I don't play a lot of video games, but when I do it should come as no surprise that it will generally be strategy games.
What inspired me to write this article was the game Victoria 3, which is set in the Victorian era. A surprising choice for the name I know.
While there is a military aspect to the game, I've yet to see a game do such a good job of modelling macro economics. There is a massive array of raw materials that can be grown or extracted, with complex supply chains and dynamic market pricing. Almost every facet of the economy is driven by this market demand, right up to transportation, trade and everything else.
This isn't a sales pitch, but there are some very insightful game mechanics which I think can teach us a lot about how the economy functions.
Technology
If you want to become a better investor, I can recommend studying economic history. I read a particularly interesting book on the economic development of England from the 9th to the 13th century.
You start to see that technology drives everything. Not just the way people do business and their standard of living, but even entire legal systems must adapt to changes in productivity. There is a ripple effect when new technology is developed and the entirety of human society must adapt.
This presents good opportunities for skillful investors to anticipate change.
I would also however recommend watching futurism programs from the 60s and 70s, where most people were expecting hover cars and space travel to be the norm. Of course nobody anticipated that mobile phones and the internet would be the game-changer.
The ability to easily communicate across the globe turns out to be more valuable to humans than the ability to leave the planet. So don't fall for hype, or pay too much attention to predictions about how the world will be exactly in 10-20 years time.
So recognise however when something significant is happening. Something like generative AI is clearly going to alter human society. Predicting that is a lot easier than saying exactly what human society will look like a decade from now.
Villages
So strangely enough, villages were an economic development to adapt to changes in the way agriculture was done. As someone who grew up in a tiny village in the English countryside, I found this very surprising. I just took for granted that people lived in a village with a church, a cricket pitch and several pubs!
But it turns out this was an administrative convenience to deal with the innovations in farming. Distributed farmhouses became more centralised, as people lived in the village and collectively worked the surrounding lands. Turns out it was more efficient to farm this way and so the entire landscape of rural England was transformed, still to this day over 1000 years later.
It was quite fascinating, as they would have arable land for grains and other crops, meadows for cows and sheep, then a forest for wood. Forests in the autumn would have many nuts like acorns and beech nuts, so the pigs would be walked through there to fatten them up for the winter.
The manure was used to fertilise the fields, the system was actually very well designed.
When you have something that good, that is just fundamentally better than the alternative, how do you stop people changing? Once the cat is out the bag, there is no going back.
Feedback loops
Ok so what was I going on about earlier? Oh yeah, video games.
So one of the early buildings in Victoria 3 is the tooling workshop. In order to create tools you need wood and iron, makes sense.
What's interesting is, as soon as you've built one, you have tools available in your marketplace. This means you can use tools at your lumber camps and the iron mines. This increases the output of the lumber camps and the iron mines.
You can also use the tools to increase farming output and so on. So the entire economy gets lifted up with this innovation, and in addition to that - the innovation can be used to improve the inputs to the tooling workshop as well.
So the economy is less like a pyramid, where simple products get turned into more complex ones, and more like a web, where everything depends on everything else.
Even something as simple as the modern day pencil relies on all sorts of complex machinery and robotics to manufacture it, computers and huge cargo ships to manage logistics and transportation - the internal combustion engine for goodness sake. How does a pencil get into your hands without that marvel of engineering?
So in Victoria 3, eventually you can mine coal and combine that with the iron to make steel. Guess what, now you can make steel tools. Guess what, you can use those tools back in the lumber camp to improve production there.
The economy is a complex messy web of dependencies.
Transcendence
So new technological innovations spread throughout the economy, infecting the entire supply chain with their awesomeness.
They will slowly replace the old ways of doing things. Like natural evolution, old methods will become extinct. The things that depended on them no longer depend on them, they depend on something else. It no longer becomes profitable to supply that solution, and the technology dies out.
Along with it, the knowledge of how to operate it will die, as people cease to be trained in it. Eventually it is lost forever, and you can get interesting documentaries about how the Egyptian pyramids were actually built. We still don't really know for sure, because we don't really understand the economy they had at the time because it doesn't exist anymore and we can't study it. We can study our natural world now and observe the intricacies of how different species interact, but of the dinosaur era we have only bones and speculation about how these magnificent beasts co-existed.
So over time, the entire system will come to depend on things that only the system itself can produce. If we were wiped out in a nuclear holocaust now, our current knowledge would be practically useless. We have all been trained on how to solve problems with solutions that can only be built with current solutions!
If you went back in time 200 years ago, you probably have no idea how to build a steam engine. And the types of tools you would need to construct a car engine don't exist, because they were manufactured with the benefits of steam propulsion. I'm no expert and this might not be totally factually correct, but the point stands.
Imagine someone coming from the future explaining how they can cure cancer. And you get all excited and bring them to a hospital, where they casually ask you for a blood transponder. You look at them blankly, and he realises his mistake.
Don't worry he assures you, we can easily make one with a laser isolation unit. You stare at him again, then realisation slowly dawns over his face before it turns to horror. He whispers in desperation, "oh no, you must not even have teleportation yet!!!" And he jumps out the nearest window screaming "this isn't living!!!!!"
Anyway you get the point. The whole ecosystem moves along, and the pathway to the current situation is not preserved because it's simply too expensive to have all these people sitting around mastering obsolete technologies.