Wednesday, 10 February 2016

Why the destruction of two Death Stars might not have bankrupted the galactic economy

I deliberately avoided any news about Star Wars until I saw the new movie, with the consequence that there was a lot of Star Wars related stuff in my to-be-read pile when I got back from holiday. One of those was this paper by Zachary Feinstein (Washington University in St Louis). Bloomberg covered the paper, as did Mark Johnston in his blog.

In the paper, Feinstein estimates the cost of constructing two Death Stars (the one destroyed in the Battle of Yavin in Episode IV: A New Hope, and the incomplete (but operational) one destroyed in the Battle of Endor in Episode VI: Return of the Jedi). Feinstein estimates a cost of $193 quintillion ($193,000,000,000,000,000) for the first Death Star, and $419 quintillion for the second Death Star. He then estimates the size of the galactic economy (Gross Galactic Product, or GGP) at $4.6 sextillion per year, and then estimates the cost to the galactic financial system of the destruction of the two Death Stars. He concludes:
In this case study we found that the Rebel Alliance would need to prepare a bailout of at least 15%, and likely at least 20%, of GGP in order to mitigate the systemic risks and the sudden and catastrophic economic collapse. Without such funds at the ready, it likely the Galactic economy would enter an economic depression of astronomical proportions.
In other words, the Rebel Alliance may have won, but they also lost because the galactic economy would implode. Nice.

However, there is one (unstated) assumption on which the analysis is based, and that is that the galactic economy is based on a capitalist model, with infrastructure spending funded through bonds sold on relatively open financial markets. Now, perhaps somewhere the economic system of the Galactic Empire is explained in detail, but it certainly isn't in the movies (and Wookiepedia doesn't have a lot of relevant detail). And when I think about the Empire, I don't expect capitalism to be the economic system of the day (this in spite of the Trade Federation and the InterGalactic Banking Clan being represented on the Separatist Council in Episode II: The Clone Wars (see here)).

The Empire is clearly autocratic, and while that doesn't necessarily imply a low degree of market orientation, it seems to me that Imperial control of the means of production is rather more likely than not, particularly in the case of building large planet-destroying infrastructure and conducting a campaign to eliminate the Rebel Alliance. Moreover the rise of the Empire involved an immense increase in governmental control, and we know that planned or command economies are a powerful tool for enacting and enforcing economic change, so it should not be a surprise if the galactic economy (at least on those planets closely controlled by the Empire) was a command economy.

Now, because command economies have greater control over the means of production, they can apply resources to 'grand projects', and are often more successful than market economies at doing so. So the Death Stars could have been constructed by decree, with resources (labour, capital and materials) re-deployed from other uses (but at significant opportunity cost in terms of the reduced availability and quality of consumer goods). Raising significant funding through financial markets might not have even been necessary, in which case the Death Stars could have been constructed without a large systemic risk to the galactic financial system.

As a side note on the galactic financial system, according to Wookiepedia, at the end of the Clone Wars, "control of the Banking Clan was ceded to the office of the Supreme Chancellor"). So the Empire had direct control over the largest bank in the galaxy - it was effectively a state-owned bank.

Finally, a couple of other quick Star Wars related notes. The Free Exchange blog has a great post on the economics of the Star Wars universe, especially trade. Well worth a read. As for The Force Awakens, I had low expectations for it, and I guess my expectations were met. Like many, I was disappointed that the plot was essentially wholesale recycled from the original trilogy. However, there was something else that bugged me that I couldn't put my finger on. Until I read this critique, which pretty much nailed it.

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