haven't been mentioned yet:

1. If it ain't natural, it ain't valuable

The situation you describe isn't actually that far off real-life: we can create diamonds and other gems artificially in laboratories. We actually mass-produce synthetic diamonds for industrial purposes, but since they're chemically identical to natural diamonds, we could easily use them in jewelry and crash the diamond market.

However, natural diamonds remain dozens of times more valuable than synthetic diamonds for one simple reason: they're natural. This is more or less entirely a marketing distinction, created by the De Beers company to keep their diamond monopoly intact, but it works (there was an excellent question about this on another SE site the other day, but I can't find it now).

It's entirely possible your world would have the same distinction: if anyone can make gold, then the gold that anyone can make would be far less valuable than the gold in the ground. Those with large treasure troves (dwarves, dragons, probably also kings) would push to reinforce this belief to protect the value of their own hoards. Bars or coins of "natural gold" would have stamps or hallmarks to guarantee their authenticity.

Granted, this isn't going to stop people from creating precious metals and gems. Stamps and hallmarks can be forged. A poor person might not care if the gold they're being offered is real or fake. But if the person offering it to them is a mage, there's a pretty good chance it's fake.

2. It's a big social taboo

This one comes from FullMetal Alchemist, where there are three big "taboos" in alchemy. The ultimate taboo is "you can't create life", as the Elrics found out the hard way. I can't remember the second, but the third is "you can't transmute gold", specifically because of the potential effects on the economy. IIRC, you can transmute gold (the Elrics do so in a flashback, albeit in such a way that it turns back a short while later), but nobody does because they know the risks. (It's been a while since I watched FMA:B, feel free to correct me if I'm wrong.)

Either way, the point remains: creating valuable items with magic might simply be considered one of those things that you just don't do. Nobody wants to be known as "that guy who created fifty tonnes of gold and destroyed the local economy". Heck, maybe someone already did that a while back and that's why the stigma around it is so strong. "You created diamonds?! You idiot! Don't you remember what happened fifty years ago?! Turn those back to coal, right now!"

Answer 12

Creating gold and gems is inconsequential, if your wizards can create good food in large quantities, fresh water, good quality tools, and whatever other basic necessities then you just arrived at a post-scarcity society.

There would be little need to til the fields and work on mines if your mages can simply summon food and great quantities of refined minerals.

Now the question is: What becomes valuable?

The answer is: Anything that magic can't do.

The most obvious solution is that ideas become valuable, your magician can summon rains of gold coins, but all the magic in the world can't write an original symphony.

Your regular citizen is going to spend time not working on the fields, but creating original works of art, maybe training in sports for pure entertainment.

This could become some sort of currency, with the regular population trading their works of art with the magician for special favors.

Answer 13

Magic Has Limits:

If you're fine limiting the magic, you could have magic work via transmutation. In this scenario, you could create gold from "thin air" which happens to be very real air particles. Perhaps the conversion to gold takes so much air that air becomes a scarce resource (and creates low pressure systems?). Perhaps the more common the source material, the less gold can be created. The transmutation case essentially brings the economy to a stable state because gold has to come from something, which eventually becomes scarce and valuable.

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To make a system stable (economics & magic) - there need to be balancing feedback loops that modulate the extremes. If your system has a positive feedback loop with no balancing feedback loops - it will self-destruct. There might be implicit balancing feedback loops (magicians self-modulate) but making an explicit balancing feedback loop is the more sustainable choice.

Answer 14

One issue that might come up is with labor - if various forms of currency get devalued, say if the magic users are walking gold mines AND can't be easily controlled by the powers that be - say because they've formed a protective alliance, or their eldritch powers make them implacable enemies, or whatever - then it seems like the issue is how to get people to /do/ things. Some kind of currency representing labor, like hour-dollars, might make sense.