Sandbox Thinking – Economics of Tribute

In all the conventional “trading” scenarios I have ever seen described, free trade is easily shown to be the result which brings the greatest amount of material prosperity. Just as the one-man farmsteader determined to produce all his “goods” singlehandedly is not going to be very efficient, the same logic applies equally to any larger scenario. I have yet to see a serious attempt to prove otherwise.

But trade is hardly the only scenario which involves transfers of goods and services. What about tribute? Or slavery? What happens if the transfer is not a form of trade, but rather something different? What happens if Group T (tributaries) provides all manner of goods and services to Group E (empire) without asking anything in return? 

To see how this scenario plays out in the real world, we need to further refine it as one in which neither Group T nor Group E is monolithic. Both are made up of different people. Furthermore, we need to remember that all real-life economic scenarios are dynamic, not static. In other words, we need to consider how the sudden addition of a Group T component to an existing Group E economy is likely to affect the economy of Group E (the empire). 

Forgetting about the members of Group T for the moment, prior to the advent of the tribute system, some members of Group E (say, subgroup EP) are likely to have been working to supply the needs of the E elite – say, subgroup “EE”. EE taxes EP (in one form or another) and consumes the proceeds. Let’s say that takes up 30% of the production of EP. The other 70% of production goes to trade within the EP sub-group. So essentially the EP people were previously not “consumers” at all (in net terms anyway); rather, they were the previous “producers” within Group E.

What happens when Group T begins to send its free goods and services to Group E? [For the sake of argument, let’s assume that 80% of goods and services consumed could conceivably be supplied by T – the so-called “traded goods”.] Well, for one thing, the recipients of the tribute are for the most part members of the sub-group EE, not members of the subgroup EP. Group EE may well continue to demand taxes from EP, but at least in a monetized economy its demand for traded goods from EP will over time tend to fall to zero. After all, if T will supply these goods to EE for free, then EP will not be able to compete with EE’s traded goods at any price. EP will stop producing any traded goods.

Theoretically, economic pressures will lead EP to eventually “retrain” itself to exclusively produce non-traded goods and services, but during a transitional period unemployment is likely to be extensive.

How long will the transition period last? For a free economy even in the case of severe dislocations the answer is probably not very long.  But what type of transition will take place in a not-so-free economy? What if there is a significant welfare or union system in place, thus keeping wages above the market-clearing level? What if there are myriad regulations limiting the types of professions or occupations people are permitted to pursue? What if very little capital (e.g. land) remains in the hands of EP to work with? What if high taxes remain payable? 

Even without thinking through all these variations, we can be sure that these will all result in a delayed adjustment. We can also surmise that during that transition period, EP may well be obliged to sell assets in order to pay taxes.

Is this not essentially the scenario faced by the populations of Western Europe and North America (EP) with respect to China (T)? How will this scenario play out?

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