Simulating an economic system with endogenous preferences: a pre-abstract for a Lab paper, looking for co-authors

In 1930, Keynes famously predicted that the economy was on track to satisfy everyone’s material needs. The new economic problem would henceforth be how to teach people to appreciate leisure. The prediction turned out to be wrong, because, as the old material needs were satisfied, new ones were created.

We explore the dynamics of a world where preferences are not only not constant, but endogenous. There are two kinds of outputs, one material and one immaterial (“leisure”). Changes in the level of material production influence the demand for the immaterial good.

This would be a paper based on computer simulations. There are two traditions to build on: that of classical economics and macro models such as the Goodwin model (dynamic, aggregate), and that of agent-based models (dynamic, not aggregate).

@mstn has already done some great job on the Goodwin model. The interesting intuition comes from parametrizing it so that it reduces to the Lotka-Volterra equations, used to describe the predator-prey population dynamics. I would like to collaborate with him and other interested parties.

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Hi, small correction, the guy’s name is Richard Goodwin and the model is this. I suppose that there are other models of the business cycle.

As you said, Goodwin built the model on the top of Lotka-Volterra because he thought that the famous contradictions of capitalism in Marx are nothing else but negative feedback loops that yield endogenous oscillations/cycles. It is a common misunderstanding to assume that Marx had a deterministic view (“the knell of capitalist private property sounds!”), but he had a more dynamic vision, where the knell faces other opposing forces (e.g. counter-tendencies in his jargon). So I think Goodwin was fundamentally right in his interpretation.

So your idea is to use the same Lotka-Volterra reasoning with two other “opposing” forces, not employment vs output share, but leisure vs work, for example. What do you mean with “preference”?

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Noted and corrected.

Consumer preferences. In a super famous 1930 paper, “Economic possibilities for our grandchildren”, Keynes predicted that the exponential dynamics of capital accumulation would soon increase productivity of labor enough to satisfy all needs, and shorten the working week to one or two days. And indeed all needs, as viewed by a worker in 1930, have been satisfied. What Keynes did not predict is that new needs would arise, that would have seemed extravagant to that 1930 workers: smartphones, Netflix subscriptions, holidays to Ibiza, pets hairdressers etc.

Neoclassical economists, correctly recognizing that needs are subjective, dropped the language of “needs” altogether, and substituted them with that of “preferences”. Standard theory assumes that preferences are exogenous to the models: in other words, people have preferences that are formed outside of economic activities. In practice, this is not true (the whole marketing profession is about inventing new needs), but models with endogenous preferences are much harder to solve mathematically. However, if we abandon the idea of “solving” a model and instead just run it, we can deal with more complexities and feedback.

Why I think this is important: because I am dissatisfied with this nonsense about “growth”. Growth of what? Ecological economists say that infinite growth is impossible, but they have in mind a growth in material resources consumption, not one in human happiness. If your value theory is based on happiness, you can in theory have increasing happiness with decreasing consumption of material resources: for example, instead of flying to the Maldives for your holidays, you move there forever.

At the same time, it is clear that individual preferences emerge in the context of economic and social relationships. I would like to think about how to build an instructive simulation of a macro world where preferences might shift from more to less materialistic, and see if we can learn something.

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I would like to add the influence of the monetary system to the paper. Although hardly ever talked about by economists, it has tremendous effects on our personal behaviour and how we structure society. As a first contribution I’d like to add the paper I wrote, which includes a parametrisable computer simulation of the money supply.

I’ll have a look at the Goodwin model too.

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Hmm… in my experience, a paper based on computer simulation is most effective when the model is simplest. This is because a complicated model with many moving parts, while it is computer-runnable, it is not as human-interpretable. A possible angle of attack is to treat issues separately, by building three models: endogenous preferences, but no money; money, but exogenous preferences; both money and endogenous preferences. Then, consider what happens in each model ahead of submission for publication.

I am using @mstn’s exercise more as a source of inspiration than as a model to extend, because I believe mutable preferences are a way to get around the discourse on growth. Goodwin’s model implicitly assumes a product made of things, physical stuff; so it makes sense to impose zero growth, like Marco does, in the long run. But you could still have positive growth of value in the long run, if value came to consist of a higher and higher proportion of non-physical stuff.

Welcome, @Stef-Kuypers!

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For reference, here the notebook with the model and my experiments at zero growth. Work in progress, it might have mistakes.

I do not have a strong opinion about extending the model or starting from scratch. Just as a technical note: Goodwin kept the model simple to make it analytically solvable (I read). We do not have this constraint: we have cheaper computational power than in 1967. Perhaps, an extension at the cost of analytical solvability is a low hanging fruit.

Anyway I agree to use it mainly as a source of inspiration. I believe that we should borrow (perhaps in a different form) social dynamics, tech progress and a way to represent the rate of profit.

Probably, it is sustainable vs unsustainable more than material vs immaterial. Finance is immaterial but financial growth is not always good. On the other side, we need material output since we are not pure spirits (not yet, at least).

In the model, growth is production/output growth. In itself it is not a bad thing (it could be production of eco-happiness or immaterial bliss). Goodwin does not say anything about the nature of produced items in my opinion. His goal was to show how booms and crisis are endogenous in capitalism. his model does not analyse an ecological problem, but a social one.

When scientists say that we should limit growth, they mean resource wasting and polluting growth, bad growth.
On the other side, in my opinion, the model shows that zero growth (regardless of the nature of produced widgets) is unhealthy for a capitalist economy. It is bad for everybody. We cannot have capitalism without growth. So the question is: can we have a good kind of growth and, hence, save capitalism?

Goodwin model does not consider needs/preferences and is another problem! The workers share of output $u$ ($1-u$ are profits) is basically the products bought by workers with their wages assuming that they spend all their money in consumption. There are things enjoyed by workers that are not in $u$ (leisure, sunsets, free beer): a common trick to raise profits is to add more stuff in $u$ (commodification?). Another aspect is that Goodwin’s model assumes that the output of production is always consumed, so there is no need to create needs. But If nobody buy my stuff, my products do not have value.

I think that extensions or new models including natural resources wasting/pollution (aka bad and good growth), needs/preferences and finance are all interesting. But I agree with Alberto to keep it simple and focus on one thing at the time.

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Hi, Alberto- Keynes was off, not because he incorrectly did not predict the rise of pet grooming, but because he incorrectly did not predict the rise of services. And I don’t mean vacations either – you neglect to mention fundamental improvements in people’s lives since 1930 – I mean, especially, health care and education, but also research, information services (which enable us to do this project altogether), and financial services. Financial services is the one we all love to hate, of course, but keep in mind that it is the means by which young people save money so as not to become inmpoverished old people. In the United States, for example, by far the largest investors in the stock market are pension funds. Also insurance, which enables large pools of people to avoid the consequences of disasters.

Actually I think Keynes was close to being correct. Average hours worked in 1930 were about 50 per week; in 2019 average weekly working hours (including vacations) in Britain are about 37 per week. But this is only for people in full-time jobs. I haven’t done the specific math, but think of it this way: in 1930 in Britain the average longevity was 58 for men, 62 for women – call it 60. In 2019 the average longevity for men is about 79 for men, 83 for women – say 81. In 1930 there was no retirement age; but now the retirement age in Britain is 65 – that means that retired people have on average 16 years during which they do not work at all – that is a rather long vacation.

Maybe Keynes was insufficiently generous.

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That’s an interesting point which has some interesting explanatory power. So as services grow in importance and are part of the endogenous preferences, then Baumol’s cost disease becomes an increasing limiter in the increase of leisure. So we get both Alberto’s increasing material preferences (hedonic treadmill) and a decrease in the rate of productivity improvement.

Keynes theory is based on improving productivity curves in manufacturing and replacement of labor by automation. As services have grown as a proportion of an economy, the ability to replace labor with capital has fallen as well. This would impose a rate limit on the growth of leisure (or growth in general).

The promise of IT and now AI is to improve the productivity of services through reification of knowledge. So what happens when we cure cost disease?

So an interesting model might model a shift from material consumption to services consumption with both low and high productivity growth of services. If leisure is then the ‘consumer surplus’ when both material and service preferences are met or moderated.

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I feel the same dissatisfaction around growth, especially the de-growth crowd. The de-growth argument feels like the same anti-human, extinctionist trolling that passes for environmental discourse in some places. I like and agree with your perspective about growing human happiness as the measure of true growth.

But there is also so much potential to ‘grow’ material well being for more people without environmental degradation. There are massive opportunities in efficiency, ephemeralization and circular material flows that we could conceivably grow the physical economy for decades.

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Pet grooming is a service :slight_smile:

Anyway, the issue here is not that Keynes failed to predict the correct configuration of society in 2019. He was not trying to do that. He was modelling one phenomenon, the substitution of labor time with leisure time. That has not happened to the extent Keynes predicted. In fact, the ILO claims that the reduction trend in annual work hours has stopped in the last few decades of the 20th century, and in some cases even reversed (Sweden):

approximately one-third of the global workforce (36.1 per cent) works more than 48 hours per week. The proportion of workers working such excessively long hours is more than double in developing countries as compared with developed countries. In the former, such long hours of work are driven mainly by low wages, which means that workers often need to work long hours to make ends meet (see e.g. Lee, McCann and Messenger, 2007). The situation is a bit different in developed countries, particularly for certain categories of professional workers and managers, who may be expected to work whatever hours are required to complete their assignments and/or may work long hours to show their commitment to the organization and thus advance their careers (ibid.)

Except, of course:

This is a great point. Again, however, the trend towards lowering retirement age has now reversed in most developed countries. I stand by the main point: as a civilization, we are investing a substantial part of our productivity gains into creating and satisfying new material needs (mostly of services), rather than into more leisure. Keynes did not see it coming, because he did not predict that, because he underestimated the extent to which our preferences are plastic.

This, I would argue, makes attempt to model preference plasticity potentially relevant. We even have a Sci-Fi reference: Keynes predicted the Culture. Anecdotically, I see that the “serious fun” hedonism so well portrayed in Banks’s work is a social attractor: just hang out in Berlin for a while, or befriend LARPers. But that does not seem to be where we are heading at the macro level.

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mtsn-

OK. I was not familiar with Goodwin, but have taken some time to bone up. I looked at Wikipedia, which gives a very technical brief description that does not go into fundamentals, history or applications. This site (https://cruel.org/econthought/essays/multacc/goodw2.html) gives an overview, which is useful. they say: " The basic features of Goodwin’s (1967) model can be stated simply: high employment generates wage inflation which can increase the wage share of workers in output; but this will, in turn, reduce the profits of capitalists and thus, in Kaleckian fashion, reduce future investment and output. That reduction in output will in turn reduce labor demand and employment and consequently lead to lower wage inflation or even deflation and thus reduce the wage share of workers. But as workers wage share declines, then profits increase and, with them, investment. This will lead to greater employment and thus improve the bargaining power of workers and consequently wages in Phillips Curve fashion and thus greater wage share in output - and the rest of the cycle then repeats itself. For good measure, Goodwin adds exogenous growth components - namely, labor supply growth and productivity growth."

First off, this is technical for most participants. Second, and perhaps more to the point, the Phillips curve of low unemployment leading to high inflation has been moribund for years – a model that depends on it is questionable. There are a number of reasons suggested which you undoubtedly know, but I’ll recite a few: oligopoly creates monopsonistic labor markets, specialization ditto, globalization pushes wages down, as more powerfully does automation and AI.

So… if you want to improve the income of workers… it’s not actually very easy. Economists know that the standard, and still politically favored remedies, such as complicated government-created labor market rules and high minimum wages and strong unions, mostly help the workers who are already the highest paid, and positively harm those who are low-paid by preventing companies from hiring them – too expensive. The other method is to improve worker productivity, which is complicated, expensive and slow: comprehensive excellent education (of Singapore or Finland level) starting very early for everyone, focus on training which is relevant to current market needs (now much more need for creative workers with technical capacities who can work in teams, for example), high levels of training in the skills required to comprehensively and creatively operate the equipment used by workers (instead of minimal training), and high acceptability and mutual understanding of workers from different genders, ethnicities, cultures, etc, as a start. Obviously this includes education, in-company training and overall culture, and is a hugely ambitious (but desirable) goal.

And as Alberto somewhat obliquely points out, to achieve the goal, it needs not just to include tech workers in rich countries, but much more importantly the teeming billions in poor countries. I am the kind of economist who is likely to remind everyone that capitalism in its rawest form lifted about half a billion Chinese from poverty to middle-income life in the second half of the 20th century, along with a quarter-billion Indians and another quarter-billion from various places such as South Africa, Chile, Mexico, Indonesia, etc. On the other side, I was a fan of Prebisch’s Dependency Theory in the 80s: if the “center vs. periphery” model is valid, there may not be a long-term upside for periphery countries, and the benefits of technology may not have much more for them than lifting the top 10 or 15% and leaving the rest in the gutter. That has of course been the theme of many dystopian novels. And obviously if the entire globe is a single economy, then the center vs. periphery applies to people within a country as well as between countries – in the US, of course, the effects can be seen if anyone wants to look. At this stage I’m inclined to think we need robust support systems for outlier individuals & families – probably something like conditional cash transfer programs – to prevent that very thing from happening – some of my students at Houston Community College are in that cycle, and it’s bloody hard to break out of. That would be controversial in the US, but we aren’t looking at political feasibility at this stage.

To relate this to sci-fi… the early utopian & other stuff on which most of my reading has been done doesn’t come up to the need, tell the truth. Anybody know of a literary work that includes such a model? Most of the recent stuff is much more likely to reflect the consequences of doing things wrong, as we certainly are doing…

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OK: plasticity of preferences. My reading in Banks was the one titled after a T.S. Eliot quote in The Waste Land about the drowned Phoenician sailor… Consider Phlebas – that petrified me… I wasn’t focusing on flexible preferences…

On the other hand, I know tons of LARPers, as a participant in the Texas Renaissance Faire for a number of years, and yes, I have thought seriously about socially marginal people (mostly with bad teeth) who travel from Faire to Faire because of their love of imaginative play and theater. They are a lot like medieval traveling mummers. There are a number of mostly extremely small businesses that operate at Faires – they are what keep the whole thing going – they make and sell clothes or armor or weaponry, produce food, etc. I work for someone who makes fine swords and knives, and employs 15 or 20 people at a forge. Such businesses are very romantic and once in a while profitable, but I really doubt that they will employ large numbers of people in the future. My favorite romantic utopian, William Morris, in News From Nowhere, thought they would, or at least that they should…

The serious fun in Consider Phlebas was more similar to a casino – a very large tightly controlled business whose purpose was to milk money from the well-off by titillating their senses. I have many issues with such businesses, starting with the negatives of perceiving one’s fellow citizens as opportunities to fuck or make money…

Yes, there must be fungible opportunities – my humble suggestion is that they be opportunities to serve one’s fellow citizens, either by helping to build houses or toilets, or by volunteering to tutor. Actually, one of the best ways to transfer “wealth” from the better-off to the less so would be to mandate a year or two of mandatory service. This would raise the less well-off, while sensitizing the better off to the needs of the rest of society instead of taxing the rich punitively, like a punishment for productivity, which of course would reinforce the whole Robin Hood cycle of the rich hating the poor and the poor hating the rich and neither ever meeting the other…

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Hi, thanks for answering. I am not an expert in Economics, but I am aware of the limitations of Goodwin model. For sure, it is too abstract and oversimplified. With Goodwin’s words: “[it] is a starkly schematized and hence quite unrealistic model of cycles in growth rates”.

However, models are not always realistic or predictive. They can be used to explain a particular mechanism or make a point. I do not remember who said that: a mathematical proof is not true, but only a more convincing argument.

Regarding sci-fi, I doubt that the model has been used for a novel. Probably, it has been ignored by non fictional Economics as well. However, and this is the reason why I proposed this model, if you set zero growth in the model, you obtain something very similar to many dystopic novels.

Assume that we reach a tipping point in the current ecological crisis and that governments have to impose zero growth as a policy, otherwise something worse could happen (human extinction). From the model, we can deduce:

  • In order to keep zero growth, governments have to control work force growth (birth control, immigration) and suppress dissent caused by high unemployment rates. Beta=0, v in steady state
  • Technology that could improve productivity should be limited. Alpha=0
  • Capitalists are not happy with zero growth. Apparently, the model shows smaller return on investments close to zero growth. Thus they will try to find profits elsewhere. The model says how: worsening working conditions (u), producing bad products and services (s and sigma), commodification of non market sectors (enlarging what we consider in u). Probably, finance would play an important role in this scenario (I suspect that capitals will be moved to finance), but it is not considered in the model.

As pointed out by Alberto, I am assuming that growth is always bad. Can we have a good kind of growth in a capitalistic economy? Or, can we model explicitly commodification? Commodification is not included in the model, but it could be something interesting to ask and it should be related to needs/preferences/leisure.

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Speaking of a higher non-material fraction of products / outcomes:

Not that I would want to move away from a simple model - but human capabilities strike me as just as important, if not more important factor (viewed from a “geopolitical elite” perspective) than “mere” “naive” happiness.

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mstn-

Zero growth is an unnecessary restriction for a sustainable economy. The proper restriction must only be sustainability – don’t make assumptions about whether growth is “good” or “bad” in advance – growth can occur in many ways, some do not negatively impact the economy but others do.

It is well known among economists and demographers that economic growth (above a certain level) does two things: first and most surely, it leads to a reduction in fertility. High fertility correlates with sustainable agriculture, as more babies lead to higher household production as they grow older than six and can work in the fields. IF education rises, AND if women are educated, AND if women are allowed to take jobs, then the opportunity cost of having a child rises and fertility falls. This happens regardless of availability of birth control, but is accelerated if birth control is available. One clear example is China. Contrary to the common narrative, the one-child policy did not significantly reduce fertility – fertility was reduced by jobs for women. What the one-child policy, coupled with availability of ultrasound technology did was to greatly increase sex-selective abortion.

Immigration is a GREAT policy for reducing fertility rates, because in the next generation (especially if immigrants do not form single-ethnicity “ghettos”) fertility rates decline to that of the host country.

Zero growth is terrible for decreasing inequality, because it reduces Schumpeterian creative destruction and innovation. This in turn is terrible for the creation of new more sustainable industries which could replace more destructive ones. So keep the growth coming, but increase incentives for making it sustainable.

Also, there is a clear correlation between countries becoming rich and becoming aware of the need to improve the environment. Poor countries are focused on helping people survive. There is no alternative to economic growth to save us all – it just needs to be managed so as to be as sustainable as possible.

So again: yes, preferences matter. But to change preferences in the direction of sustainability is a two-pronged process. One prong is the negative consequences of non-sustainability – hurricanes, floods, droughts, reduced land fertility, etc. As we have seen, even in clear cases, there is a strong reaction such that people put on blinders to prevent the need to change. This leads to the second prong, which is education, starting from a very very young age, in relating positively with nature, with animals, with natural settings – and mixing races and economic groups to defuse the negative effects of fear of The Other, which prevents trade and labor migration, which are hugely positive. Education is slower but much more sure, and needs to start immediately so as to save us as soon as we become willing.

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Ha. Sharp as ever, @trythis. I am an admirer of Hausmann and Hidalgo’s notion of product space, a formalization of the technological interconnectedness between different products and services. Taking it on board leads to an indicator called complexity index, used to measure the health of an economy. The idea behind the complexity index is exactly what you say: a healthy economy is one which can produce many different goods and services, or, in your words, has an extended set of capabilities.

The complexity index has its own failings (for example, it is sensitive to scale). But I think it carries relevant information if computed as a time series for the same economy.

I suggest this idea could move forward faster if we organized a Lab Seminar about it. It could work like this:

  • @mstn could give a presentation of the work done so far.
  • I could do some reading, and propose ways to model endogenous preferences. Anyone who has ideas, welcome to suggest them too.
  • Free discussion

Edgeryders subscribes to a service called Zoom, which is much better than usual conference calling. I am happy to set up a Zoom call, maybe giving ourselves a few weeks to prepare. What do you guys think? @trythis @petussing @JasonCole @Stef-Kuypers @Usal

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Ah yes of course! For sake of simplicity one could perhaps say the economic complexity index (ECI) is a decent proxy of capabilities.

Though part of what I was trying to get at is that there are quite a few of those capabilities that don’t result in international trade or similar and thus won’t register on ECI or even product space. I am thinking more abot things like trust, health, social cohesion / solidarity, basic research, or defense / military.

But those don’t generally seem to be in scope for economic papers anyway and may best be marked as such for now. My hunch is though that some of them can be among the elephants in the room when looking at why there is a lack of interest in non growth maximizing concepts.

Big fan of zoom, all for it! (even bigger fan of re-listening in a different brain mode, and being able to read up on some terms, and adding more, diverse, and concise comments - particulary if we have different expertise levels at the table)

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Ok for the meeting.

A more sophisticated (and, for some aspects, controversial) model is World3 from the Limits of Growth book. They model natural resources as well as the economy. I’ll try to understand how/what, maybe we can borrow some ideas.

@trythis if you are interested in what we have now instead of ECI, that is, GDP, Mazzucato in her new book “The Value of Everything” has some chapters about how GDP is calculated. Apparently, there are many elephants. If I understand correctly, R&D costs (which is not basic research) were included in US GDP in 2013, making GDP grow of 2.5% overnight. Interesting also the section about pollution: if the polluter pays to clean up, GDP decreases, but if another company is paid, GDP grows :confounded:

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Yep :slight_smile:

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Aloha,

We don’t pretend to be world class economists. The posts here all took some time to digest and show an exciting level of thought, hopefully we’ll find good places where we can contribute.

The SF genre we create in is Cyberpunk. It seems optimistic because it is in the future (as in there is a future) while still being “grounded sci fi” or simply “realistic sci fi.”. This as opposed to “fantasy sci fi”, a sub-genre distinction. We assume anything in Cyberpunk must include an element of anti-authoritarianism.

To that extent, in the cyberpunk world we created there is some level of geo-engineering and some drawdown technology deployed at scale plus people must have a degree of cyberization (they are cyborgs) and/or gene manipulation, in vitro and/or horizontal (they are inter-species hybridized) to survive.

As far as other material, we read as much RGP and TT mini fluff as possible. This mostly includes Shadowrun, Rezolution, Interface Zero 2.0, Judge Dredd, Inquisitor, Rogue Trader and Necromunda. We really enjoy the original Ghost in the Shell anime & diverse SF films, from Metropolis to Alphaville to The Matrix & more. We “borrow” freely for characters and scenarios but mostly use either Savage Worlds or 2 Hour Wargame rules.

Also, we got involved with 3D image making with DAZ3D and have experimented with limited 3D & 2D animation. This all helps us visualize our world. We finished an original feature length screenplay with good Hollywood structure. The movie is about reputation, integrity, identity, dignity, camaraderie and honor being more important to transactions than money.

The screenplay made it through some early rounds of competitions but never made it to any finals. We intend to rewrite it with fewer characters and a more developed world. We know we have acceptable movie narrative structure down.

For an in-world economy we’ve been excited to find this topic here on Edgeryders. Synchronically, Jason Hickel recently published The sustainable development index: Measuring the ecological efficiency of human development in the anthropocene (free PDF download available.)


This seems to hold a great deal of promise. His report opens with a great critique of current state of the art economics and the whole thing is only 8.5 pages (+references). We were hoping someone here might give it a read and offer an opinion.

We’re considering going beyond just creating a RPG economic add-on module to integrating the economics as the scoring system, replacing the current money system used in Savage Worlds. We imagine a world where values other than money are privileged.

While we would like to go forward with a screenplay rewrite, for either live or animation production, we also are considering a book or graphic novel.

What form or genre is imagined for the form/structure of this project here on Edgeryders?

Secretly, we wish to promote radical system change with fictional narrative. That is our ulterior motivation. We’ve always imagined critical theory has been part of SF from it’s beginnings and wish to continue this trajectory. The idea of presenting this as fiction seems subversive and we like that.

We’ve been functioning as a collaborative couple for a long time and intentionally moved into theatre arts from visual arts explicitly to create in a more fully collaborative environment. We really enjoy collaborating. Our biggest production as theatre co-directors included over 60 creatives; including acting talent & design teams for set, lights, audio, makeup & costumes. One of the best times of our lives.

It seems much more is happening in Europe than here in the States. We greatly appreciate the European cultural lead. The idea of working through Edgeryders on collaborative production is thrilling.

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