Economics in The Lord of the Rings: The Rings of Power

Economic Questions about the Amazon Series

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There are two things I love in this world: Economics and the works of J.R.R. Tolkien. And family. Three things.

Now that we have the final episode of the Amazon series, The Lord of the Rings:The Rings of Power, it’s fair game for public discussion. SPOILER ALERT While there aren’t any massive spoilers, I do talk about some details from episode 7, so you’ve been warned. Plus, the season finale has been out for a week! What are you doing that is more important?!

There has already been a ton of discussion of the show before we even saw a single episode: the plot, mysteries, costumes, music, dialogue, and faithfulness to Tolkien's work. Tons.

My comparative advantage is economics, so if you’ve been wondering about the economics of The Rings of Power, you’re in luck!

Reading Fantasy/Sci-Fi as an Economist

First, I recommend that you don't search for holes in any fantasy world's economics. Don't think too hard about the magic, either. It’s easy to poke holes. As Tolkien puts it, fantasy requires some willing suspension of disbelief.

Fantasy authors don't know any economics. Some are better than others, but Tolkien is not good at economics. He didn’t have a chance to read Economic Forces, so who could blame him? I’m okay with that since it's rarely the core of a fantasy story, unlike things like politics, psychology, or relationships.

Instead, it's much more fun to use the economic way of thinking to ask probing questions about the fantasy world (just like the real world) that are left out of the author's discussion. In a good story, there is depth beyond what is written that the reader explores. Economics helps us explore that more and (hopefully) enjoy the book more.

Here are my questions about The Rings of Power.

Do guilds raise or lower the GDP of Númenor?

Going back to Adam Smith, economists have a strong aversion to guilds. After all, guilds are monopolies, and monopolies restrict production, which distorts production and generates economic inefficiencies. Instead, economic prosperity requires resources to move to their most valued use.

The guild system of the Kingdom of Númenor plays a surprisingly significant role for an economic system in a fantasy world. So did guilds help or hurt Númenor’s economy?

At first, it seems guilds must be bad. The economists are right. For example, the mysterious vagabond Halbrand, the best smith in the world, shows up on your shores and he’s not allowed to make an anchor because he doesn’t have some guild crest. Let’s ignore that keeping Halbrand out was probably a good idea.

As Hayek and Sowell teach us, knowledge isn't free. The Númenóreans don't know he's the best blacksmith in the world, but it doesn't seem that hard to verify.

"Here Halbrand. Make something. Wow, impressive. You're hired." End of question. They do that later on when he makes a sword.

More generally, I wonder how flexible Númenórean labor markets are. The three jobs we see (blacksmiths, Isildur as a sea cadet, and Eärien in the Builder's guild) are very rigid. Eärien needs to go through a strict application before apprenticing. We won't be seeing a rapid supply response when demand changes, as one would hope for in a dynamic economy. The one exception where we see dynamism is preparing for war in Middle-Earth. They are ready to mobilize 500 men at what seems like a moment’s notice. I’ll say more about that below.

If you want a hot take, I’ll argue that the root cause of the fall of Númenor (spoiler) is not ideological or due to the King's Men's rejection of the Valar.

Instead, the cause is economic. It always is. Economic stagnation generated a political backlash. Yes, the Chancellor of Númenor Pharazôn keeps the frustrated workers at bay when one elf shows up, but what will he do after centuries of economic stagnation?

But what if the guilds help Númenor’s economy? Economists, like Charlie Hickson and Earl Thompson, argue that guilds were important for European economic development.

Charles Hickson | Earl Thompson, National Defense, and Efficient Institutions

Maybe that's true for Númenor. After all, Númenor is the most prosperous civilization in the history of the human race. They have to be doing something right.

The guilds could have allowed for the rapid mobilization toward war. Certain guild members earn a premium, but they can be called into war at any time. Sure, they aren’t drafted in the show, but how free was the choice?

You need to be able to mobilize for war to survive as a civilization. You need to survive as a civilization to grow. If the guilds help the war effort, the guilds help economic growth. Josh, Alex Salter, and my paper “Preventing Plunder” in the Journal of Macroeconomics explicitly models the connection between defense and economic growth and ties it to guilds.

Why Did King Durin Reject Elrond’s Trade?

Elrond offers the wood and game of Eriador for 500 years in exchange for access to the recently discovered mithril under Khazad-dûm, and King Durin rejects it. That seems like a great deal to me. 500 years is a lot of wood and game! Khazad-dûm is rich, but it isn't a post-scarcity society.

As usual, we can't rely on what people say are their reasons for making decisions. King Durin, or Durin III, claims he isn’t willing to risk Dwarven lives just so the Elves could cheat their fate and live forever.

But that's not the offer. Durin would be risking lives for the Elves but for 500 years of wood and game. Remember, our Adam Smith:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

Elrond is not asking the Dwarves to mine for mithril out of pity but out of self-interest. 

So why did Durin III reject the rich offer? I think there are a few economic reasons:

Reason 1: Elrond’s offer is not credible

What would hold the Elves accountable for their promise? Elrond is great, but Durin can't rely on that. Lots can change in 500 years.

Ideally, Durin could time the mithril deliveries with the wood and game deliveries to avoid this problem. Pete Leeson has a paper, “Trading with Bandits” about how one society has gotten around these kinds of timing issues. Basically, you need to be clever with who pays whom when.

But (in the dumbest part of the show) the Elves need the mithril by spring, or else they die. A payment plan won't work. Plus, this isn't exactly a repeated dealing, so how likely is it that Durin III stumbles on a solution within minutes of being made an offer? In Leeson's paper, people discovered solutions over time.

Reason 2: Durin III just values Dwarven lives that much

While Durin is likely a generous king, he's still a king. He doesn't have huge incentives to worry about miners’ lives. In the real world, kings aren't exactly known for valuing lives.

I wonder if the Dwarves in the mithril mines paid wages. If so, why not raise their wages and see if people are still willing to mine? Compensating differentials are a powerful tool. Then Durin III can calculate the value of a statistical Dwarven life and decide whether it is worth it.

Reason 3: Durin III is aware of the tail risk of mining mithril

One thing that complicates the cost-benefit analysis of mining mithril is the tail risk. What if things go really wrong? Maybe mining mithril is not just a risk of 20% of death for those in the mine, but there is a chance of the collapse of Khazad-dûm.

If that’s what Durin III is thinking, then I want him on my Longtermism Superforecasting team; the risks of delving too deep turn out to be true when they awake the Balrog, and boom everyone dies, turning Khazad-dûm in Moria, which means “The Black Pit.”

However, I think it's a stretch for Durin III to consider the tail risks of a Balrog. It’s more reasonable that he's just worried about Khazad-dûm collapsing for normal mining reasons.

Why Aren’t the Elves Richer?

This is beyond The Rings of Power to Tolkien’s work more generally, but I wonder why the Elves aren’t richer. Yes, they are the richest societies in Tolkien’s work but where are their flying cars?

They have thousands of years to accumulate capital. After all, they surely have a low discount rate, which in a standard model means a high rate of capital accumulation. They also should have a high rate of human capital accumulation. How much would you learn if you lived until the end of the world? The Solow model would predict strong growth.

But how effective are their institutions at encouraging innovation? Have they been able to take advantage of Smithian specialization? Maybe that is their problem.

Or maybe I’m wrong, and the Elves are rich. I’d love to hear what people think. I’d also want to hear your questions. I can even do a Part 2. Let me know in the comments.